MONEY Investing

Thinking About Becoming a Landlord? Avoid These 6 Rookie Mistakes

For Rent sign
Zachary Zavislak

Putting your property up for rent can be tricky. Here’s how to sidestep six of the most common blunders.

Ever considered becoming a landlord? There are plenty of reasons you might. For some, it’s the temptation to scoop up a cheap property before the last of the deals vanish. Or maybe you’re like the 39% of homebuyers who told real estate firm Redfin that they’re interested in renting out their old place. Then there’s the lure of steadily escalating rents. The cost of renting the typical single-family home or apartment rose 4.5% in the past year, and spiked by more than 10% in the hottest areas, according to Trulia.

Becoming a landlord can be a profitable move, but learning the ropes requires some effort; it’s easy to take a misstep and end up in the red. “It’s not a passive investment, like putting your money in a mutual fund,” says Robert Cain, founder of landlord resource site Rental Property Reporter. Below, six slip-ups frequently made by newbie landlords, and strategies that will help you avoid making the same mistakes.

No. 1: Underestimating costs

You’ll most likely account for your insurance, taxes, and if you have one, mortgage. But you might miss expenses such as water, garbage, gardening, and regular repair and upkeep tasks. Even riskier, you may fail to put aside a large enough pot for unexpected expenses and big-ticket items. “Mom-and-pop investors tend to skimp on reserve and emergency funds,” says John Yoegel, author of Perfect Phrases for Landlords and Property Managers.

For a realistic estimate, plan for annual costs (not including your mortgage) to run at least 35% to ­ 45% of your yearly rental income, says Leonard Baron, who runs the real estate investor website ­ProfessorBaron.com. When calculating future income, it’s a good rule of thumb to include only 10 or 11 months of payments per year. After all, whenever a tenant moves out, you’ll still be stuck with expenses.

Parsing Rising Rents

No. 2: Breaking the law

Tenant and landlord laws vary from state to state and even city to city. For example, in some areas, you can require a month-to-month tenant to move out within 15 days, while in others you must give him 60 days’ notice. Yet when real estate site Zillow quizzed landlords on basic rental laws, the average respondent missed at least half the questions. One easy way to avoid getting into legal hot water: Never buy generic lease or other tenant forms, which don’t account for local laws, from a general real estate site or a big-box store, says Cain. To get the skinny on what’s permitted in your town, talk to your local or state landlord or apartment owners association. These groups usually cost at least $50 to join.

You know that federal law prohibits you from denying a rental to someone based on race, religion, or gender. Keep in mind that it also means that you can’t advertise a place as perfect for female roommates or specify no kids. You may, however, include a cap on the total number of occupants or ban pets.

No. 3: Skimping on vetting prospective tenants

When you’re looking for a good renter, it’s not enough to trust your instincts, or even to go on a referral from a friend. “Landlords get in trouble when they are in a hurry to find tenants and when they feel sorry for someone,” says Cain.

Never rent your property without checking the prospective tenant’s credit, confirming the source and amount of income, and checking in with the current and previous landlords, he says. Look for income to run at least 2½ times annual rent. Sites such as E-Renter.com and MySmartMove.com provide credit and background details for around $25.

No. 4: Ignoring renters insurance policies

Landlord policies cover the structure of the home, your appliances, and liability in case of injuries or property damage. Not on this list? The tenant’s stuff. You may think that’s not your problem, but Michael Corbett of Trulia warns that renting to one of the 65% of tenants who lack a policy can cause problems if something goes wrong. “Tenants lash out when they realize they aren’t being compensated,” he says.

In places where it’s legal, such as California, he recommends requiring that renters purchase a policy (go to your local landlord association to check the law in your state). This may shrink your pool of potential tenants, but is likely to increase the odds that you end up with someone responsible. If that’s not an option, be sure to explain to your tenant that you are not covering his things, and suggest he buy his own insurance.

No. 5: Failing to check out the property regularly

Don’t count on your renter to tell you about problems. “A tenant will complain about an inconvenience, such as plumbing issues, but not necessarily something like broken rain gutters that can produce major problems down the road,” says Yoegel. What begins as a dripping pipe or watermark on the ceiling can quickly swell into a multi-­thousand-dollar repair if left unaddressed. “Water damage is a big one,” says Corbett. “It can be outrageously expensive to fix.”

While you must respect your tenant’s privacy and cannot legally enter the residence without advance notice, you should find a way to take a regular look at the property. One solution: Add a clause to the lease specifying that you or your property manager will inspect the home at least every six months. It’s also a good idea to drive by the place once a week or so to look for exterior trouble spots. Finally, swing by anytime work is being done; you can verify that the job goes as you see fit and take a quick glance around for other potential issues.

