THE main obstacle to Gavin Vallance’s plans for buying an apartment in New York City seems to be a three-bedroom colonial about 17 miles away, in West Orange, N.J. Barbara P. Fernandez for The New York Times.
Mr. Vallance, an information technology specialist at a financial services firm, bought the house about six years ago for $270,000 but has since decided he prefers the city to the suburbs. Selling it now isn’t the best option. “Maybe I could get $340,000, but four years ago I would have gotten $400,000,” he said.
And so he waits, leasing a one-bedroom in Midtown Manhattan while he rents out his house.
Dr. Lorena Siqueira, a pediatrician, is also dealing with unfortunate market timing. Three years ago, she bought as an investment a two-bedroom condominium on Brickell Key, a gated island in downtown Miami. She is concerned that the recently completed condo will not sell quickly for the price she wants — above the $1 million or so she paid at preconstruction prices. Stuck now with two homes that are near each other, she will rent out the new unit.
“I would rather take a loss on the rental and wait for the market to stabilize,” Dr. Siqueira said.
The housing market morass has created a new class of real estate investors: the accidental landlords. Some, like Mr. Vallance, have moved into new homes and can’t sell their old ones — at least for the prices they want — while others, like Dr. Siqueira, chose to invest in the changing market. Then there are those for whom renting has become a way to forestall impending foreclosure.
No one knows the exact number of unintentional landlords, but a survey a year ago by Completelandlord.com found that nearly one out of five landlords did not plan to rent out a property when he or she bought it.
For many of these people, though, the option of renting out a home is a godsend, enabling them to cover some or even all of their carrying costs while they regroup financially or wait out the market.
Some may prove so adept at being landlords that they choose to continue in that role. Of course, others may shrink at the mere thought of dealing with broken toilets, bounced rent checks or strangers living in what was once their home; they might be better off selling the property, or walking away from it, even if it means losses.
“The people who don’t succeed don’t have the ‘people skills,’ ” said Janet Portman, a real estate lawyer and co-author of several books, including “Every Landlord’s Legal Guide” (Nolo.com), “and they don’t know the difference between a Phillips screwdriver and a straight-edge screwdriver.”
More often than not, they also fail to treat the rental property as a business. “You have to segregate the income and expenses” from personal accounts, Ms. Portman said, and handle separately matters related to taxes, insurance and home maintenance.
So where does the neophyte landlord begin?
One of the first steps, experts say, is to become familiar with local landlord-tenant laws and laws pertaining to fair housing, or to consult an experienced real estate professional who is.
“People think they can do what they want with their property, but they are really constrained by some very complex rules,” Ms. Portman said.
(Landlords can check out www.hud.gov, the Web site for the Housing and Urban Development, to review rules and regulations, and thelpa.com, the Web site for the Landlord Protection Agency. Ms. Portman’s book also has state-by-state information.)
Landlords must exercise caution, too, when drawing up a lease or month-to-month rental agreement — the documents that spell out everyone’s rights and responsibilities. (Standard forms can be downloaded at Completelandlord.com, nolo.com, thelpa.com or myriad other places.)
One poorly worded clause could provide a dangerous loophole for a bad tenant who happens to be well versed in the law.
“I’ve had all kinds of tricks pulled on me by renters to try to avoid paying,” or eviction, said Alex Lazo, a real estate investor from Orange, Calif., who has had both good and bad experiences over the last few years. “It’s a lengthy process to get somebody out.”
For that reason alone, it is crucial to thoroughly vet tenants. “Call their references, ask for copies of tax returns, run a credit report,” said Danielle Babb, whose coming book, “The Accidental Landlord” (Alpha Books), devotes a section to tenant evaluation.
For $16.95, landlords can obtain a credit report from thelpa.com site, which includes a FICO score range and makes note of liens, collections or bankruptcy filings. Clearscreening.com also sells services.
Another option is to hire someone to do this work. Dr. Siqueira will hand over most of the rental duties to Daysi Morey, a listing agent for her new Miami condo building, the Asia. Mr. Vallance, meanwhile, found his tenants through Roberta Baldwin of Re/Max Village Square in Upper Montclair, N.J., the agent who sold him his house, but he is handling other chores.
Property managers not only find and screen tenants but also collect the rent and manage maintenance and repairs; some provide housekeeping services. Fees are around 6 to 10 percent of the monthly rent, experts say, though in some resort areas they can easily exceed 30 percent. (A real estate agent may charge 3 percent of one year’s rent to find tenants.)
But here again, landlords must be cautious. Managers “vary tremendously,” said Ms. Portman, who suggests asking other landlords for recommendations. Groups like the National Association of Residential Property Managers (narpm.org) can also help.
A good property manager will have a list of reliable contractors to fix the plumbing or repair the clothes dryer, although one way to minimize these problems is to ensure that the property is in good shape before it’s rented out. “Make sure the place is up to code — check local ordinances for requirements,” Ms. Portman said.
Because repairs will cut into profits, it’s important to keep an emergency reserve. “Even with the most minor repairs, you have to have a technician go out there — and there goes half the month’s rent,” said Mr. Lazo, the California landlord. “Sometimes it’s cheaper for the place to be vacant,” he said, adding that he derives most of his profits after the property, once appreciated, is sold.
All of these expenses — along with the mortgage, property taxes or homeowner association dues — should be kept in mind when calculating how much rent to charge. Will the home be furnished? If so, landlords can typically charge $200 to $500 more a month, according to Ms. Babb.
A real estate agent or property manager will know the going rates. Do-it-yourselfers can peruse places like Craigslist or rent-o-meter.com, a Web site that provides a spectrum of rents in a particular area.
Mr. Vallance charges $1,900 a month to rent his house; the tenants also pay for utilities and water. Still, the rent covers just 90 percent of his monthly expenses, and so he expects to write off any losses on his tax return, along with expenses associated with the property.
While tax deductions are an advantage of being a landlord, there are also drawbacks. Those who have not lived in the rented-out property in two of the last five years may have to pay a capital gains tax on any profit after the property is sold.
Landlords must also be cognizant of insurance. “Call your carrier and tell them what you’re doing,” Ms. Portman said, adding that homeowners’ policies might become null and void once a property is rented, unless changes are made. (Renters will need their own coverage for personal items.)
“You need to confirm that everything in your policy will kick in if the tenant starts a fire and burns down the place,” she said.
The lesson to be taken from this article is that often when you are considering a condo purchase; to the time it is constructed and registered may be 3 years from deposit to registration. Your life circumstances or even family unit may have changed in that time.
I recall a client who purchased a beautiful suite on Queens Quay ( Bathurst south of Front Street) that was a one bedroom plus den, with an incredible unobstructed view of the Toronto Islands and harbour. Prior to occupancy he was blessed with their second child. The thoughts of night life and living downtown became storage space for cribs and strollers. David Pylyp