Increasing demand for home rentals creates opportunity for landlords

Maryalene LaPonsie | Improvement Center Columnist | October 8, 2012

When Michelyn Petersen found the perfect position as a physical therapist in picturesque Alpena, Mich., her only problem lay nearly 250 miles away. It was the house she purchased in Grand Rapids, Mich. at the height of the housing bubble and couldn't sell after the market crashed.

"It was listed for about a year," says Petersen, "no bites, no nothing."

Finally, Petersen did what many homeowners may be considering. She pulled the house off the market and found a renter who has been living in the house for the past two years.

Petersen isn't alone when it comes to deciding to enter the landlord business. While some homeowners find themselves in a similar situation of being unable to sell a house for what they owe, others may be looking at the current buyer's market and thinking it is the perfect time to pick up a few investment properties.

Whether you have a home you can't sell or are looking to add investment properties to your portfolio, becoming a landlord can be a smart move, so long as you keep your expectations in check and your feet firmly planted on the ground.

The time is right for rentals

According to a 2011 report from the Joint Center for Housing Studies at Harvard University, many owner-occupied properties are finding new life as rentals. So much so, the number of owner-occupied properties being converted to rentals is fast outpacing additions to the rental market from new construction. From 2007-2009, the last year data was available in the report, more than 1.8 million owner-occupied single family properties were turned into rental units.

The Harvard study also found home ownership rates dropped to 66.9 percent in 2010 from a peak of 69 percent in 2004. While that may not sound like a lot, it represents the steepest drop in annual records since the 1960s. Meanwhile, the 2010 Census Bureau data found the number of housing units occupied by renters increased by 14 percent from 2000-2010.

Rental options for today's landlords

With more families attracted to renting -- a 2011 Rent.com survey found only 13 percent of adults believe home ownership is an essential part of their American Dream -- becoming a landlord may make sense for many.

If you are interested in earning extra money as a landlord, there are several ways to pursue this opportunity.

  • Rent out your existing single-family residence rather than trying to sell it
  • Rent out a room of your existing home or convert a portion of your home, such as a basement, into an apartment
  • Purchase a multi-family property in which you live in one unit and rent out the other units
  • Purchase investment properties that are either single-family or multi-family and live off site

The right option for you will depend largely on the amount of capital you have on hand to make repairs and improvements as well as your personal preferences. While some families might be comfortable sharing living space with others, not every landlord wants to live on site.

5 things to consider before renting

Once you have decided to become a landlord, start with these steps.

1. Investigate tenant/landlord laws: The first stop for any would-be landlord should be city hall. Laws may vary depending on your city, county or state, but you need to understand your obligations before renting out a property. Don't forget to also check with your homeowners insurance and mortgage company too.

In Petersen's case, she found out her city had a specific local ordinance. "All rental units [in Grand Rapids] have to be registered with the city," says Petersen. "I also had to change my homeowners insurance."

2. Make needed repairs: You might be able to live with a toilet that runs occasionally or a broken window latch, but your tenants are going to expect a little more. Some repairs will be required by law while others are needed if you are going to attract quality renters.

3. Determine a reasonable rent: Keep in mind rentals cost more than a monthly payment. You also need to calculate utilities, taxes and maintenance. Once you have determined how much is needed to cover costs, you then need to determine whether the monthly rent is reasonable for that area. Ideally, you have made this calculation before buying a fixer-upper with the intent to rent.

4. Consider how to handle maintenance: Are you handy enough to make repairs yourself? And if so, do you mind being on call 24/7? For those who don't want to hassle with repairs, contracting with a property management company is one way to relieve the burden of maintenance responsibilities.

5. Create a screening system for applicants: A good tenant is key to a successful landlord experience. While state and federal laws must be followed -- for example, race, religion and familial status can't be used to deny potential tenants -- landlords can screen references, pull up a credit report and do a criminal background check before green-lighting any applicant.

Still undecided whether the role of a landlord is for you? Petersen's advice is, "It's better than a house sitting empty if you aren't going to live in it. But," she adds, "you have to choose your renters carefully."

Whether you want to fill an unsold house, like she did, or have ambitions of building an inventory of rental units, market trends bode well for the rental business. It could be an excellent time to be a landlord.

About the Author

Maryalene LaPonsie has been writing professionally for more than a decade on topics including education, insurance and personal finance. She holds a Bachelor's Degree in Political Science from Western Michigan University.