No. 6: Going DIY at tax time

The tax treatment of rental properties is nothing like that of your home, and keeping it all straight is nearly impossible for novice landlords. The rules of depreciation are a prime example. The IRS requires that you take a deduction for wear and tear on the property each year. However, “the rules say depreciation is ‘allowed’ or ‘allowable,’ so people assume it’s optional,” says Cindy Hockenberry of the National Association of Tax Professionals. If you don’t claim the deduction for depreciation, you’ll miss a yearly tax break. Then, when you sell, the IRS requires you to retroactively depreciate the home, and that’s likely to leave you with a larger-than- expected tax bill. Not tricky enough? Starting this year the government “complicated” the regulations about what types of repairs you can deduct annually, says Hockenberry.

The bottom line? Get a professional’s help—at least for the first year or two until you fully understand the rules. And don’t forget to keep receipts for everything: You can deduct all the costs involved in managing your property, including the mileage for all those drop-bys.

TIME movies

Iconic Ferris Bueller’s Day Off House Finally Sells for $1.06M

Ferris Bueller Home Sale
Visitors tour the pavilion in the back of the modernist home in Highland Park, Ill., that was featured in the movie "Ferris Bueller's Day Off" in 2009. Eric Davis—Sun-Times Meida/AP

The Ben Rose house — a.k.a. Cameron's crib from the 1986 film — has been a hard sell over the years

The famous glass house of Ferris Bueller’s Day Off fame just sold for $1.06 million. While the ’80s comedy classic is beloved by movie fans, prospective homeowners haven’t quite felt the same way about the building itself.

The unusual Highland Park, Ill., property’s adjustable walls, two separate units and popularity as a pop culture landmark had real estate agents going “…Anyone? Anyone?” for years — its $1.06m price tag is well below the original $2.3 million asking price from 2009. Perhaps the house’s notable architectural history — it was designed by A. James Speyer in 1953 in the style of Ludwidg Mies van der Rohe — made up for the lack of a fiery-red Ferrari in the end.

[Variety]

MONEY

Why Underwater Homeowners Are a First-Time Buyer’s Enemy #1

Underwater home
17% of all homeowners with a mortgage owe more than their homes are worth. Dejan Stanisavljevic—Shutterstock

17% of homeowners, and 30% of lower-priced homes, are underwater. That's keeping first-time home buyers from finding their dream home.

Home sales picked up a bit in April after a slow, ugly winter, but compared to last year they’re pretty sluggish. They’re trending down 7%, according to the latest from the National Association of Realtors. What’s more, first-time home buyers are still missing from the market: Their share of purchases stayed flat from last year at 29%. Historically, four out of 10 buyers are first-timers, NAR reports.

What gives? It’s not just that aspiring buyers are having a hard time getting mortgages. In most of the country’s largest cities, there simply aren’t enough homes on the market to satisfy demand. One big culprit: The homes where owners still owe more than the house is worth–and so they can’t sell.

Even though prices have rebounded nicely in the last two years, 17% of all homeowners with a mortgage are underwater, according to data firm RealtyTrac. In fact, 241 counties representing a third of the country’s population have at least 20% of homes that are “seriously underwater”–mortgage debt is more than 25% higher than the home’s value. In 136 counties, it’s more than 25%, and the worst counties top 33%.

Source: RealtyTrac

A homeowner who can’t pay off the mortgage without bringing cash to the closing table simply isn’t going to sell. Not only do they need to be able to settle with the bank, they also need to cover their own closing costs and sales expenses. Between a 5%-6% agent commission and closing costs, the owner has to be at least 10% above water, and that’s before they even consider putting money down on their next property.

This cycle hits first-time buyers the hardest, says Zillow chief economist Stan Humphries, because underwater homes tend to be the most affordable. About 30% of homeowners in the lowest price tier of homes were underwater in the first quarter, compared to 11% of homes in the highest third.

“It’s hard to overstate just how much of a drag on the housing market negative equity really is,” Humphries says. To make matters worse, the shortage of for-sale homes created by the underwater owners drives up prices, “which in turn makes those homes that are available that much less affordable.”

The low end of the market is where listings are fewest, according to Zillow research.

 

MONEY

What It Costs to Live in America’s No. 1 Place to Live

Sharon, Massachusetts, was ranked no. 1 on Money’s Best Places to Live. This New England town is surrounded by a wealth of good jobs in Boston, Providence, and the Route 128 tech corridor, which shielded Sharon from the worst of the recession. From a cup of joe to a tank of gas, here’s what things cost in Sharon, Mass.

MONEY

Watch: You Can Live Big or Small in the Best Place

A half-hour train ride from Boston or Providence, the town Sharon, in Massachusetts, has the natural beauty of a more remote place.

