The Accidental Landlord Dilemma

 
 

The Accidental Landlord Dilemma

We have quite a few current owners who bought a property in 2005 or 2006 just before the real estate crash, and rather than sell the home at a discount in the years following, kept the property as a rental.  They may have preferred to sell the property, and had no intention of initially keeping it as a rental, and therefore, became an “accidental” rather than an intentional landlord.  Many of these owners were relocated during the recession or decided to buy another home at a discount, but either couldn’t sell without having a real financial loss, or refused to take a paper loss.  So, for last 10 years they had this property as a rental, but now that home values in most of the country have reached pre-recession prices, and the accidental landlord can now be a determined seller and not lose any money.  But should you?  Here are some reasons to keep this property as a rental:

  • If you have paid your mortgage as agreed, your mortgage balance should be at least 20% lower. If you bought a home for $500,000 and owed $450,000, the balance should be no more than $370,000.  You now have an equity position of 75% or less loan to value.
  • After 10 years, for that same $450,000 original loan, the monthly principal reduction is almost $1,000. Each month the landlord is creating equity simply by making the monthly payment.
  • If the property was a breakeven in 2005, rents should have increased 25 to 50% and now the property should be profitable. Even if there were a slight loss in 2005, e.g., the rent was $2,000 and the total monthly cost was $2,300, the rent should now be $2,500 and the expense still at $2,300.  Even if prices were to decline again, the positive cash flow should be immune to lower prices.

For many, you may have been accidental back then, but you have adapted to the role of landlord, and can finally reap the rewards of positive cash flow, equity and future price appreciation.  You suffered through the recession and all that may have come with it: negative cash flow, negative equity, dicey tenants and the three t’s.   Now is the time to actually enjoy owning rental properties.