A t first they were dubbed as “accidental landlords.” They being homeowners who never intended to rent out their properties, but in the housing bust, they couldn’t sell their homes. Rather than seek foreclosure, as others did, they waited out the tough times by finding people to help pay their mortgage.
As the housing market has improved, and rent continues to increase in many metropolitan areas, buyers are trying out the role of “intentional investors.” They’re opting to build a real estate portfolio instead of sell their properties.
“We’re seeing accidental landlords migrate toward investors and see the value of having a property that can generate income for them,” says Lukas Krause, vice president of operations at Real Property Management in Salt Lake City.
But filling the shoes of a first-time landlord is no easy task. If you enter the job unprepared, you could lose money and deal with a real nightmare. Do yourself a favor, experts say, and spend time on research and preparation beforehand. With professional guidance you can avoid many common mistakes that could cost you time, money and stress.
“I often caution my clients who have already hectic full-time jobs that being an absentee landlord can be problematic,” says Michael Brier, a veteran certified public accountant in Burr Ridge, Ill. “It often takes more time and aggravation than they anticipate.”
Start by seeking advice from a financial planner, real estate attorney, property manager and/or a certified public accountant with expertise in residential investments.
Many rules or regulations govern the success of a rental investment. For instance, Breier notes that it’s important to understand the IRS rules and regulations regarding passive activity losses.
“Often, the new-to-the-business landlord is under the impression that they will reap lucrative tax benefits starting right away,” Breier says. “This is not always the case as the rules for deducting losses on real estate are very complex.”
You also should check what your current mortgage documents say about the home becoming non-owner occupied. Some mortgages contain what is called a “due on sale or transfer clause,” Breier adds, which may be triggered when the owner converts the residence to rental.
Ideally, a property-management company could takes care of all the chores and also screen your future tenants, so that you’re not inviting people with a serious criminal past into your home and neighborhood.
A survey on landlord practices conducted by independent research firm Liminality, Inc., on behalf of Real Property Management, found 21 percent of do-it-yourself landlords sometimes or never conducted background checks on their prospective tenants. Only 44 percent conducted sex-offender checks.
Krause says DIY landlords don’t have the time or resources to screen tenants, which can lead to property damage, legal fees and more.
Eliseo Arebalos, a broker and co-owner of architecture 8, a real estate brokerage in Los Angeles, says hiring a property manager also helps the owner create distance.
“My goal is to get the owner in the mind set of the property now being an income generator versus their personal residence,” he says.
And while it is always good to have tenants you get along with on a personal front, the ultimate goal is to select a strong and responsible tenant to protect an investment.
“I have seen owners approach tenant selection more as a friendship,” he adds. “Unless it is a personal acquaintance renting the property, my consistent recommendation is to keep the personal interactions limited.”
When it comes to protecting your personal investment as landlord, nothing should be accidental.
Krause adds that you need professionals to relieve the stress and interruptions that come with trying to manage a rental property.
© CTW Features