Over the last few years, we have seen an increase in homeowners choosing to become landlords rather than placing their homes on the market. In deciding whether or not becoming a Landlord is right for you, there are a number of factors to consider, but primarily they fall into the following three categories: Financial Analysis, Risk and Goals.
The financial analysis is probably the easiest of the three to assess. You will need to assess if you can afford to rent your house. If you consider the likely rental rate, vacancy rate, maintenance, advertising and management costs, you can arrive at a budget. It is important both to be reasonably correct in your assumptions and to have enough reserves to cover cash-flow needs if you’re wrong. The vacancy rate will be determined by the price at which you market the property. Price too high and you’re either vacant or accepting applicants that, for some reason, couldn’t compete for more competitively priced homes. Price too low and you don’t achieve the revenue you should. If you want to try for the higher end of an expected range, understand that the cost may be a vacant month. It is difficult to make up for a vacant month.
Consider the other costs renting out your property could accrue. If you have a landscaped or large yard, you will likely need to hire a yard crew to manage the grounds. Other costs could increase when you rent your home, such as homeowner’s insurance and taxes on your property. Also, depending on tenant turn-over, you may need to paint and deal with maintenance issues more regularly. Renting your home is a decision you need to make with all the financial information in front of you. You can find more information about the hidden costs of renting here.
If your analysis points to some negative cash-flow, that doesn’t necessarily mean that renting is the wrong option. That answer needs to be weighed against the pros and cons of alternatives (i.e., selling at the price that would actually sell), and some economic guesswork about what the future holds in terms of appreciation, inflation, etc. to arrive at an expectation of how long the cash drain would exist.
Risk is a bit harder to assess. Broadly though, it’s crucial to understand that if you decide to lease out a home, you are going into business, and every business venture has risks. The more you know, the better you can mitigate those risks. One of the most obvious ways of mitigating the risk is to hire a management company. By hiring professionals, you decrease your risk and time spent managing the property (and tenants) yourself. However, this increases the cost. So, as you reduce your risk of litigation, you increase your risk of negative cash-flow, and vice versa… it’s a balancing act, and the risk cannot be eliminated; just managed and minimized.
In considering Goals, what do you hope to achieve by renting your property? Are you planning on moving back into your home after a period of time? Will your property investment be a part of your long-term financial planning? Are you relocating or just hoping to wait to sell? These are all great reasons to consider renting your home.
Keep in mind that renting your family home can be emotional. Many homeowners LOVE the unique feel of their homes. It is where their children were raised, and they care more about preserving that feel than maximizing revenue. That’s OK, but it needs to be acknowledged and considered when establishing a correct price and preparing a cash flow analysis. Some owners are so attached to their homes that it may be better for them to “tear off the band-aid quickly” and sell. The alternative of slowly watching over the years as the property becomes an investment instead of a home to them may prove to be more painful than any financial benefit can offset.
In the process of considering your financial situation, the risks associated with becoming a landlord, and the goals you hope to achieve with the rental of your property, – ask yourself these questions. Before reaching a conclusion, it’s also a good idea to familiarize yourself with the landlord-tenant-lawspecific to your state (and in some cases, separate relevant ordinances in the city and/or county that your property lies within) and to do some market research (i.e. tour other available similar rentals to see if your financial assumptions are in line with the reality of the competition across the street). If you are overwhelmed by this process, or will be living out of the region, seek counsel with a property management professional. Gaining experience the hard way can be costly.
J. Michael Wilson is the dedicated broker at Windermere Property Management Seattle, and has 17 years of experience managing properties in the Seattle region.
As the old saying goes, you only have one chance to make a first impression. If you’re selling your home, it’s true, except that there are several impressions to be made, and each one might have its own effect on the unique tastes of a prospective buyer. I’ve worked with scores of buyers, witnessed hundreds of showings, and I can summarize that experience down this: a tidy and well maintained home, priced right, listed with professional photographs, enhanced curb appeal and onsite visual appeal will sell fastest. We all know first impressions are very important, but the lasting impressions are the ones that sell your home. It’s not easy, but if you can detach a little and look at your home from a buyer’s perspective, the answers to selling it quickly may become obvious to you.
The very first impression your home will make is through its web presence, whether on Windermere.com, the MLS, Craigslist or any multitude of websites. Fair or not, the price is typically the very first thing people look at, and it will be the measurement by which your home is judged. You can always adjust to the right price later, but the impact is lost. It will take something dramatic to get a buyer to reassess the way they feel about the value of your home.
Closely following price are the listing photos. According to this recent article in the Wall Street Journal, professional photos will not only impact your first impressions, it may also make a difference in the final selling price. Great photos might even overcome those initial price objections. Does the exterior photo capture your home at its hi-res best? Does the accompanying text enhance or distract? Online, your home has only a few seconds to capture the home buyer’s attention. If it doesn’t, they’ll click the “Back” button and resume their search. The goal is to have buyers excitedly calling their agents to arrange a showing.
Another old saying is “Location, location, location,” and sure enough, the first live impression of your home is the location. Forget this one; you can’t move your home. There’s not much you can do about location, right? Actually, there is one thing you can do: price it right from the start.
Let’s move on to the first time a buyer sees your home as they pull to the curb out front. Go stand out at the curb and look at it the way you would if you were shopping for a home. Sometimes, a couple hours of labor and $100 worth of beauty bark can be worth thousands in the sales price. I’ve had buyers choose not to get out of the car when we pulled up to a home that they had once been excited to see.
Likewise, I’ve had buyers say they’ve seen enough simply by peaking into the front door. The nose trumps the eyes when it comes to the first impression when entering the house. Buyers get more caught up in the details. Once the home shopper is inside, it’s easy for them to get distracted and focus on something that seems to have nothing to do with the structure they will be buying, from a dirty dish in the sink to a teenager’s bedroom that’s been decorated in posters and/or melodrama. Do everything you can to set a positive lasting impression. The buyer may look at dozens of homes. What is your strategy to convince them to make an offer on yours?
Guest post by Eric Johnson, Director of Education