The Accidental Landlord

Do you know someone who owned a condo, only to have life throw a few curve­balls and need to move out and rent it unex­pect­ed­ly? Perhaps this story applies to you … If it does, I can’t blame you for acting as you did. Here’s how an acci­den­tal landlord can best move forward, even if it’s been several years.

It’s rare this “accident” works out well

It’s a story I’ve seen told many, many times. Someone bought a home before the mortgage meltdown, then their family grew or their needs changed and they needed to buy a larger home. They were under­wa­ter on their first home, and instead of selling it at a steep loss they held onto it and rented it out. There was no plan, except the vague “waiting for the market to improve” so they could reach break-even or possibly have some equity.

The rationale that “it’s good to own rental property” is heard all the time, but just because you own a rental doesn’t make it a good situation. It may be easier just to hold onto it for now, but is it smarter to? There are many things the acci­den­tal landlord should consider when deciding to fish or cut bait.

Do you receive positive monthly income?

Rule #1 in deciding whether a rental property is working is whether you are getting positive cash flow. If so, great. If not —or you are in a position where you could sell without bringing money to the closing table— why wouldn’t you? Maybe it’s just that you’ve had the property as a rental for so long, and you’re used to it, so why change things. I get it.

But is this place your vehicle for retire­ment, your anchor for financial inde­pen­dence? If you have equity and are still having to kick something in towards the mortgage every month, I’m guessing you as an acci­den­tal landlord have been lulled into com­pla­cen­cy. If you don’t know whether you have equity or not, speak with an experienced/respected agent and find out.

Is it a financial benefit, or an albatross?

At this point, it’s important to look at this property as a financial instru­ment just as you would any other invest­ment. Is it deliv­er­ing the financial benefit you want it to? Could the money that you have sunk into the place be used better elsewhere?

One argument often heard from an acci­den­tal landlord is that con­sis­tent­ly making mortgage payments helps your credit — and yes, any ongoing on-time payments can’t hurt you. But that debt goes against your overall assets and lia­bil­i­ties, and can certainly affect your potential needs elsewhere — such as the kid’s college fund or a vacation home.

The ongoing risks you need to consider

There are many things that must be taken into account, espe­cial­ly if the rental you own is in a condo building. If you’re at a “breakeven” or slightly positive cash flow each month, these could sub­stan­tial­ly throw you off. They are:

• Property taxes. Taxes have gone up sub­stan­tial­ly just about every­where, and if they haven’t for you yet, expect them to soon
• Monthly assess­ments. These can and often do get increased every year or two
• Special assess­ments. Deferred main­te­nance items or unfore­seen repairs can creep up when least expected, and unless you’ve set aside money for this type of thing, you’ll need to pony up for your unit’s portion of the cost
• Ongoing inci­den­tals. If you enjoy having to meet new prospec­tive tenants when a lease ends, no problem — otherwise, you’ll need to pay someone else to get the vacancy filled, which is often equal to a month’s rent
• The “come fix it” calls. unless you have a man­age­ment company handling every­thing for you (also at a cost), you’re still the one who gets the call to go and fix the leaky toilet
• Interest rates. Rates are at near all-time historic lows right now, which means that buyers who may otherwise not have been able to afford before may be able to at this moment
• Turning tides. We are seeing the market def­i­nite­ly change, after a run of many years of solid value growth. Real estate sales are cyclical, and we while we are nowhere near the situation sur­round­ing the mortgage crisis, the market is likely not posi­tioned to see growth in the near term

Final word: The Accidental Landlord

There can be numerous benefits to owning rental property and being a landlord. Rentals can be a great invest­ment — they can be, but aren’t nec­es­sar­i­ly just because they’re an invest­ment property. Buying a property inten­tion­al­ly for invest­ment purposes using sound and proven guide­lines is a far cry from con­tin­u­ing to hold a property that you’ve unin­ten­tion­al­ly had for years.

This nagging reason should also be con­sid­ered: If you didn’t orig­i­nal­ly sign up to be a landlord and don’t thor­ough­ly enjoy it, you need to weigh the hassle factor of just having this thing hanging over your head, and decide if you’ve finally had enough.