Dear Ray,
We’ve purchased a new home, and we’re on the fence about what to do with our old home. Should we sell our old home or hold onto it and rent it out? We’d appreciated your perspective.
— E.H.
The decision whether to sell or rent your home is not so simple. From my perspective, the No. 1 problem I see is the majority of people fail to fully consider all the issues that arise when you become a landlord. Deciding whether to rent out your home is both a monetary and personal decision, and it depends on your tolerance for risk.
Long before I became a Realtor, I learned the secret of real estate: He who holds, wins. In my family, we hold real estate long-term. But that means you need to become a landlord — therein lays the challenge.
Being a landlord involves a lot more than placing a “for rent” ad on Craigslist, choosing the most charming applicant, then sitting back and collecting rent checks — that’s the fantasy part of being a landlord. Before you take on a new career as a landlord, take the time to educate yourself.
Do your homework
The first question you need to ask yourself is: Can I afford to keep my present house? Over the last decade, many people have been able to refinance their home mortgage and lock in a low interest rate. The low mortgage payment — combined with the strong rental market — means you may be able to charge more in rent than the monthly mortgage payment.
But what happens if your tenant doesn’t pay the rent? Even careful screening won’t guarantee your tenant will pay the rent on time each month. Your tenant could lose his/her job, and many people aren’t very good at managing their money. Are you prepared to cover your mortgage payment if the tenant fails to pay the rent for one month or three months? Do you understand the eviction process and the costs involved? Do you know an experienced eviction attorney?
Before you make a decision about whether to become a landlord, I recommend you talk to an attorney about worst-case scenarios.
Have you considered the tax implications of converting your home to an investment? Now is the time to get in touch with your certified public accountant to have a conversation about the pros and cons of owning an investment property. You need to have a grasp of the tax implications and plan out a long-term investment strategy, as well as an exit strategy if you decide to sell.
While doing your homework, you should also contact your property insurer. Will converting your home from owner-occupied to a rental result in higher insurance premiums? Do you need to increase your liability coverage?
Here are some additional issues to think about: Is your home/condo governed by a homeowners’ association (HOA)? Does your HOA have rules about renters? Will you allow pets — cats, dogs only? Will you collect the rent check in-person, or have it mailed to you? Who will maintain the yard, gutters and exterior? Does your lease provide for periodic property inspections? What lease form are you using, and does it address Seattle’s unique landlord-tenant laws?
What’s the condition of your home? Have you maintained the home in top condition? Is your home updated and unlikely to need repairs? Or will you need to replace the roof and furnace in the next five years? And what if the furnace goes out in January, or the sewer line becomes clogged, flooding the basement at 3 a.m.? Do you have a list of service providers who will respond when you have an emergency?
Repairs are part of being a landlord, and so is handling tenant calls. Who will take the tenant’s call when repairs come up? Will you manage the property yourself, or will you hire a professional property-management company?
Have you developed a budget for the property? Do you know the actual monthly expenses or carrying costs for the property? That would include the mortgage payment, real estate taxes, insurance, homeowners’ dues, utilities and an additional amount for unexpected repairs.
Where is the property located? Is it in a neighborhood that is likely to improve or decline? In most cases, you can count on attractive appreciation of your property over time. According to historical data from the National Association of Realtors, existing homes increased their value by 5.4 percent annually from 1968 to 2009, on average nationwide.
A good investment
From its exclusive research, NeighborhoodScout.com reports, “In the last 10 years, Seattle has experienced some of the highest home-appreciation rates of any community in the nation. Seattle real estate appreciated 51.3 percent over the last 10 years, which is an average annual home-appreciation rate of 4.23 percent, putting Seattle in the top 10 percent nationally for real estate appreciation. If you are a homebuyer or real estate investor, Seattle definitely has a track record of being one of the best long-term real estate investments in America through the last 10 years.”
NeighborhoodScout’s exclusive research also found that Seattle’s housing market had one of the top real estate appreciation rates in the United States over the last quarter of 2014, which may hint at the city’s near-term real estate investment strength.
All of the data on home appreciation in Seattle points to the advantages of hanging onto your home long-term and converting it to a rental — but only you can determine if you’re cut out to be a landlord after considering all factors.
RAY AKERS is a licensed Realtor for Lake & Co. Real Estate in Seattle. Send your questions to ray@akerscargill.com or call (206) 722-4444.