The Accidental Landlord: How to Rent Your Home When It Doesn’t Make Sense to Sell It

Table of Contents

Title Page

Dedication

Copyright Page

Foreword

Introduction

Chapter 1 - The Costs Associated with Renting Your Home

Chapter 2 - Pros and Cons of Becoming a Landlord

Chapter 3 - Are You Cut Out to Be a Landlord?

Chapter 4 - You’ve Decided to Rent, Now What?

Chapter 5 - Lease Agreements 101

Chapter 6 - Getting Your Property Rented

Chapter 7 - Getting Your Home Ready to Rent

Chapter 8 - Advertising and Marketing Your Home

Chapter 9 - Money Matters

Chapter 10 - Evaluating Tenants

Chapter 11 - Managing Your Property Yourself

Chapter 12 - Tenant Troubleshooter

Chapter 13 - Time to Sell or Time to Dwell

Chapter 14 - Refinancing Your Rental Property

Glossary A

Fast Forms B

Resources C

Index

This book is dedicated to my nephew, Zachary, who reminds me every time I see him that life is so much more important than work will ever deem it.

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Dear Potential Landlord,

Chances are you’re browsing through this book because you’re finding yourself in a peculiar situation due to the tightening of the housing market over the past couple of years and you need to rent your home. I have been in this position myself and have had many good and bad experiences that I will share with you throughout this book. I have also partnered with a fantastic company, The Landlord Protection Agency, which you can find out more about by visiting my website at www.accidentallandlordbook.com. Here you will also find other tools to support your efforts!

I know this can be an intimidating and difficult time, but the rewards of landlording can be exhilarating and financially beneficial. I do my best in this book to walk you through not only the steps, but also the potential pitfalls you might face.

As a California-licensed real estate professional with a Ph.D. in technology, my goal is to leverage technology in every way possible to make our lives easier, particularly as investors and real estate experts. I talk a lot about ways you can leverage the Internet to save yourself headaches and hassles. I’m also a professor and the author of other books on real estate, including Commissions at Risk, Finding Foreclosures, and Real Estate v2.0. I have a professional website you can browse to get to know me as an author at www.drdaniellebabb.com. I look forward to this journey with you and welcome any comments, feedback, or questions anytime!

Best to you,

Dani Babb, Ph.D., MBA

Foreword

Have you ever heard of anyone becoming a landlord by accident? In the past, most people became landlords on purpose, by purchasing investment property to rent for profit and appreciation. Market conditions are now turning more and more would-be sellers into landlords. In most cases, these are people who aren’t prepared to be landlords and haven’t the slightest idea of how to properly manage a rental property. Without knowledge of landlord protection, you as a landlord are in big trouble!

The book you are holding is an excellent guide on how to make managing a rental property as easy as possible, whether you are an accidental landlord or an experienced real estate professional. In it, Danielle Babb presents to you in simple terms some of the finest proven techniques and forms used by professional landlords across the United States and Canada. In addition, The Accidental Landlord is full of timesaving and moneymaking ideas. She provides you with helpful Internet sources to make your experience as a landlord easy and even fun.

Danielle is a real estate investor and landlord herself who understands firsthand what it takes to manage tenants. After only a few conversations, I soon realized that she and I share much of the same philosophy concerning real estate investing and landlording. She has thoroughly impressed me with her knowledge and advice in real estate analysis and technology. She’s also a published author of five excellent books (this one included) on real estate and cutting-edge business-enhancing technology. Her credentials as a Ph.D. and national TV real estate expert make her an excellent source of reliable information and advice.

As a real estate broker and investor for more than 25 years, I’ve always been involved with residential rentals. I used to think that to be a successful real estate investor, I had to buy as many properties as possible. Sounds good, right? Well, at first I was not an educated landlord, so I learned about tenants the hard way. Tenants can destroy not only your home, but your life as well if you let them! My hard-learned lessons and successes as a landlord led me to create the popular website The Landlord Protection Agency© (www.theLPA.com).

I’ve found the best lessons are usually the most painful ones, but with Danielle Babb pointing you in the right direction, you can save a lot of time, money, and pain by taking the easy steps of managing your investment correctly and more efficiently.

You are about to read a very special book by a very special person. If you are a landlord or expect to be one, you should own this book. Enjoy it!

John Nuzzolese

President of The Landlord Protection Agency©

Introduction

A strange phenomenon has bewildered economists and changed the way homeowners look at the places they call home. It used to be a widely held belief that our homes were a solid investment, one that would appreciate at a modest pace of 8 percent to 12 percent per year in good markets and slightly lower in less-than-stellar economies, but ultimately when we retired we’d have a nest egg in our homes. Even better, we’d get to create a life in this place called home—the center of our family life, a refuge from our hectic work lives.

All sorts of unexpected and reality-changing things have happened in the home real estate market. Throughout the late 1990s and early 2000s, real estate was the golden investment—the one thing that was a sure bet because it was tangible with limited land and could provide greater and faster returns than a flailing and unstable stock market. Everyday investors were troubled by what they saw after the tech bubble burst on the NASDAQ after the ’90s and began looking for more surefire and stable investments. Having forgotten the trouble of the early 1990s, they chose real estate.

Some people moved their families to better neighborhoods with better schools. Some who were less risk adverse took out the sudden instant equity and purchased other homes with the money—I am one of those myself. Many of us moved up into bigger, better homes, living the American dream. Some of us used our homes to finance other houses, either getting caught up in the buying frenzy ourselves or becoming an unintended victim of others’ speculating.

Some of us took out the money in our homes and invested it in Dow stocks that were severely off of record highs after the terrorist attacks of 9/11. Others looked at their dwindling 401(k) dollars and instead invested in homes that appreciated in the double-digits year after year in several markets—most notably, Arizona, Nevada, the Northeast, South Florida, and the West Coast. There’s only so much land was a common mantra I consistently heard—I preached this to my family and friends myself and bought up houses like penny stocks with low down payments, adjustable or pay option adjustable-rate mortgages (ARMs), and even negative amortization loans. A feeling of invincibility that now reminds me of my tech-boom-era day-trading days in the mid-90s soon came to bite many of us.

Another fuel to this greatly changed market? As hedge funds looked for better investments than those of the stock market, they were willing to take on riskier securities—primarily those mortgage-backed securities we hear so much of today that combined A-rated paper (mortgages given to those with good credit and a history of paying their bills) with lower-rated credit (even D-rated paper, the rating assigned to those most likely to default). Due to this incredible demand for all things mortgage-backed, lenders began to practice creative lending, requiring low down payments, allowing those with poor credit to obtain financing, and allowing individuals to just simply state their income (the so-called stated income loans), which in turn led to little personal investment in the home.

For most, this was a welcome blessing and homes are now occupied by families who are prosperously thriving in them. For many others, they need to move but can’t afford to pay the bank; they find themselves owing more than their home is worth after the market bubble burst.

In the past, when we bought a home with 15 percent or 20 percent down, we had a very serious stake in the home; the lender wasn’t the only one at risk. In the 2000s, lenders took on far more risk. Appraisers weren’t able to appraise property fast enough to keep up with prices that in some markets literally went up thousands each week.

Banks began offering loans to those who’d never had the option of homeowner-ship before—individuals with bankruptcies, numerous foreclosures, and a history of not paying bills. One of my own family members was able to secure three mortgages during the early 2000s, despite a history of bankruptcy and foreclosure—all with no money down. Many Americans jumped at the chance, and the home boom grew bigger. Creative loan options allowed homeowners to add what they weren’t qualified to pay to the principal balance of their home loans (as the previously stated negative amortization loans), but many were unaware (though it was thoroughly documented on the loan papers) that at some point, a loan-to-value cap would require them to pay the full payment. Nor did many realize that their introductory rate would actually increase, in some cases doubling or tripling their payments by 2007 or 2009. This led to a desperate attempt by many to move into more affordable housing or make more money by moving (again requiring a home sale), and logically following, a steep increase in home inventory occurred. By the summer of 2007, inventory for resale homes was at ten months’ worth and new-home inventory was at eight months’—historic levels since organizations began tracking them.

How Did We Get Here?

Let’s take a step back to understand another important fundamental. In late 2004, the Federal Reserve, responsible for monetary policy in the United States, began doing something no one believed could happen during the post-9/11 recovery (though most of us admit we had no clue how long the recovery would take, so we therefore had no clue when the Fed would begin raising interest rates). It raised the federal reserve funds rate, and interest rates on mortgages therefore began to climb. Suddenly rates were resetting on homeowners, and for many (yours truly included)—the only thing that allowed us to make our mortgage payments was the payment cap of 5 percent to 9 percent per year, which expires after 1 to 7 years, depending on your loan. Writing this book in the winter of 2007, I can tell you that the worst is yet to come. Many millions of homeowners who are in the default stage are yet to hit foreclosure; without intervention, they will lose their homes.

So, what happens when homeowners see their homes worth $500,000 one year and their neighbors selling theirs for $400,000 the next? This may well have happened to you. If you still have equity, you might choose to leave and buy a bigger home for fewer dollars—essentially upgrading while the getting is still good. This is a buyer’s market if there has ever been one in my lifetime—or in my parents’. Foreclosures are at an all-time high, offering good deals for those who need to get into this market. However, many homeowners need to move and either still believe they can get $500,000 or don’t have the equity left to sell for $400,000 and still pay their debts and obligations, much less put a down payment on a new home. Some just simply cannot afford the mortgage and need to rent to someone who can pay until they are back on their feet or interest rates allow for a refinance that makes their home affordable again.

