A new term hit our popular culture a few years ago… the Accidental Landlord.
Somebody decided the word accidental was easier to use than “I can’t sell my home so I decided to rent it out” landlord. Calling these owners an accidental landlord has stuck. I don’t like the term. An owner who rents their home has made the decision that holding the property is the best strategy. There is no accident to it.
Property managers state they have two types of clients. Professional investors and accidental landlords. Accidental landlords are often people who had to move and decided to rent their home for cash flow. When the reality of owning a rental property starts to hit home there can be comfort in stating the decision to become a landlord was accidental. The frustration begins when there is a lack of resources available to handle surprises. The owner is now living in another home and has expenses associated with the new home. It is also likely that there is a very small difference between outflows (mortgage, interest, taxes, insurance and maintenance) and inflows (rent income) for the accidental landlord.
Accidental landlords compose an increasing number of rental owners. It is wise to stop thinking the decision was an accident. A better approach is to change the mindset about the investment. Owning a rental property offers tremendous long-term opportunities.
The following are tips from an actual owner who figured out how to be a successful Accidental Landlord.
Think Like An Investor
If you decide to rent your home do it wearing a business hat. Give up any emotional attachment because you raised the children, were newlyweds, or planted the large trees in the back. It is now an investment. Like any investment, your goal is either to generate income or to create value. With homes that are now leased, the first few years are hard to make a cash profit. Lack of equity and large mortgage payments are usually the culprit for why a home can’t be sold. The resulting net or even negative net cash proceeds, are often very disappointing to the accidental landlord. Other than covering the majority of the owner’s expenses, the typical accidental landlord’s former home is likely not going to provide an income return. With the exception of principal reduction and tax considerations, their former home is a long-term appreciation investment. It is at the point where the owner realizes their home is not a cash machine they become vulnerable to the accidental landlord label. The owner should accept the investment goal is not income generation, but value maximization.
The goal of value maximization is accomplished by holding the property and recognizing that tenants are covering the majority of expenses while paying off debt obligations on the property. The goal could easily be that the property is a retirement savings plan, available to be sold in the future, debt free.
Investments are a choice, not an accident. Investments should be held with the idea they are good choices and better than the alternatives. Real estate investments may involve losses in cash, but there is a nice tax benefit when you add in the deductions and depreciation available. This is usually why it is better to rent a home that can’t be sold for market, than to take the huge equity hit.
Give Serious Consideration To Hiring Professional Management
A common reaction from the accidental landlord is they can’t afford professional management. Are you an investor or a home owner? Investors utilize professionals to maximize their investments value. A great property manager will pay for themselves in many ways. They will actually increase your income and appreciation! A professional property manager can help you see your investment in a different light. The professional manager will be a problem solver. Your investment will grow in value and return, while you spend your time and energy expanding your life. This decision is not accidental. It is smart and valuable.
Here is a list of some of the ways professional management pays for itself and why the accidental landlord should not decide to also be the accidental manager.
Leasing the home
A professional property manager knows what channels of marketing will be successful for your home and location. Each day the home sits vacant costs money. Advertising the home for rent also costs lots of money. Not to mention needing to show the home to all interested parties. What is your time worth?
Taking an application
The biggest expense to a residential investor is not repairs. It is the bad tenant that leads to eviction and damages. Professional managers have access to data resources that can eliminate most of the bad tenants. These tools will cost the accidental landlord time and money. Will you know how to assess factors such as income to rent ratios, and issues with credit scores? A lot of subjective professional judgement, based on years of experience, goes into the tenant selection decision.
Identifying Top Dollar Rent
Professional investor clients state that the cost of management is easily covered by simply being able to rent their property for more money. Professional property managers in Indianapolis have access to current market information. Not dated rumors from a year ago when your neighbor rented their home. Tenants seem to want to negotiate leases when dealing directly with the owner. Finally, experienced tenants will pay more rent for a property with professional management.
Avoid The Biggest Mistake of Accidental Landlords
The biggest mistake the accidental landlord makes is comparing their former home to an investment property. The returns will not match what homes purchased for investment achieve. Investment properties have to be purchased with significantly more equity (down-payment) than a home that will be owner-occupied.
The accidental landlord should have the objective to pay off their mortgage debt while providing a great place for their tenants to live. If the rent covers the interest, taxes, insurance and maintenance, then you are at minimum breaking even. As the mortgage debt is reduced you are creating equity. With a little good fortune, the home will appreciate and holding the home will look like a great investment!
Your rental plan as an accidental landlord is not to receive a cash flow return. It is a savings account. The home might also appreciate. The owner should look into refinancing on a 15 year mortgage. Rent the home for 15 years and it will be paid off. At that point, your rental becomes a cash machine and the returns will be as good, if not better, than professional investors. After 15 years of renting, you will be a professional investor!
The accidental landlord’s home was not purchased as an investment. Achieving positive cash flow will take time to achieve. The owner should have a long-term vision when renting the property formerly known as home. It has the chance to be another source of wealth in retirement if the long-term perspective is maintained.