Living as a Landlord: The Alternative to Selling

As housing sales remain lethargic in most of the country, many desperate sellers are turning to renting as their salvation. If you find yourself in the same situation, read on for tips on successful renting.

You may have never thought about becoming a landlord, but if you cannot sell your home in the current sluggish market, you may have no choice. Many homeowners are turning to renting in order to wait out the market, and the situation is forcing many to “take a crash course in Landlord 101 with or without professional help,” says a recent Denver Post article. John Dunn of Denver-based Dunn and Co. says that his property management firm receives calls every week from homeowners who can’t sell their homes. He and other Denver real estate agents estimate that homeowners typically decide to rent out a property after six months on the market with no prospective buyers.

If you are having difficulty selling and wish to go the rental route, there are many things you need to know to be successful. First, many first-time landlords often misunderstand the rental market. “A lot of people think, ‘My house payment is $1,900 a month, so I have to get that, plus [the property management] fee,’” Dunn says. “The payment has nothing to do with what the rental market is.”

Another complication comes from the renters themselves. Even if you set a fair rental price, a bad tenant can turn this back-up plan into a nightmare. Property management companies can screen potential tenants for criminal histories and perform credit checks more easily than you can. Although it is more difficult as an individual to dig for this kind of information, you can find out a lot of information by asking the right questions, says Dunn. You should always interview the tenant’s last two landlords. The current landlord “may tell you anything just to get rid of that person,” Dunn says.

Additionally, the transition from homeowner to landlord can be difficult, since people are generally very emotionally attached to their houses. “It’s now an investment property,” says Dunn, “you have to remove yourself emotionally and look at it that way.” It is also difficult for first-time landlords to decide whether to use a property management company. On the one hand, it may make your life easier, but on the other hand, such firms typically require 10 percent of the monthly rent. This can be hard for a lot of landlords since, as William Bronchick, president of the Colorado Association of Real Estate Investors, explains, “For a lot of people, they’re barely breaking even.”

Ron Herdt, a broker-owner with Cityscape Real Estate in Denver, also wants new landlords to be aware that they need to switch their current homeowner insurance policies from owner-occupied to landlord-based to protect themselves from potential losses. Plus, Herdt says, "the insurance needs to be paid upfront."

You also need to keep your property in tip-top shape, since people looking to rent tend to inspect a property in the same way as if they were buying. The following few tips will help you keep your property in good shape for current and future tenants, and for the possibility of a future sale:

• Use your senses. A property that smells bad and looks dingy will not rent well. A fresh coat of paint and an absence of disturbing odors (such as pet odors and cigarette smoke) will rent more quickly and at a higher rate than comparable homes.
• Buy quality components: Install commercial-grade tile rather than vinyl flooring when renovating a rental property.
• Purchase paint in bulk: If you have several rental properties, or even just one, buy paint in bulk and in the same shade. That way, you can spend your time on touch-up work rather than on hunting for the same shade or having to repaint the entire place.
• Build relationships: Establishing relationships with high-quality local service providers will be key. They will perform good work and will make your service needs a priority when you are in a rush.

Finally, avoid the most common mistake new landlords make and don’t fail to qualify your tenants for the rental price. “When you buy a new home, a third party qualifies you [for the loan],” explains Chris McElroy, regional vice president for the National Association of Realtors. The same should apply to a would-be tenant, for your protection.

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