When a rental property lands in your lap, should you hold or fold? Outsource the management or do it yourself? Are you ready for the tenants, toilets and trash?
It doesn't take much to turn an ordinary homeowner into a landlord. Maybe you have to move but want to keep your home and rent it out. Or you have a change of fortune -- you get married, receive an inheritance or buy a new house before you unload the old one.
While many people would love to have an extra house to worry about, owning even one rental property can be a headache. You have to tear the problem apart and ask yourself, among other things:
- Is it worth hanging onto this property?
- How will you feel about strangers moving into your beloved home?
- Can you, a novice with a day job, turn a dime on a real-estate rental while avoiding the Tenants from Hell?
The answer to these questions depends partly on the place itself. Ideally, it's in good repair, in a safe part of town and the mortgage is cheap or paid off. The more your place departs from this ideal, the more closely you should look at selling if you can. That's because, whatever your reason for holding and renting out a spare house -- and there are many -- it won't work if you don't treat it like a business.
Can you do it? Should you?
The biggest criterion for whether you should even attempt this may be whether your temperament is suited to being a landlord. You first have to look yourself in the mirror and ask if you have the time and the skill set to do this properly.
Landlords' tales of nightmare tenants
In addition to your obligation to yourself to keep the business afloat, your landlord responsibilities include:
- Providing a safe, smoothly functioning home for your tenants. That means, for example, making sure plumbing, wiring and appliances function, outdoor areas and stairways are safe. It means quickly responding to a tenant's report of the inevitable malfunction or problem.
- Advertising the rental, selecting tenants and evicting them if you must -- all of which are governed by law.
- If you can't see yourself performing these roles, it doesn't mean you can't pursue your rental plans; you just might be one of the people for whom it's worth paying a professional property-management service. In fact, if you are out of town, consider the decision made; you simply must be on site to manage a rental. But first, you need to do some basic math:
Calculate your "nut."
That's the total cost of keeping the place going, including mortgage payments, utilities, maintenance, yardwork, repairs and any professional services you'll need, which could include property management, tax help and a legal consultant. If you're renting out your primary residence, you'll also have to decide whether to rent it furnished or unfurnished. If you leave furniture, be prepared for it to be damaged or, at the minimum, show some wear. Any personal effects, electronics, fragile items and anything else you care about should go in locked storage, either on-site or at a paid storage facility.
Estimate your rent price.
A competitive rent price reflects prevailing rates, so simply adding up your cost of ownership won't do. Check newspaper ads, call property management agencies and look at online classified ads such as Craigslist.org or Realtor.com's Move.com to assess the price range for similar units in your locale. Visit a few to hone your research.
Compare the rent you think you can get with your costs.
Work up two profit-and-loss statements: a best-case list and a more conservative one that includes all the things that could go wrong. Even if the plan doesn't pencil out, there may be good reasons for hanging onto a rental that doesn't turn an immediate profit. Among them: tax-sheltered depreciation; the chance of a profit if property values appreciate; the need to hold a home for a family member to use later; the prospect of a worse loss incurred by selling immediately; or the simple desire to add to the value of your estate.
Outsourcing: Paying up for peace of mind
When you add up the responsibilities, there's much to be said for hiring a professional. Going this route will cost you about 10% of the monthly rent collected -- a smaller proportion for high-end properties with high rents.
Avoid outfits charging less than 8%, says Robert S. Griswold, whose book, "Property Management for Dummies," contains a list of credentials, services and experience helpful in selecting a management company. These managers may lowball the management fee, then overcharge for maintenance or pay kickbacks to expensive contractors. Find a management company that bills you only for what the repair contractor charges, says Griswold.
If worrying about your property is keeping you awake at night, if a bad tenant is taking the fun away, if you must dig deeper and deeper into your savings to support it -- that's the time to sell if you can. Rental property is a business, and if it's not a business you like, let it go and stick to work you enjoy.
Marilyn Lewis of MSN Real Estate