When it comes to real estate, there’s something for everyone in this charming town, ranked by Money as the Best Place to Live. We took a sneak peek at three homes–entry-level, mid-range, and high-end lake-front—to see how far your dollar goes here.

MONEY Ask the Expert

Should I Sell My Home or Rent It Out?

Q: I may need to relocate for my job. I got a deal on it in 2012. Should I keep it and rent it out while prices are rising—or should I sell and use the profits to make a nice down payment on a new home? — Shane Keys, Atlanta

A: A solid rental property investment generates enough in rent to cover expenses plus a 10% return, says Brandon Turner, an experienced investor and senior editor at real estate investing website BiggerPockets. You told us that you’re paying $1,100 in mortgage, taxes and insurance. Add to that a property manager (average cost: 12% of gross rents), repairs, and a reserve in case of vacancies. It’s unlikely that the $1,500 maximum in monthly rent you’d likely bring in for your three-bedroom home (check comparables at sites like Hotpads and Rentometer) would produce anything close to a 10% return.

You also told us that you have $45,000 in equity. Selling and plowing that into your next home would eliminate the need for expensive private mortgage insurance—now costing you $137 a month because you had to go with a low-money-down FHA loan—and it would of course reduce your mortgage payment. Plus, you’ll be able to protect the profit from capital gains taxes (up to $500,000 for married couples in home equity is tax-free), a perk you eventually lose if you convert your home into an investment property.

Turner’s conclusion: Sell.

MONEY house hunt

‘I Have $1 Million and I Couldn’t Get a Mortgage:’ A Buyer’s Story

Lynda Pratscher bought this two-bedroom condo for $138,500.

Despite her more-than-$1 million investment portfolio, Lynda Pratscher couldn’t qualify for a loan because she wasn’t earning income.

Lynda Pratscher, retired telecommunications project manager, downsized from her $315,000 four-bedroom home Middleton, WI to a $138,500 two-bedroom condo in Wheaton, IL. This is the story of her House Hunt.

She was ready to sell but wasn’t sure where she wanted to end up.

I’ve been a single parent for 15 years or so, and my oldest son was off to college. A four-bedroom, three-car garage home in Middleton, WI was just way too big for me and my younger son and way too much for me to maintain by myself.

I was hesitant because the market hadn’t completely come back yet. I was lucky because I bought in 2002 and the home was worth about $50,000 more than what I paid for it. I sold it in 2012 and decided to rent for a while until I decided what I wanted to do. We went out to Las Vegas and tried that out. We stayed for a year and then moved to Illinois, where we were originally from, in Aurora, just outside Chicago.

After a while she started looking for condos, but saw they were selling fast.

I liked Aurora, but I wanted to go back to college and take classes. I didn’t want the congestion of a big university town though, and I don’t want to live near Animal House. I started looking at towns near the College of DuPage in Glen Ellyn, IL. They have a fitness center, classes, events. I figured, I could build my social life around that.

In February I started contacting agents and looking on all the websites. I set up custom searches and got email updates from agents about new listings. I found a beautifully landscaped condo complex near a lake and started watching for that. When a condo there came up, I contacted the realtor and it was already under contract.

Related: What mortgage is right for you?

At first, she wanted a mortgage. She didn’t want to use all her free cash for a home purchase.

I had quit my job in February, knowing I could live off my savings. I will be 63 in July but I wanted to wait to take Social Security if I could. I have $1.1 million in investments, plus the money from the house sale in a CD. I went to my credit union, and they wouldn’t give me a mortgage because I didn’t have an actual income. They wouldn’t even look at my investments! To them, I had no income. It just sounds crazy.

Then her perfect condo showed up.

I saw a condo on a realtor’s email list and it had everything I wanted. It was on the first floor. It had a one-car garage. It had laundry inside the unit. My agent called me the next morning at 6 a.m. and said, ‘We have an appointment at noon, are you OK with that?’

I walked in and loved the place right away. It was very well cared for and the bathrooms had just been updated. I knew I wanted to put in a bid. She said, ‘I think this thing is going to go very fast.’

The list price was $139,000 and I bid $135,000 cash. They dropped the price by $500, but my agent told me two other people came to see the place after me. I accepted the counteroffer. I didn’t want to lose it. Later, their lawyer told my lawyer they had a backup bid for substantially more than the asking price. I got a great deal.

It turned out that paying cash saved her some money.

Closing was so easy, and the original estimate on my closing costs was $3,000. I ended up paying only around $2,000. I had no idea how much it was worth to pay cash.

House Hunt is an occasional series about buying a new home. Have an interesting story to tell? Email us at realestate@moneymail.com.

