|Rookie landlords face big
These scenarios play out daily in Anytown, U.S.A:
- You're transferred to another market or lose your
- You need to take care of a chronically ill out-of-town
- You can't pass up the opportunity of a lifetime
on the opposite coast.
- You'll soon be working a succession of contract
jobs in different towns for at least year.
Whatever the motivation, you've
got to move on. But you own a house and aren't sure you want to
sell. You may return in a few years, or may want one of your grown
kids to nest there again someday.
So rather than sell, you decide to hang out a for-lease
sign. Just ask enough rent to exceed your house payment and you're
on your way. You can't lose, can you?
You can, and resoundingly. To the unsuspecting freshman
landlord -- especially an absentee one -- the renting pitfalls can
Check your tenants
Consider the case of Scott Fagerstom, who left his Seattle
home in good hands when he took a dream job in San Diego. A trustworthy
friend and colleague leased the place, but quickly left and subleased
it to others, who also departed. Soon, the tenant mix was almost
unrecognizable to Fagerstom, who was hundreds of miles away. And
things got ugly.
"I guess they were frustrated that there wasn't
a fireplace, because they started a fire on my hardwood floor,"
says Fagerstom, who is vice president of an Orange County public-relations
firm. "And one night, I got a hysterical call from a neighbor
saying they were shooting guns on my lawn ... they also pushed a
couch out the window."
Fagerstrom spent considerable time and money flying
back and forth to the small-claims court in Seattle. He has since
sold the house.
"The one big mistake mom-and-pop type landlords
make is not running a credit report or checking references of all
tenants," says Champaign, Ill., investor and Realtor Randy
Hughes. "If you get what we call a professional tenant in there,
they can spend two to six months in your house without making a
Such deadbeats usually plead a plausible case to landlords,
who will often let them move in sans a deposit. Or they may proffer
a first-month rent check that bounces, usually after taking occupancy.
"Then it's pure hell to get them out once they're in,"
Be tough with the tenants upfront, screen them thoroughly,
make it clear what's expected of them in their rental contracts,
and clear their checks first, say seasoned landlords.
Today's drip, tomorrow's flood
Even before that, get a thorough home inspection, Hughes says.
Small roof leaks or a faltering central air-conditioning unit or
furnace may not be obvious to you, but they can also become monster
problems, especially if you're a thousand miles away. A full appraisal
is also helpful to establish value and rent.
Emotional attachment to a home aside, rental data
suggests that owners of most higher-dollar houses should just buck
up and sell them, says Ron Starr, a Bay Area landlord, investor
and real estate educator.
Know the rent you can get
The lower the house appraisal value, the higher percentage of
rent-to-value the landlord can expect to get, and vice versa, he
For example, owners can usually get about $550 a
month rent for a $50,000 house, or 1.1 percent of the home's value
based on the average mortgage, say landlords. But research shows
a $200,000 home will get an average of $1,600 a month, or 0.8 percent
of its value, while a $400,000 home gets about $3,000 a month, or
just 0.75 percent, says Starr. The reason? It's tougher to find
quality tenants for high-priced rentals, especially in a down economy,
and it's harder to get a workable sum when you do.
Landlords getting less than 0.8 percent of a home's
value per month aren't left with enough to provide for even a small
cushion after fixed costs, especially as interest rates rise, Starr
says. A monthly return of 1.25 percent or higher is optimal.
Finding a good renter can be tough, with so many first-time
buyers entering homes in recent years due to relaxed lending standards,
say landlords. "There are simply fewer quality tenants in the
market," says Hughes, who has been a landlord for 30 years.
"Everybody with a heartbeat and decent credit has already bought
The good news is that new-home demand will drive up
the price of your home investment, he added.
Finding help from afar
Without adequate preparation, becoming a remote landlord "can
be a recipe for disaster," Hughes says.
Try to find a friend or relative to look after the
place. Or better yet, enlist a handy neighbor who has a vested interest
in the neighborhood, he says.
Property managers usually get from 7 percent to 10
percent of the month's rent, and may not be too motivated to do
their jobs well by the small sum associated with a less-expensive
home. "Of course, no property manager is going to do as good
a job as you," says Hughes.
Also realize that renters "tend to not keep a
house in very nice condition," Starr says. "A lot of times,
an owner will get disgusted with what the renter has done to their
home. Emotionally, the owner would have been better off selling
in the first place."
Do your homework and double-check it, Starr says.
"It doesn't take much for new landlords to find themselves
in a negative cash flow."
Steve McLinden is a freelance
writer based in Texas.