Still yet, you might be facing other concerns or issues. Job changes are a common reason people move. This can be a relatively short move within the same state or a major move to another state. Unfortunately, many of you might have taken home equity lines of credit (HELOCs) and second mortgages on your homes to pay off debt, take lavish vacations, or even purchase additional property with a euphoric ignorance that the market could never go down. A sudden job change for you at the same time your home value drops 20 percent or more in 1 year can leave you with a sense of disbelief and unwillingness to let your home go for such a cheap price (not considering the 5-straight-year price increase!). This is mostly a psychological phenomenon, but for many of you, you might have taken equity up to 95 percent or 100 percent of the value, and when the value disappeared, you were forced to move but literally were unable to because you couldn’t pay off your primary and secondary debt obligations on the home. Many of you perhaps even have third mortgages that have to be paid.

Retirement is another reason people are forced to move. Some of you might have retired and suddenly found yourselves living on nest eggs that are netting you less monthly income than you had hoped or planned for, or you want to move closer to family or retire in a warmer climate. The Sun Belt states are common places to move—Nevada, Arizona, California, and Florida. Many retiring boomers have suddenly found themselves with hundreds of thousands of dollars less than they’d expected, and many have chosen to rent their homes and wait for the market to rebound. You may well be in this category.

Be careful using real estate for retirement income if your retirement date is less than ten years away. So far since we have been tracking stats, real estate has never lost value over a ten-year period, but you don’t want to wage your retirement on it if you’re looking to start fishing within a few years!

Health issues are listed among the top three reasons for bankruptcy in this country, and they certainly are cause for financial distress—including the inability to pay for a mortgage. Treatments for some diseases are very costly and might not be covered by insurance, and homeowners are forced to borrow money until there is nothing left. You might have been forced to decide between doctors and mortgages—first borrowing against equity in your homes, cars, and even your fallback savings or retirement and 401(k)s. This is understandable but dangerous, as the fall of the market left many people with health issues needing to move to be closer to better doctors or to reduce their expenses but incapable of selling their homes.

Yet still others see the rental market increasing and the demand growing and feel that renting their homes will be profitable. There has been an increase in rental demands in our nation—the higher home prices climbed, the less affordable purchasing a home became. A lot of people turned to renting as an alternative to home buying for a variety of reasons: lower costs, the ability to move easily, and the number of great rentals on the market as speculators and investors bought brand-new properties only to put them on the rental market within days of taking ownership! There continues to be an increase in demands for rentals due to high foreclosure rates and a tightening of the credit market, so if you do choose to rent your home, you should have no shortage of potential renters! It’s always tough to decide when to buy or rent, and many websites and online calculators (and plenty of lenders) will try to help you make that decision. Be as unbiased as you can when looking at the numbers, and try to make a rational decision that works best for you.

Any one of these situations could be the one you are in, and the reason you picked up this book. You’re already contemplating the potential of renting your home. You have a few options. You might decide to take the remaining equity out of your home and move anyway, using this equity as your down payment while keeping your home on the market and not renting it. This is possible if you can live on the extra equity in the home for at least the average inventory period (as noted earlier, ten months for resale homes) and still pay your bills at the same time you are paying two mortgages. This leaves your resale home vacant but allows you to move. This might even entice some buyers because the home appears move-in ready (and it is). This might not be an option for many of you.

Many individuals needing to move have simply chosen to put their homes up for rent and ride out the market. You might be contemplating this yourself. This is a tactic investors have been using since the initial decline in prices, and it is now becoming common practice for everyday homeowners. In my small community of roughly 80 houses, I’ve seen 10 for sale in the past six months and 4 for rent. That ratio was unheard of six months ago, particularly in this community that has regularly sustained high sale prices and low inventory (not the case today).

So, what happens if you need to rent your home and ride out the market? What if you need to move to another part of the state or country or even retire, yet you cannot afford to sell your home in this market? What if you don’t want to sell your house for less than you paid for it despite the real estate loss on your taxes? I was in that exact predicament in 2004 and again in 2007. As a real estate investor, I knew what to do to keep myself out of foreclosure, but for millions of Americans facing the same decision, the options are unclear or confusing. This book will fill that gap—within the first two chapters you will know whether it’s financially feasible to rent your home and, if it is, whether you have the stomach for it.

Another option is to take the equity out of the house you own (assuming there is any and it’s sufficient as a down payment for the other home you’re trying to buy), buy the other house to take advantage of the buyer’s market we see today and will see for awhile to