TIME real estate

Nearly 10 Million Mortgaged Homes are Still Underwater

Mortgage Bankers Association To Release Weekly Mortgage Market Index June 12
A house for sale in LaSalle, Ill., June 7, 2013. Daniel Acker—Bloomberg /Getty Images

A new reports estimates some 18% of mortgaged homeowners are stuck with homes worth less than their debt, and that's an improvement over previous quarters

A collapse in housing prices has trapped nearly 10 million U.S. homeowners in homes worth less than their mortgages, according to a new report by real-estate price tracking website, Zillow.

The report estimates that in the first quarter of 2014, 18.8% of mortgaged homeowners were stuck in homes that would sell at a loss. That marks an improvement over the final quarter of last year when 19.4% of home mortgages were underwater and a significant improvement over the 2012 high of 31.4% — but still leaves nearly 10 million households struggling in negative equity.

The report estimates that another 10 million homeowners have 20% or less equity on their homes, known as “effective negative equity” as homeowners can’t draw enough home equity to swallow the costs of selling the home and moving upmarket. Many home owners rely on home equity to fund the broker’s fees and meet the next home’s down payment.

Underwater borrowers threaten to leave a lingering chill in the housing market, the study’s authors concluded. “The unfortunate reality is that housing markets look to be swimming with underwater borrowers for years to come,” said Zillow Chief Economist Dr. Stan Humphries.

TIME housing

Apartments are Driving the Housing Recovery, Not the Suburbs

Retail and Apartment Construction Ahead of Building Permits Data
Subcontractors work at the Donohoe Construction Co. Bentley retail and apartment building under construction in Washington on May 14, 2014. Bloomberg/Getty Images

The momentum in the housing market is back. But it's apartment-building that's driving construction

U.S. home construction is surging back to pre-recession levels, but it’s not because people are building traditional suburban homes.

It’s because apartment building is on the rise.

Home builders began construction on 1.07 million homes in April at an annualized rate, up 13.2 percent from March, the Census Bureau said Friday. That’s the highest rate of home construction since November of last year, and the last time housing construction hovered consistently in the over 1 million homes-per-month annualized range was early 2008.

But homebuilding looks very different than it did six years ago. Today, apartments and condominiums are driving construction, instead of all-American white picket fence homes. In April, construction on structures with 5 units or more increased 42.9 percent compared with the month before, while construction on a classic single-family homes rose a measly 0.8 percent. It’s part of a new trend of young people moving to cities and raising demand for apartment units and rentals.

“It’s been a consistent story,” said Jed Kolko, chief economist with real estate firm Trulia. “Not only is multi-unit construction a larger share of overall starts than it was during and before the bubble, but a higher share of those multi-unit starts are intended for rent as opposed to condos.”

Rentals are in high demand as more people chose to live in densely populated cities and find it difficult to obtain a mortgage. In the first quarter of 2014, 93 percent of multi-family homes started in April were intended for rent, compared with around 60 percent during the pre-recession housing bubble, according to Census data.

During the recession, a lot of young people found themselves jobless and living at home. But as the recovery has picked up pace, young people have gotten jobs and are ready to move out. Much of the multi-unit construction is due to young people re-entering the workforce and renting their own flats. Plus, mortgage standards remain pretty tight after the recession, making it harder to buy a house.

Whatever the reasons, single-family, suburban homes simply aren’t the economic force they were before the recession.

 

TIME Israel

Israeli Ex-PM Ehud Olmert Sentenced to 6 Years in Jail

Former Israel prime minister Ehud Olmert is sentenced to 6 years accusation of corruption in Tel Aviv, Israel on May 13, 2014.
Former Israel prime minister Ehud Olmert is sentenced to 6 years accusation of corruption in Tel Aviv, Israel on May 13, 2014. Jack Guez—Anadolu Agency/Getty Images

The former prime minister and mayor of Jerusalem was convicted of accepting bribes over a contentious real estate deal in the Holy City

Former Israeli Prime Minister Ehud Olmert was sentenced to six years in prison Tuesday and ordered to pay a fine of more than $289,000 after a court convicted him of accepting bribes during his time as mayor of Jerusalem.

Olmert was convicted of accepting $161,000 from realtors who sought approval for a contentious luxury housing development in Jerusalem called Holyland. He served as mayor of the city from 1993 to 2003, and was Prime Minister of Israel from 2006 to 2009.

Judge David Rozen compared Olmert to a “traitor” during the sentencing, the New York Times reports, and railed against the wider corruption of political and business elites. “The cancer must be uprooted,” Rozen said.

Olmert’s defense team had requested a commutation of the sentence to community service, but Rozen matched the prosecution’s request for jail time.

The former Prime Minister maintains his innocence and vowed to appeal the decision in a statement on Tuesday, calling it “severe and unjust.”

[NYT]

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser