A Wonk reader is wondering whether to rent out his home rather than sell in this market, but he knows there's a lot to consider beyond finding a good tenant.
He's hardly the only one weighing the "to be a landlord or not to be a landlord" question. So I chatted with Lewis F. Laws, Maryland regional director of Long & Foster's property management division, about what landlords who never thought they'd be landlords should keep in mind.
Laws, who has worked in property management since 1984, oversees managers in the state and also manages a portfolio of properties in Montgomery County.
Q. What should homeowners consider before turning landlord?
The first thing they need to do is determine the age the property was constructed, because Maryland has the Maryland lead paint law, and that's a biggie. So if the property was constructed prior to 1950, then it is mandatory that they will have to register their property with MDE--Maryland Department of the Environment. They will have to have it inspected by a state certified inspector, and they have to obtain from this inspection a passing certificate before they can rent the property. And until they obtain a passing certificate, they cannot legally lease the property.
Everything prior to 1950 is mandatory participation. Properties constructed from 1950 to 1978, they may opt to participate in the program or opt not to. But the problem is, those properties built in the opt-in, opt-out timeline, they may still have lead paint. Because it wasn't until 1978 that the government banned the sale of the lead-based paint.
So what happens is, if they are in the program and they are compliant through the MDE program, it doesn't guarantee them that they can't be sued and lose money, but what it provides is … a cap of $17,000 as an award. Also, if they are in the program, then their landlord insurance policy should cover--they'll have to request it, but it should cover lead-based paint. …
So those owners who have the '50 through '78 properties, we recommend, strongly recommend, they have them tested, [and] if there is lead in the property, then they participate in the program to have that limited liability protection.
Q. What was that about landlord insurance?
They need a landlord liability policy. … If they don't, heaven forbid something happens. If the house burns down and the insurance company finds out it wasn't owner-occupied, they've violated their insurance policy and the insurance company owes them nothing.
Q. What should landlords do to attract renters?
They want to make sure they have the property in marketable condition--competitive marketable condition, and they be realistic about pricing it. Landlords tend to think their property is the best property in the whole country as an investment, and they certainly want to maximize their income, but they have to be very careful not to overprice it.
If it doesn't show well and it's not priced right, it's not going to rent. There is no shortage of rentals on the market at this time, because of what's happened on the sale side.
Q. How can homeowners determine a competitive rent?
Work with a Realtor who works the rental market and listen to the agent. Not poo-poo the agent. … The agents know their business. Other than that, they can read the paper and see what their neighbors are renting their properties for. But if they're for rent by the owner, the price might not be a realistic obtainable value.
Q. What's the trend for rentals in the Baltimore area?
My manager there has told me if … the folks are realistic about condition and pricing, they are moving. I'm finding for my market, that if a property is vacant in excess of 60 days, there's a reason. It's either condition or it's price. It's one of those two or a combination of those both.
Because there is so much available, this is a tenant's market--because there is so much available, even the rental properties have to look almost as good as the sales properties. If they don't maintain them, if they don't look good, there will be one down the street that will outshine them and that's the one that's going to get rented.
Q. How is it a buyer's market and a renter's market at the same time?
It is a buyers market, but the buyers aren't buying. And the media is guilty of contributing to this as well. The media is preaching that prices haven't reached the bottom, so you've got a lot of people out there that could buy but aren't buying. … "I'll just rent something."
Q. So then why isn't it a landlord's market?
Typically the two markets … are opposite, but not in this cycle. What's happening is, you have a lot of owners who are not landlords by choice. They've got their properties for sale because they've moved on, so they have to generate money from the property because they can't afford double mortgages. So they're faced with, 'Well, if we can't sell the place, we've got to rent it.' That's placed a lot of rentals on the market that normally would not be there. …
They couldn't sell the properties, so they had a choice: rent it or lose it. That's what it amounted to.
