The Accidental Landlord: Rent your Home until you can Afford to Sell it.
I recently came across this article which I originally published on Ezine in 2009, but I believe it has more relevance today than is did when I originally published it 7 years ago. Alberta?s depressed oil and gas sector, along with corresponding house price drops, and increasing vacancy gaps suggest that Accidental Landlords abound in our province. It?s funny how even though many things have changed in the last 7 years, many things have stayed the same. Opportunities for Accidental Landlords are on of those constants.
House prices are down. This is clearly bad news for those of us who own one or more rental properties. In some cases, selling your home means you will have to come up with a material amount of capital just to settle your existing mortgage, pay the bank penalty, or to cover Realtor fees. Fortunately, there is another option.
To some; renting your home brings to mind fears of tenants trashing it, months of non-payment of rent, or midnight calls to emergency pipe repairs. Sound familiar? I have heard these stories for over 15 years, it seems that everybody has a "bad tenant" story but rarely can claim that the actual event happened to themselves. Basically, for every bad tenant experience, there are 50 stories that get passed along and altered to make the poor landlord seem victimized or felt sorry for. Bad tenants, oddly enough, are actually extremely rare. You can trust me because I know; I?ve been in the business my entire life, my dad was a landlord, and so was his dad.
If you have a house that has negative equity or very little equity, renting your home out for the short term while property values rise is a great idea. As surely as inflation exists, house prices will rise. Research conducted by myself and the staff at Hope Street would suggest that, on average, house prices have historically risen at the rate of about 4.5% per year for the past hundred or so years. If your house has negative equity currently, you may find that within a few years, the inflationary growth of the homes value will be sufficient to cover your expense of getting rid of it.
Lets not forget about mortgage pay down either. Each mortgage payment that you make to the bank will be comprised of a portion of interest (which the bank keeps) and a portion of principal, that is, the amount of money that the bank will credit you for decreasing your loan amount. In most cases, a mortgage will rarely extend for more than 35 years; so one can expect a very material amount of equity growth based on the fact that the regular mortgage payments will decrease the principal balance.
The most common complaint I hear from the general public is that the rent that a property will generate is not sufficient to cover the total monthly expense of owning the house. For instance, a property may cost $2000.00 per month to own, but will only rent for $1800.00. This is a fairly common problem in today's real estate market but one that can definitely change. As house prices rise, and your mortgage balance decreases the total monthly obligation will decrease.
In a worst case scenario negative cash flow (as they call it) will provide you with a valuable tax deduction from your normal income and is the lesser of the evils. One can either loose a few hundred dollars per month while renting your home, or loose a hundred thousand or more dollars by selling it while the market is down.
After all, everybody I talk to knows that the value of his or her home will eventually rise. Renting out your home is a great way to provide interim support while house prices rise, and to provide housing solutions to those who choose not to buy. Maybe Accidental Landlords are not Accidental Landlords at all.