In the midst of all the economic, mortgage and election issues, it was really refreshing to read the New York Times article today about our favorite quirky Seattle neighborhoods where we work and play, which we sometimes forget what gems they really are.  " A Seattle That Won't Blend In" provides a great overview of Ballard and Fremont, from a historical, landmark, local interest, and travel/entertainment guide point of view.  A pleasure to read, with interesting facts about local establishments and landmarks that serve as a reminder to those of us lucky enough to call Seattle home that we need to make a point of getting out to enjoy our fair city more often.  Brothels-come-Pizzeria's, farmers markets, the locks, sealions, parks beaches, and the best dining around- it's all right here, and the NYT article is a great stroll through every bit of it!

 

 

 

 

I have been blogging and posting about the emerging issue of owners and sellers who are considering renting vs. selling their property in order with weather the bumpy housing markets.   On Sunday July 20, the New York Times ran a great article on this very topic, written by Vivian Marino (article link below), which I think is right on the mark in covering the issue.

 

In the article, Ms Marino talks about a “new class of real estate investors- accidental landlords”, and walks through the stories of several actual owners who are (or have recently) dealt with the issue of not wanting or being able to sell their homes in the current market, and working through the issues of how to handle the property as a rental.  Landlord-tenant, Fair Housing, caution about sourcing a lease to adequately protect the owner, managing vendors for repairs and maintenance, and the importance of screening tenants are important issues which the article raises. 

 

Ms. Marino also talks about the value of professional Property Management, which I have discussed as well in earlier blogs.  Essentially, managing a property effectively while navigating all of the above concerns can not only be challenging for an “accidental landlord”, but can also be a full time job.  For what is a pretty nominal fee (generally $100-$200 a month on average), a Property Manager is a trusted professional resource who can provide expertise and has the knowledge and experience to manage properties effectively.  Ms Marino also wisely points out that Property Managers “vary tremendously”, and owners should use references and referrals to find one they feel comfortable with.  In addition  to personal referrals from friends or colleagues, she also recommends NARPM (National Association of Residential Property Managers- www.narpm.org) as a referral resource.  In addition to these, I personally find that a good way to tell how well a PM manages their properties is to drive by some of their properties.  As you see signs or rental listings for a particular manager (and consider the impression their marketing makes on you as well), take a trip by the property.  Is it well maintained, kept tidy (garbage cans off the street, etc), have they polished up all of the curb appeal elements?  This is the best way to know how they will manage your property as well. 

 

The only aspect that I felt the article under-represented was the “relax, it doesn’t have to keep you awake at night” factor.  Of course turning your home into a rental property is a big deal, and yes as I’ve pointed out there are a lot of complicated issues that bear on the situation.  But with a little bit of education and awareness about them, you will be able to make informed decisions, and you should do so, then let it go, don’t overthink or worry incessantly about it.  If you are reading Property Management blogs and doing some cursory research, you understand the issues enough to know your resources.

 

“Landlords, if only by accident”, NYT July 20, 2008 is highly recommended reading for all of the “Accidental Landlords” out there.

 

http://www.nytimes.com/2008/07/20/realestate/20sqft.html?_r=1&ref=todayspaper&oref=slogin

As the real estate markets continue their volatility into what looks like could very well be the rest of 2008, this issue has really become the key question facing many sellers.  I can’t count how many forums, blogs, and news columns have started debating this in the past few weeks. 

 

The short answer of course, is that there’s no short answer.  But that’s not a big help to owners who face wither lowering their asking price to a break even or a loss against what they paid, or continuing to struggle with monthly mortgages while property site on the market.  So, let me outline some of the key considerations and issues, in the hopes that after reading this, someone asking themselves the question in the title could make an educated decision on their own situation.

 

Whether renting is an alternative to selling is something that's based on the specific needs of each seller/property. Many owners rightly think about rental cashflow, as well as the market forecast over the next 18-24 months. These alone aren’t enough on which to base a decision; there are a handful of considerations that also play a part in the equation.

If you aren't depending on the sale in order to close an another purchase, than renting certainly should be something you consider. It is a buyers market right now, and while prices could continue to fluctuate in the short term, it could be prudent to hold onto the property as a rental for one or more years to see how things play out. Over the longer term, real estate historically has continued to increase in value- the question today is how much and over what timeline. So, waiting things out isn't a bad alternative if that's an option for you.

Based on the above, is renting is a consideration, carefully review all the numbers to get an idea of how they will work

 

Monthly rent: This is tougher to gauge that you’d think, as it’s based on a  lot of things, including current market conditions in your city, area and even your immediate neighborhood.  You can look at other similar rentals to get a general idea, and a professional property manager can help you find the right rent.  Be realistic (what you think it’s worth and what others might think can be two different things), and be willing to be flexible- often if a property doesn’t general a lot of interest early on, it’s an indication that the price isn’t quite right yet.  (Note that rents are set by the market- what people are willing to pay at a given time based on similar properties in the area- not by a pre-determined amount you need or think you should get).   

 

Expenses: These include property taxes, mortgage, insurance, average repair and maintenance, yard care and other upkeep costs.  Utilities may or may not be covered by the tenants; generally in single family homes they are, but that’s not a hard and fast rule.  This again is something which varies in the market, and which your property manager can help you sort through.  So, they will either be an expense for you, or a non-impact for you  if the tenants pay them.  Also include 8-10% (of the rent) for property management costs.  Before resigning these as a cost, however, consider the ways in which your property manager helps get higher rents, lower repair and maintenance, and lower vacancy between tenants.  All together, these all come out about equal, but without professional property management, you risk seeing these other items cost you more.

