With the real estate market in recovery, many homeowners moving from small homes, townhouses or condominiums may consider holding on to their first property as a rental investment while purchasing a new property.
Blakeslee Crumbliss and her husband, John, for example, purchased their Adams Morgan rowhouse in July 2007. However, with a baby born recently, “the place was so small, and we were really packed in there,” Blakeslee Crumbliss said.
They were able to purchase a new house and are getting their rowhouse ready to rent. “We’re going to try to manage it ourselves,” she said. “The idea was totally daunting at first. It’s taken us awhile to warm up to it.”
Crumbliss is learning as she goes. After analyzing her and her husband’s cash flow and researching comparable rents in the neighborhood, “We think we can break even,” she said. They’ll consider selling it once it has appreciated and they can make money on it.
She’s talked to former neighbors who are now landlords of their Adams Morgan properties and researched requirements online and in print. “I tried to find the smallest, most comprehensive book I could” on how to be a landlord, Crumbliss said. She’s learned a lot about D.C. landlord and tenant laws, insurance and other requirements. “We’re trying to do everything by the book, but it’s kind of hard to find the information,” she said.
Some of the things she says she’s learned: In the District, you can’t charge more than one month’s rent as a deposit and you must have a fire insurance policy on the property (and can include appliances in the coverage). She plans to set aside some of the monthly rent to cover maintenance, and she’s considering hiring a tenant finder to handle the background check, credit check and leasing paperwork.
Even after learning whether they can qualify for a new loan while keeping their first mortgage, owners must then decide whether they have the means to maintain a new home as well as a rental property.
Figure out the cash flow
The first thing accountant Ken Anderson advises clients pondering whether to become landlords is to consider cash flow. “Will you have a positive or negative cash flow?” he said. On the plus side, count rent as well as estimated income tax savings from the loss claimed on your income tax return. Then subtract costs such as mortgage principal and interest, real estate taxes, maintenance and repairs, homeowners’ or condo fees, insurance, and depreciation.
“You usually wind up with a negative figure,” which is written off as a loss on income tax returns, Anderson said. “If the property is paid for or if you have a high income, you might have a profit,” he said. In those cases, “you may have to carry the loss forward. If you sell it, you can deduct the loss at that time.”
Another tax benefit is depreciation. You’ll be able to deduct depreciation — for residential properties, the cost of the property, including improvements, minus the value of the land for 27½ years, Anderson said.
“To claim the loss on the income tax returns annually, you must manage the rental of your property,” Anderson said. “The loss may be deferred on the income tax returns if you have high income, in which case you carry the loss forward and claim it in later years or when you sell the property,” he added.
Hire a professional?
After financial details, the next thing would-be landlords must consider is which aspects of property management they’re able to handle themselves and what must be outsourced to a professional.
“I can tell you as an investor-owner myself, property management is no joke,” said Kennemer, who owns three rental properties in Arlington. She said she has had her share of nightmare tenants as well as the heavy workload of overseeing rental properties.
“The job of a property manager is to collect the rent and deal with maintenance and repairs,” said Kennemer. But “something as simple as a water heater breaking can become a full-time job” until it’s fixed.
That’s when owners turn to professional property managers, either individuals or companies.
Long & Foster Cos. manages more than 5,000 properties in the mid-Atlantic region, including single-family homes, townhouses and condominiums. “Property management is a real headache, and I think most people want someone else to do it for them,” said Wes Foster, the realty firm’s chairman and chief executive officer.
About 65 percent of the properties Long & Foster manages are in the Washington area, according to Joe Amatangelo, vice president of residential management. About 70 percent of those properties are owned by non-real-estate professionals: They bought the home to live in and may eventually return to live there. They may be people, such as military or government employees, who are temporarily stationed outside the area, he said.
A small percentage of the properties Long & Foster manages are owned by people who are ready to move into a larger home but owe more on their initial mortgage than the home is currently worth, Amatangelo said. “They don’t want to sell because they’re underwater and want to hold on to the property” until it appreciates, he said.
Besides managing her own properties, Kennemer helps landlords find and evaluate tenants. “You can be lucky and get the perfect tenant, but maybe 15 percent of the time that will happen,” Kennemer said. It helps to have a professional create a listing with professional photography, show the property, run background and credit checks and help the landlord select the tenant from qualified applicants.
Some landlords choose to hire a property manager to handle everything (finding the tenant and the rest of the management duties) because it’s so time-consuming to learn the business and respond to the 24-hour demands of property management. Amatangelo says that many landlords who turn to his company’s property management services “were simply tired of dealing with constant demands and problems with tenants.”
Property managers can handle legal issues involving landlord-tenant law and fair-housing regulations, maintenance, rent collection, and all of the interactions with tenants. Professional property management is assurance that things are handled correctly. “It would be no different than having a stockbroker or investment banker handle your IRA or 401(k). We make sure your property is maintained and continues to appreciate,” Amatangelo said.
Typically, property managers charge a percentage of the monthly rent. “Charges can range from 8 to 10 percent industry wide,” Amatangelo said.
“Our [percentage] is based on where it is, what kind of shape it’s in, maintenance required and the number of properties managed for that owner,” he said. “If someone has five or six properties, we like to give them a break.”
Anderson, who also serves as an expert witness, has been in court when landlords have sued tenants for damages to their rental property. “Sometimes the landlords do not prevail because they expect the tenant to treat the property as they would,” Anderson said. “Wear and tear is part of any rental, and new landlords generally do not take that into account. When a tenant leaves, you should expect to have costs of fix-up.”
What to look for in a tenant
One of the most important considerations of renting is picking the tenant. “You need to be as sure as you can that the tenant will pay the rent on a timely basis and not tear up your unit. If you run into a bad tenant then expect to have legal expenses in addition to greater fix up costs,” Anderson said.
If the application reveals that the tenant has “credit dings, like three or four accounts they’ve been late on, it’s not worth the risk,” Kennemer said.
Even if a prospective tenant sails through credit and background checks, there’s no guarantee that he or she will be satisfactory, Kennemer said. She has learned some secrets of tenant selection over the years that help her identify desirable ones.
“People who turn out to be good tenants are careful when they walk through a house. They close closet doors and put down blinds,” Kennemer said.
Potentially good tenants also take care of their possessions, such as their car, Kennemer said.
“It doesn’t have anything to do with the age or type of car,” she said. The question is, “Is it in good repair? . . . If they roll up in a trash heap with old wrappers in the back, rolling on a donut [tire],” that’s how they’re going to treat your property.
A landlord will also want to consider the condition of the property and the type of tenant it will attract.
“The better you keep up your property, the more likely you are to have a good tenant,” Kennemer said. If the place is run-down, “you’re more likely to have someone who’s willing to accept damage to the house.”
A poor tenant may also simply fail to inform the landlord of structural damage that can cause serious problems and expenses later on.
Kennemer is realistic about the risks of being a landlord, but she has had positive experiences over the years. “I have had wonderful tenants that spackled and painted” when they left, she said. “There are wonderful tenants out there.”
Susan Straight is a freelance writer.