Author Archives: rmheditor
I never intended to become a landlady but my pending out of state move made it inevitable. I was not about to sell my house as the market was continuing to improve. My vision of a landlord was much like the school lunch lady, usually mid-50s and disgruntled for no readily apparent reason. As someone in my late 20s I had a hard time seeing myself in this role though my self-image was the least of my worries. My mind was swirling with questions about my new landlady responsibilities. Would the tenant trash my beloved first home? What would I be liable for? Can I charge enough rent to cover my mortgage? What tax implications are involved in having a rental property? How do I manage everything thousands of miles away?
I knew there were professional property managers I could hire to handle things but I am a penny pincher and save every opportunity I can. Being a generation Y’er, I turn to the internet to solve my problems. Enter the World Wide Web and massive information overload. I read articles seeing messy evictions, costly squatting, the wide range of ways a property can be destroyed from pests to pets to drugs to water damage and all the things I didn’t even know I didn’t know about renting your house.
I started looking into the wide range of leases, tenant screening methods, tax, state and fair housing laws. I knew that I could save a little money each month on management fees and assume I am smart enough to make the right legal, accounting and other crucial decisions. On the other hand, I could hire a professional who has a bank of resources, network of experts, years of experience and whose living is entirely based on managing rentals well. I knew there were huge financial and legal risks I was exposing myself to by becoming a DIYer. I also knew that vacancy rates are around 9% while professionally managed properties boast half the vacancy rate. Vacancy is expensive (meaning a huge loss of rental income plus the cost of turnover) and this fact alone was almost enough to convince me. I knew I could spend time trying to learn about all these subjects and struggle to manage my property from thousands of miles away, effectively letting my house control me. Alternately I could buy myself some peace of mind and enjoy half the vacancy rates while I spent time adjusting to my new home, job situation, focusing on how to maximize my other assets.
I ended up finding a property manager with over 10 years of experience, who handles everything for me. The tenant he placed is quite like me, fastidious and responsible. My manager checks on the property regularly and I get a rent check every month that more than covers my mortgage, management fees and taxes. So, no stress over advertising the property, picking the right tenant, setting rates, rental housing laws, late night emergency calls and no disgruntled landlady here. I just get to sit back, collect money and build equity. I guess being a landlady isn’t so bad after all.
Since the housing bubble burst, thousands of people have found themselves in the position of owing more on their current house than it would sell for in today’s market. A recent article from Time Magazine indicates that over 11.1 million homeowners are currently upside down in their mortgages, and that this number is growing at an alarming rate. If you’re one of the unfortunate crowd who finds themselves in this situation, and you either need or want to move, you’re likely trying to figure out how to get out of your current house without losing any more of your hard-earned cash in the process. Here are three common strategies that many people in this position consider:
1) Doing a “short sale.”
A “short sale” occurs when a bank agrees to let a borrower sell their house for less than the outstanding mortgage, then forgives the rest of the debt. Banks may be willing to do this in scenarios where, by their calculations, they stand to lose more money by going through a foreclosure process than they would by doing a short sale. However, part of qualifying for a short sale involves submitting a “letter of hardship” that explains why you can’t continue to make your current mortgage payments or pay the difference between your home’s sales price and your outstanding mortgage balance in the event of a sale. Simply wanting to buy another house, or “needing” to move for reasons that are essentially a matter of personal choice/preference, generally won’t cut it.
2) Buying a new house before walking away from the first, a.k.a. “buying and bailing.”
The term “buying and bailing” describes homeowners who walk away from their current house with its upside down mortgage, but purchase a new house at a better price and lower interest rate before their credit tanks. These homeowners typically tell lenders that they will rent out their old house (sometimes producing fake rental agreements), but never actually find a renter, and stop making mortgage payments on the old house as soon as their new house closes. The problem with the “buy and bail” is that lying on your loan application (for example, about having a renter when you actually don’t) and producing false documents is mortgage fraud, which is a federal offense, which, according to a recent FBI warning, is punishable by “up to 30 years in federal prison or $1,000,000 fine, or both.”
3) Renting the current house out, then buying another.
Renting your house and buying another may be easier than you think. While lenders have tightened their guidelines surrounding this practice due to the recent spike in “buy and bail” transactions they’ve seen, if you have a fair amount of equity in your home, this may be a viable solution. Here are typical lender guidelines for renting your current house, then buying another.
- You must qualify for both mortgages, which makes sense, because you’ll be paying two mortgages. A central issue is whether you’ll be able to count your rental income from the current house in your income to debt ratio (see above). If you have at least 30 percent equity (for conventional loans) or 25% equity (for FHA loans) in your current house, you can include rental income on your mortgage application.
- You must produce a signed lease on the current house, typically for a one-year term. The lender may require that the renter has already moved in.
- Some lenders require applicants to show that they have cash reserves to pay for the mortgages for 6 to 12 months.
If you are fortunate enough to have a good savings account and 30% equity in your current home or enough income to support two mortgages, then renting out your current home and getting into a new house at a lower interest rate, might be a viable option – and it also could be a sound investment.
Landlords and property managers across the country can revel in the buoyant facts about the apartment market: rents are high, vacancies are low and new units are cropping up every day.
Even with the slowly-growing real estate market pulling a few renters toward homeownership, the rental market is growing. According to a recent report by Axiometrics, rents increased by 0.54 percent in July, bringing the national average rent increase for 2012 up to 4.42 percent.
When the new units hit the market, Axiometrics expects rental rates to be slightly negatively impacted, but is still predicting overall growth of 4.1 percent.
Furthermore, property managers are having no trouble filling vacancies. Apartment occupancy levels are sitting at approximately 95 percent, according to a report by Marcus & Millichap.
Axiometrics expects about 56,000 new units to become available for rent by the end of 2012, which has multiple effects. On the one hand, rental rates will decrease slightly. On the other hand, new units need property managers, and property management firms all over the country are racing to increase staff to provide for landlords, which leads to an increase in the property management business.