Accidental Landlords

An increasing number of people are choosing to rent out their house instead of selling at a loss. But managing a property has its headaches.

Jeannette Boccini thought she had found a great renter, someone who would take extra good care of her townhouse. Then the nightmare began.

The tenant repeatedly harassed the neighbors, complained that the wood chips in the community playground were toxic, and informed Ms. Boccini on Christmas morning that someone was playing Christmas carols too loudly.
But the final straw was the night the tenant showed up at Ms. Boccini’s door to report there was dust all over the mailbox. “I absolutely flipped,” Ms. Boccini says. “I was like, ‘You don’t like it? Get the hell out of my house.’ ”

Like many these days, Ms. Boccini became a landlord not by choice but because of circumstances beyond her control: namely, the real-estate crash.

In 2008, she bought a second, larger home in an East Coast town, planning to sell her old home and move into the new quarters at roughly the same time. But when housing prices tanked, she was suddenly faced with a choice: sell for $100,000 less than what she paid, or hold on and hope that prices recover.

No one should decide too quickly to become a landlord, a job that brings with it legal responsibilities, a steady parade of expenses, and unforeseen headaches. It might bring in extra cash, or it might be a sinkhole if the home sits empty or costs exceed the rent.

Becoming a landlord when a property proves difficult to sell is also a gamble that housing prices will rebound fairly soon, and that the ultimate sale price will more than cover expenses incurred in the meantime.

Nevertheless, “I think we will see a lot more owners becoming landlords,” mainly because the economy hasn’t recovered, says Lisa Eckert, property manager for Coldwell Banker Bain, in Kirkland, Wash. “They’re turning to renting out as the last-ditch effort,” she says.

Because of all the challenges a landlord may face, it’s important to do some research before posting that for-rent sign.

Among the things to consider:

Rising Rents: There are financial benefits to being a landlord, of course, especially when rents are on the rise, as they are now in many markets.

In fact, the market for rentals currently is booming thanks to the lingering effects of the recession and the millions of potential home buyers who are unable to qualify for mortgages, says Rick Sharga, executive vice president of Santa Ana, Calif.-based Carrington Mortgage Holdings LLC.

Kelli and Jordan Buttars have rented out their condo unit in Salt Lake City since 2010, but already they have raised the rent by $50 a month when one renter moved out and another moved in. Given the state of the housing market, Ms. Buttars, a real-estate agent in the area, expects rents to keep rising.

High Costs: But the costs of renting can be high—both financially and psychologically.

Jerry Arnold has been renting out a condo he owns in Seattle since 2009. He has tried to sell the unit twice.

“The real horrors are things you can’t control,” he says. Things like maintenance issues that keep piling up in the older building. There’s a plumbing problem, for example, that has required repeated attention—and he can’t count on his renters to pay attention to small leaks before they become big ones. “Nobody treats a property like an owner,” he says of renters.

Landlords should keep in mind what costs they’re likely to incur, from taxes and insurance to homeowner association dues. Temporary landlords will have to repaint, recarpet, or do larger repairs before being able to put the home on the market again.

And don’t forget maintenance costs. “If something like the furnace, water heater, or other costly item goes out, it can be hard if money hasn’t been set aside or has to come out of savings,” Ms. Buttars says.

Getting Help: It adds to the cost, but many landlords say it pays to hire a property manager.

Property managers deal with all kinds of responsibilities, from maintenance issues to collecting rents and performing inspections. Whether it’s a neighbor complaining about noise, or a tenant who hasn’t paid the water bill, the owner is legally responsible to address problems within a certain time, says Ms. Eckert. Having a manager can help settle disputes in a timely manner.

Fees for property management vary depending on region, type of property and services. Full-service managers in the Seattle area typically charge 8% to 10% of the rent per month, Ms. Eckert says.

Self-protection : Owners who go it alone should do everything they can to protect themselves. They should document everything, Ms. Buttars says—including why they didn’t rent to someone. They should take pictures that show the rental’s condition before tenants move in. And make sure they have a good contract that can be enforced, especially important if they have to evict someone.

Ms. Hoak is a reporter for MarketWatch in Chicago. She can be reached at amy.hoak@dowjones.com.