Q. Are you finding that most homeowners-turned-landlords are making money renting out their homes? Or are they losing money after paying expenses?
Depends on when they bought. … If they bought at the height of the market when we saw double-digit appreciation, they're carrying negatives. They're not breaking even. But that's still better than losing the property. A lot of landlords, the ones who are landlords not by choice, as soon as the market turns around that they can carry a positive cash flow or even a break even, they're going to sell these properties. But until that point, they really can't afford to sell these properties.
Q. This is the "shadow inventory" we keep hearing about, then?
Yes. That's a good phrase.
Q. How much does it cost to hire a property manager?
It depends on the brokerage. Different brokerages have different fees. … Our management fee is either 10 or 12 percent of the monthly rent. It depends not on the price of the property, it depends on what the landlord wants included in the service. … If they want their homeowners' or condo association fee paid on a monthly basis through Long & Foster, then we're at 12 percent.
Q. What does a property manager do?
My God, they do everything. The property manager's job is to oversee the property. When it's vacant, to remarket it to find and locate the tenant for the landlord. … To oversee the maintenance, repair of the property. … Now, the cost of the repairs are the owner's expense, but we oversee the repairs, get the vendors and so forth. … They get annual property condition visits--we visit the property, and depending on how long the lease is, they get multiple visits. We do move-in condition reports, move-out condition reports.
In Maryland, there are a lot of jurisdictions that a landlord must license their property with their county and city to have a legal rental. So we basically try to make it as easy and carefree for the owner as humanly possible.
Q. What are the mortgage implications of renting out your home?
Unless the owner has a mortgage that stipulates that he or she must occupy the property for a specific number of years, … mortgage companies don’t care. As long as they get their payments, they have no heartburn. But there are certain mortgages, such as VA, you have to occupy the property for a certain number of years before you can rent it. …
If the [conventional] mortgage lender knows they're financing an investor, the [investor] probably will be paying a higher interest rate initially. If [instead] they've occupied it and moved out, they've got their loan as owner-occupied. … The mortgage companies, I don't think, care as long as the mortgage is paid. … They can't legally make them renegotiate their loan.
Q. What about property taxes? Once you're a landlord, you're no longer eligible for the state homestead credit, so you'll almost certainly be paying more.
Precisely. … But if they move out, a lot of times the assessors don't know it's [not] an owner-occupied property.
Q. But officials have been cracking down on that, haven't they?
Well, in the counties that require licensing. … Obviously if they license, then the county will have knowledge that it's no longer owner-occupied.
Q. What about income tax deductions?
The IRS requires that the landlord not be a passive landlord. … Even if they turn it over to a property management company, they still need to have some active participation in it to continue meeting the IRS requirement.
Q. What sorts of expenses should homeowners-turned-landlords count on?
Depending on the age of the property, the Maryland Department of the Environment lead paint program. The licensing, if their property is in a jurisdiction that requires licensing. And the maintenance on the property. They are expected to maintain the houses, and the local jurisdictions have housing codes. So they're going to have to do repairs and maintain the property.
Q. What's the rule of thumb for maintenance costs? One percent of the value of the property every year?
There is no rule of thumb. I wish there were! A lot of it depends on the age of the property. … Certainly the newer homes need a lot less service, a lot less maintenance.
Q. Do you suggest homeowners talk to a real estate attorney and/or financial planner before turning landlord?
Realtors are not licensed attorneys. We do not and should not give assured financial information that will impact these folks' life. The Realtors can only give them their guess of what these things will be, their estimation. … They do need to speak to their own financial advisors or attorneys, whoever they choose.
Q. If a landlord wants to hire a property manager, what questions might he or she ask before choosing one?
They really need to read the property management contract completely, every word of it, before they sign the dotted line. Because a contract is a contract, and they're all different. Some firms or some contracts allow that in addition to a management fee, that every time the company has to oversee repairs to the property, that they get an additional percentage for every repair.