 

Cash Flow:  Totals rents less total expenses is cash flow, meaning the amount left over (or under) each month from the rental.  Whether it covers your expenses completely or not, think through the impact of having this cash flow over a year vs. a vacant home for sale accruing mortgage payments each month with no offsetting income.  This is where it may make sense to minimize your overall cash outflow with supplemental rent, rather than letting them home sit vacant on the market. (See below about renting and selling at the same time). 

 

This is easy math, right?  Here is one typical scenario with averaged figures:

 

Home listed for sale- vacant                

Rental Income               $0

(annual- 12 months)                  

                       

Expenses                    

(annual- 12 months)                  

                       

Mortgage                      $28.80

Insurance                      $2,520

Property Tax                 $4,000

Utilities                         $7,200

Repairs/upkeep             $2,500

Property Management   $0

                       

Cash Flow                     ($45,020)

(before tax and depreciation)

 

 

Rental             

Rental Income               $19,800

(annual- 12 months)                  

                       

Expenses                    

(annual- 12 months)                  

                       

Mortgage                      $28,800

Insurance                      $2,520

Property Tax                 $4,000

Utilities                         $7,200

Repairs/upkeep             $2,500

Property Management   $1,980

                       

Cash Flow                     ($27,200)

(before tax and depreciation)

 

This uses a typical mortgage of $2,400/month and average rent of $1,650/month, which are wildly generalized- each property will of course have a more specific financial makeup which will vary from this; but what this does provide is the example that, with average figures used, rents can supplement a very high amount of overall annual costs (in this case, 60%), even if it’s not all of them, and that professional property management is a very small portion of the picture, especially given all of the benefits it provides.

 

If you’re home is for sale and sits on the market for a year, in this case it would cost you about $18,000 less out of pocket should you rent it instead while the market stabilizes.  Even more, it would only take 4.75 months on the market to have used up the difference in costs of vacancy vs. renting; so if you expect your home to be listed but unsold for longer than this, it would make sense to have rented in instead.  Again, these are averaged numbers, but you can use your own to figure the same decision points.

 

There is one more item beyond this in considering the financials.

 

Tax impacts and depreciation:  Something else that you need to think through is that income property (which is what a home becomes as a non-owner occupied rental) has financial benefits beyond simple rental cash flow. As income property, it's treated tax-wise somewhat like a business, meaning that operating expenses (utilities you pay, repairs, taxes, insurance, mortgage interest, management, etc), as well as depreciation and other costs are deducted from the gross rental income in order to determine taxable income for the property. (This is very different than personal income taxes, which are simply a percentage of your total reported income)  The affect can be a dramatic tax benefit depending on the specifics involved. So, owners should confer with a CPA or other resource to consider these benefits in addition to simple "rent less mortgage" cash flow impacts.

Finally- being a landlord is not something that everyone is prepared to become. There are landlord-Tenant laws, tenant screening, vendor management (like, knowing a reliable plumber who doesn't charge an arm and a leg to fix a leaky faucet), tenant relations (for example, what are your options if the tenants break one or more of the terms of the lease?, or, what are your obligations if they want to paint the interior in leiu of part of the rent, etc), and myriad other issues that, unless an owner does a lot of research first and/or have the time to take on landlording as a "part time" or even "full time" job, s/he may not be effective at self-managing the rental. In these cases, using a professional property manager provides you with a trusted professional resource to navigate rental property issues confidently. I have some questions/criteria you should consider in choosing a property manager, and would be glad to share those- just write me an email to ask.

About “sell while renting.  Given the above many owners take the next logical step and want to rent a property *while* it’s for sale as well.  This isn’t as easy as it sounds, as in this case you’d need to do a month-to month rental, which aren’t favored to the landlord, and  tenants are smart and aren’t going to want to move in a few months if it does sell, so it’s much harder to rent to begin with. 

 

Conclusion

 

Once you’ve thought through each of the items and figures above, you should have a better idea whether you should consider renting your property in the near term if you’re having difficulty selling it.  There are many pieces of information here, all of which vary or depend in some way on your property and your unique situation.  If you’d like to review rental options further, RD House would be happy to sit down with you at your property for a consultation.  You can reach us at (206) 728-6063 or www.rd-house.com

Man With a Plan - an Interview with Enrique Peñalosa, the former Mayor of Bogota, Columbia appeared in the June 8 edition of the New York Times Magazine- a link to the online version is below. 

 

Although brief, I thought Mr Peñalosa had several really valid points, which anyone living in a moderately sized area should consider (especially planners).  His main thrust  is that "when you construct a good sidewalk, you are constructing democracy".  This sounds odd at first, but his point is that if you build sidewalks as standard parts of a cities infrastructure, it really says that anyone can be mobile to anyplace they need to be, whether the walk, bike, or use public transportation.  Too often cars become a differentiator- for citizens, and for businesses.  Without them, you can't really get anyplace you want to unless you can afford to drive, pay for gas, parking and upkeep.  In the US, cars are such a part of the culture, but more and more we're starting to see that they may not be a viable solution over the long term- as many countries have known for a long time.  Sidewalks, in fact, were part of a huge political firestorm in Bogota, and part of the reason Mr Peñalosa suspects he wasn't re-elected. 

 

In a world of skyrocketing gas prices, it's certainly something to think about; the interview is a great read that's engaging and entertaining (he has a wry sense of humor that comes through in the article as well).