Ericka Newsome-Hill was in a quandary in 2008. Her wedding was right around the corner, and she wasn’t sure what to do with her Atlanta townhouse, as her fiancé, Joseph Hill, owned a similar property.
Selling wasn’t an option. “My property lost too much value during the market downturn,” the 40-year-old says. “If I were to sell, I would have had to come to the closing table with $30,000 or $40,000 out of my own pocket. That wasn’t going to happen.”
Like Newsome-Hill, more than a quarter of U.S. homeowners owe more on their mortgage than their house is worth. It’s a position that leaves owners with few options. But Newsome-Hill had a plan. She decided to become a landlord. She first investigated property management firms. These operations handle the marketing and maintenance on rental properties, typically in exchange for 10% of the collected monthly rent, plus a month’s rent for filling vacancies. She did the math and decided that route was too expensive.
Instead Newsome-Hill hired a local real estate agent for a fee equal to one month’s rent. The agent helped her set a rent based on the average rental rate in the area, advertised the listing in the Atlanta Journal-Constitution and on Craigslist, and stuck a “For Rent” sign in the front yard. The latter proved to be the most effective marketing tool.
The agent also vetted potential tenants using a third-party background check firm. “The onus was off of me to screen everyone who called, and pore over applications,” says Newsome-Hill, who only spoke with the applicants who passed muster with the agent. She also called their previous landlords to discuss payment history and the tenants’ treatment of the property.
Once her first tenant was selected, Newsome-Hill worked with her agent to draw up a one-year lease (the typical length, although month-to-month and multiyear are also used). The agent also gave her a “walk-through” sheet that she gave to the tenant to fill out before moving in. (Samples of both documents can be found online.)
To handle maintenance and repair issues with the rental property, Newsome-Hill pays $400 a year for a home warranty contract that covers the townhouse’s heating and cooling equipment, appliances, and other major systems. “When something goes wrong, I make a phone call and they send someone out to handle it,” says Newsome-Hill, who is content with her choice to rent, rather than sell.
“Overall it’s been a pretty good experience because I have reliable tenants who haven’t damaged my home,” says Newsome-Hill, “and who have managed to pay the rent within a reasonable timeframe every month.”
Seventy-five percent of U.S. cities saw home prices decline during the first quarter of 2011, according to the National Association of Realtors. During the same period, U.S. apartment vacancies dropped to the lowest level in almost three years, as the stagnant home-buying market created more rental demand, reports New York-based real estate research firm Reis Inc.
This has created somewhat of a “perfect storm” for homeowners who don’t want to sell but who have to move. “If they can’t sell their home within 60 or 90 days, I talk to them about renting,” says Tanya Waxler, broker-owner at real estate firm UKeepCommission in Lakewood Ranch, Florida. “As soon as that ‘For Rent’ sign goes up, owners start getting calls.”
To ensure a smooth transition from homeowner to landlord, Waxler says tenant screening is a must. She even advises owners to call the potential renter’s current neighbors for feedback. “Find out if they leave their trash cans on the curb for weeks or play loud music at 2 a.m.,” says Waxler. Credit checks are also critical, she says, as are phone calls to references, including past landlords and current employers. This background check is crucial because depending on your state or local laws, evicting a tenant can be costly and tedious. “Don’t hand over the keys to your house until you’ve done a thorough check.”
Once the new tenants are in place, keep an eye on your property. “You can’t just move them in and forget about them. You have to manage the tenants,” says Waxler. “A quick visit will tell you if they’re smoking in your house, or if they have three dogs.”
With the right tenants mailing rent checks on time, homeowners can benefit from having someone else pay off their mortgages until the market recovers. “The rental market is hot right now,” says Waxler. “It’s a good alternative for owners who have to move, and who don’t want to play war with their wallets.”
