In today’s market in the Pacific Northwest, high home prices and relatively high interest rates have made home affordability exceptionally difficult. For homeowners who are trying to sell their residences, this has equated to longer times on market and more negotiating with price.
A lot of times, sellers have a timeline they must sell their home by or a price they want to meet. But what happens when this can’t be met? When faced with this decision, many owners turn to renting their home instead of selling their home. Opting to cover the mortgage and wait for the market to respond favorably rather than sell at a loss. There is a term to describe people in this situation: “Accidental Landlords.”
What Is An Accidental Landlord?
An Accidental Landlord is a homeowner who ends up renting out their property due to circumstances that prevent them from selling their home. This situation can arise for various reasons, and the term "accidental" reflects the unplanned nature of this new role. In today’s housing market in the Pacific Northwest, many Accidental Landlord’s simply do not have a better option when faced with selling their home for a net loss of the price they purchased it for.
Is Renting My Home The Right Call?
We would recommend thinking about the following details if you are considering renting your home:
1. Can I even rent my home? In the Washington South Sound region, especially Tacoma and Puyallup, many Homeowner Associations (HOAs) and condominium complexes have a limit on how many homes may be rented at any given time. Moreso, there is usually a waitlist on these rentals with other owners in the same situation as yourself. To ensure you are within compliance, check your HOA by-laws and local regulations to see what the current limit is, if any, prior to listing your home to rent.
2. Does renting my home make financial sense? Many owners in today’s market are losing money every month on their home. Yes, you read that right. They rent it for less than their mortgage. The reason these people can stomach this is because the alternative (letting it sit vacant or selling it for thousands of dollars less) is an even worse option.
Consider this example scenario: Andrea bought her home for $300,000. It currently is on the market for $280,000 and is having trouble selling. That’s a whopping $20,000 loss, not including any other fees, if a buyer is willing to purchase the home at $280,000. Andrea’s mortgage is $2,500, but it will only rent for $2,100 right now. That’s $400 she must cough up every month to break even! What’s the best option?
Andrea does some quick math. 20,000/400 = 50. That means Andrea needs to rent her home for 50 months (4 years 2 months), paying $400 out of pocket every month, to have lost the same amount of money she would have from the sale. On top of that, Andrea cannot afford a $20,000 loss right now. But she can stomach $400 each month. She chooses to rent her home instead of selling, hoping interest rates and home prices recover.
Let’s think of another scenario for Andrea: She is stubborn on renting it for $2,500, even though the market says it should only rent for $2,100. “It’s worth the price, and I can’t be underwater on my mortgage anyway,” she thinks. Consider the circumstances when her home sits vacant for two months at $2,500 rent price. That’s $5,000 in sunk costs. When you remember if she rented it for a net loss of $400 ($2,100 rent price) right away, it would take over a year to have $5,000 in total losses. The takeaway here—it is not necessarily the rent price that is crippling your budget, it is usually the vacancies and other costs that hurt the most when trying to rent your property.
This is not a recommendation to follow Andrea’s footsteps. However, this is a position that many homeowners are currently facing. Along with our rental calculator, we can help price your home and see what the market will allow at this time. We are not financial advisors and cannot make this decision for you. You must take time to consider all the things that are required to rent a property. Broker dues, Capital Expenditure (CAPEX), vacancies, etc. You need to consider all these factors when you do the math and make a decision like Andrea.
3. What if there is a date I want to sell this home by? Once a lease is signed by a tenant, there are notification requirements and timelines before you can sell the home again. You cannot suddenly sell the home if you have a tenant in the property. Because of this, you need to think carefully if you plan to sell the home on a specific date in the future or if you want to hold it indefinitely until the market improves. Having a candid conversation with your property manager can set you up for success in that situation, as they can work with you to get the property ready for sale when the time comes.
4. What if I want to move into my home again? If you plan to move into the home again, this can change some of the aspects of renting. A few things to consider would be paint choice, landscaping, appliance repair/replacement, and maintenance.
For example, if you have unique color choices for accent walls (bright pink, purple, blue, etc.) or exterior painting, this can usually make it harder to rent. Our recommendation in this case would be a neutral color to appeal to a large audience of potential tenants. However, if you plan to move into the home in a few short years and do not want to have to change the colors back to how you had them, this is a conversation to have with your property manager. Same goes for your appliances and maintenance. Some brands are more durable and affordable and make them ideal for renting but may not suit the design of the home. All told, this usually is not a showstopper, but something to consider and speak to your property manager about.
5. What Type of Rental Do I Want? This can be an entire post in and of itself, but there are generally three categories of rentals for homes. Short Term (think: VRBO, AirBNB), Medium Term (Furnished Finder, AirBNB), and Long Term (Zillow). Each of these comes with different price points for what they can rent for, operating expenses, legal considerations, and many more. We would recommend looking into property managers for each of the three types of rental properties you could use and finding what will work best for your situation.
Here at Up First Management, our expertise is in long-term rentals for residential homes in Pierce County and Thurston County. With that said, we have relationships across the industry so just reach out and ask us.
Moving Forward
Other than location and amenities, how your property is operated has the largest impact on your return on investment. Having an experienced property manager on your side who understands the market is key to this.
Renting your home is not impossible and not only for “wealthy investors.” We pride ourselves in working with all types of owners from different backgrounds and keep the “mom and pop” homeowners in business. We understand each situation is unique. Our intent is to ensure we reach the best outcome for each individual owner. We are confident your home is in good hands at Up First Management and will put you at ease when listing your property for rent.
