You bought your apartment a few years ago, you decorated it and made it a home. One day you or your partner gets an amazing job offer across the country that you can’t turn down. Or you just found out you’re going to have a baby and you need a bigger place. Perhaps you and your partner decide to move in together and consolidate two households into one. Or your parents need more help as they age and you need to be closer to them.
Unexpected life changes are … well… unexpected. It may be that you have time to sell your home before you have to move or find another place but selling a home is stressful. Add to that the stress of whatever life change you’re going through. Throw in factors that are outside of your control, such as the current state of your local real estate market. It just might not be the right time to sell.
The first time I became an accidental landlord was in 2006. I got an amazing job opportunity abroad and less than 2 months later I had packed up and moved. I had owned my apartment for just over a year and I owed more on the mortgage than the property was worth since I had obtained 100% financing with closing costs rolled into the mortgage. This was in the heyday before the 2008 mortgage crisis. With all the excitement of a new job and moving abroad, I didn’t have time to even think about selling. I used a property management company to full manage the apartment and I became a landlord! The second time I became an accidental landlord was in 2020, when I moved in with my boyfriend of 5 years. I had purchased my dream apartment in 2017 but by 2020 I was having a mid-life crisis and trying to change careers. At the time of writing this article, my local real estate market is booming and the value of my apartment has appreciated nicely. I am still trying to get my new career off the ground, but the apartment is part of my long-term retirement plan and I have decided not to sell.
And so you become a landlord — Tips for getting started
Assuming you’re not independently wealthy, you’re probably like me and will need to rent out your home to cover your mortgage and other ownership costs. Also assuming you haven’t been preparing your whole life to become a professional real estate investor, you’ll need to learn things on the fly. In this article, I want to share with you some helpful tips I have learnt from being a landlord.
- Consider your options. Am I contradicting myself here? I set out writing about life events that force you into being a landlord. Hear me out. You always have choices. That job offer you can’t possibly turn down … well, you can. You and your partner can delay moving in together until you have managed to sell your place. If you need to get a larger place due to a baby on the way, pregnancy takes at least 9 months and for the first few months, baby can sleep in a crib next to your bed or in the living room. Tough words perhaps but take some time to be honest with yourself and consider all your options and choices you can or need to make. Being perfectly honest, I’ve always had a deep fascination with all things real estate, and looked forward to becoming a landlord. If this was not the case, I could have taken an extra month to move and explored the option of selling more seriously. Sitting down with a cup of coffee to jot down your thoughts is a good way to calm yourself and consider your options.
- Figure out if you can afford to become a landlord. Part of considering your options is looking at the money side of things. There are costs of ownership that you will probably know quite well already such as monthly mortgage payments, HOA fees, property taxes, minor maintenance (a blocked drain or a broken window) and major maintenance (a heating system or a roof must be replaced). Then you need to consider the costs of being a landlord, such as property management fees, adding even more for maintenance (because, well, tenants) and setting aside money for inevitable vacancies that are part of being a landlord. A rule of thumb for maintenance is to set aside 1% of the value of the apartment each year, add 1% if the property is a house and add 1% if the apartment or house is older than 10 years. For vacancies, I would set aside up to 10% of the rental income for vacancies until you have at least 3 months of rent saved up at all times. Finally, do some research on going rents in your area. I’d recommend interviewing a few property management companies or local realtors to get their assessment. Will the monthly rent you receive cover all your costs? Be conservative in your assessment. If you can break even, considering the lowest achievable rent, then you’re good to go.
- Deciding to do it yourself or hire a property management company. I personally would only handle managing my own property if I live nearby and have the time and willingness to handle the work. If you are too busy or live far away from the property, then a property management company is a good idea. Property management companies offer different service packages ranging from the bare minimum to full service companies. Interview at least three companies before selecting one and have them explain in detail what they will (and won’t) do for you and how much it will cost.
- Think about an exit plan. Once the dust has settled, think about what your short, medium and long-term plans with your property are. The first time I became an accidental landlord, my focus was packing up, moving to a new country and starting a new job. I kind of hoped everything would work out with the apartment and was very relieved when the property management company found a tenant and the rent payments started coming. Except then they didn’t. The first tenant had to be evicted. The second tenant paid but was often late with the rent. The third tenant was a dream and eventually went on to buy the apartment from me. The bigger problem was that I was my completely reliance on the property management company as I was working abroad and had no friends or family near the apartment to drive by and check that my apartment was still standing. The situation was keeping me up at night and I decided quite early on that I would sell the apartment as soon as it made financial sense to do so. With my second apartment, I live nearby and have decided to manage it myself.
In Conclusion…
Property ownership and having a steady, positive cash flow can help you build wealth and is a great decision for many people. For others, selling is the right choice. Take the time to think about what makes sense for you. Becoming an accidental landlord has happened to many people and they have survived. Many thrive. Take a deep breath! I hope my tips will be helpful to you.
