Confronted with a slowing market, some home sellers resort to renting out their properties—forced to become landlords.
here should be a scientific term for the stages of grief a home seller goes through when times get tough. Since a house usually is the most valuable possession any of us are likely to own, what if potential buyers just don’t give it the same value? Oh, there is denial, followed by anger, depression, and, to be sure, lots of bargaining. But what if you reject that classic KÃ¼bler-Ross step, acceptance? What happens if you simply don’t accept that lousy, penny-ante offer?
In that case, you might be one of those home sellers who decides to ride out the current market slowdown by renting out the house. Indeed, in the last 12 months, more homes (252—an increase of 33 homes) have been put on the market for rent when they could not be sold. But are you ready to become a landlord?
Michael M. of Pleasantville readily admits the reason he chose his new path. “Our personal greed led us to become landlords,” he says. “My wife and I had put a lot of energy into our house, a lot of repairs, and we wanted to see a more appropriate payday than what we were seeing on the table.”
He and his wife had already moved into another house when they found themselves in the “bit of a pickle” of getting offers some $30,000 less than they had priced their home. “We were unrealistic in how the market had declined around us.”
When realtors hear their clients wonder aloud about renting out a sale property, they have the cautionary notes. “It requires a lot of adjustments, and most of them aren’t doable by most people,” says South Salem realtor Ken Sobel. “You have to hunker down and retrain to be a landlord.”
Even though Westchester County’s median home sales price is relatively stable ($622,500), especially when compared to the rest of the country ($220,000), it’s the buyers who have the leverage now. “People see the stories on CNN and it makes them nervous and they are moving to the rental side,” reports J.P. Endres-Fein of David Endres Realty Group. “Our office created a whole new rental division.”
For Michael M., becoming a landlord meant educating himself on the fine points of the trade. Besides the human component (i.e., deciding whether you are emotionally equipped to find and deal with a tenant), there is the financial side. Strict ledgers must be kept and tax benefits must be studied. A computer consultant, Michael was comfortable checking out the numbers; he saw he could endure it financially. When a friend in real estate advised him that the most important factor in renting success was choosing a tenant, he put a lot of attention into the study of references, not to mention gut feelings.
The biggest surprise was the swarm of applicants for the modest, three-bedroom, 1,500-square-foot house. “We had so many responses at twenty-five hundred dollars, I immediately changed the price to twenty-eight hundred dollars.”
“When I lived in that house, I was sweat-equitying everything,” he says. “But now I hire someone, pay the bills, and get a write-off on it. I get receipts for everything and keep very careful track, although I have to pay a fortune in insurance alone. That twenty-eight hundred dollars sounds great, but it goes brutally fast.”
While the rental fee is nice, it does not really bring profits. “There’s very little profit in real-estate investing other than the equity of the home itself. Anything I lose will be a write-off. When it comes time to sell, I’ll sell when real estate is the sweetheart child again. In five years, who knows where we’ll be?”
The deal also has been good for Michael’s pride. “All my friends sold,” he reports. “I said, â€˜Fellas, you got low-balled and you didn’t have the guts.’ Now, granted, they might be laughing at me; they don’t have any headaches. But I still own real property. And I’ve got a nice tenant who’s great because he always sends me a check. If he missed one check, my eyes would fall out of my head.” And so far his eyes have remained intact.
While the $2,800 rental fee worked out in this case, that’s because Michael was paying off a $300,000 mortgage on a Pleasantville house purchased seven years ago. But to pay off a million-dollar mortgage, such as you’d have on any nice house in Scarsdale, you’d have to ask around $6,000 a month.
Figuring out the rental price of a house involves a number of calculations. Adding up your mortage, insurance, and upkeep costs leads you to one number. (If you don’t like fixing heaters at three in the morning, you might have to pay someone to manage the property.) You’ll have to consult with your tax advisor to see how much depreciation you can charge and what sort of capital-gains hit might be waiting when you do sell the house. And finally, as realtor J.P. Endres-Fein notes, you have to look around to see what similar houses are getting and charge accordingly.
Marc Katz of Dobbs Ferry wasn’t forced into becoming a landlord. But he thought it made sense to rent out his beautiful white Victorian. “I was horrified by the ups and downs of the stock market,” he says. “I lost a lot of money.” Real estate, by contrast, seemed so much more solid. “I haven’t lost any money on that building. There’s not much to do. If you have nice tenants, nobody bothers you, you collect the rent, then you pay your mortgage, and that’s about it.
“It’s a tremendous value that people don’t realize. Not only are you collecting income, but you’re also depreciating the building. The government is almost paying for your mortgage. Anyway, I would say Westchester is solid. It’s gone up twenty or twenty-five percent in the last three, four years. Now it’s gone down three percent, and everybody’s crying. It’s still way up!”
Katz is going to try to sell it again. “But I’m in no hurry. The building is making money.”
It’s when the money is suddenly turned off that one’s character is tested. Steve Ferrari of Elmsford is experiencing a little character-testing now with a house he’s rented out. He had screened his renter carefully. She was in the medical field; she had credentials. Then, he says, she lost her job, turned to drinking, had loud parties, angered the neighbors. Worse, the rent started coming late. “So you’ve got to document everything,” Ferrari says, “and take it to the village court and hope for an eviction. That’s the bad thing about renting—you can lose two or three months’ rent. I try to key on people with young children because hopefully they’re going to stick around a while.” The tenant has since been evicted, Ferrari reports, with a month’s rent outstanding.
Ferrari, who runs a kitchen and bath business, now thinks of his rental property as a retirement plan. “There’s no pension in the kitchen business, so that’s part of my retirement.” He will forgo the slim profit provided by rental fees (about 25 percent of operating costs) for the real payday of selling an appreciated house. “When I’m ready to pack it in, the house goes.”
He doesn’t recommend the landlord business to friends anymore. Just as owners of apartment buildings are getting socked by the double whammy of rent control and heating-oil prices that have doubled, home renters face considerable danger.
“Rentals right now—that’s a tough business. Real estate is so expensive, and taxes are so expensive. How much rent do you charge after your mortgage? Some of my friends who do this are going crazy. I know guys who are literally walking away from their properties,
because it made more sense than holding on.”
Indeed, according to Westchester County Clerk Tim Idoni, foreclosure filings are up 39 percent over last year and up more than 200 percent over 2005. This would indicate that many more people should consider renting their troubled houses. But becoming a landlord means acquiring a skill set, and not everyone is up to learning it. Besides, much of the game rides on the soundness of your tenants
“You could find yourself on the short end,” warned Michael in Pleasantville. “You’re only a genius if they play by
Chris Hodenfield thought about becoming a landlord last year, but went for the fast sale instead.
Caption: Between outstanding rent and slim profit margins, Steve Ferrari of Elmsford no longer suggests the landlord biz to friends.