Is Live-In Landlord Life for You?

The Washington, DC area is known for many things — beautiful cherry blossoms, a great dining scene and so much more…but an affordable housing market is sadly not one of them. With cities around our region regularly ranking high among U.S. locales for average home prices, many homebuyers need help nabbing their piece of the market, and one strategy for many is seeking a home that allows for rental income that helps offset the mortgage.

Being a live-in landlord or owning investment properties that you lease out requires research, reading up and planning, but it may be an option for you or someone you know. There are two primary owner-occupied options we see in our neck of the woods:

1. Multi-Unit Properties: A multi-unit has two or more independent units allowing for multiple individuals/families to have distinct homes in the same building. You likely are familiar with the terms duplex and triplex, which are two- and three-unit properties.

2. Shared Single-Family Homes: If your home is larger enough to welcome one or more person, you may elect to have a roommate. The roommate could have their own separate area of the home, like a lower level, or simply occupy a bedroom with shared bath, kitchen, etc.

In either of these types of homes, you can choose to have longer-term tenants with leases or you may opt to welcome someone on shorter, more flexible terms through Airbnb or another platform. We’ve especially seen an increase in these among Millennial homebuyers. But, before you count your leasing income on that future home, here are a few things to keep in mind:

• Remember Income is Not Guaranteed: If you are only able to make a property work for your budget by renting, make sure you have a contingency fund and plan if market conditions change. You may need a buffer between tenants (and won’t have income for a period of time), see demand fluctuate (as we saw when a large number of college age students returned home during the pandemic and no longer were seeking off-campus housing, resulting in less demand and depressed prices) and/or (but hopefully not) run into tenants who can’t or won’t pay. So, know your numbers and have savings you can fall back on to ensure you can pay your mortgage if the income decreases or stops.
  

• Understand the Rental Market: You may have recently been a renter, so put your tenant cap back on for a bit. What are your target renters looking for? As a result of the pandemic, for example, more people began relying on personal vehicles over public transportation, so is there off-street parking and, if not, how easy is to park on the street? Another consideration is that secondary units are often in lower levels of homes, which are inherently less desirable than above-grade units. When you take all of this into account, you can best price your unit to find a tenant quickly.
  

• Know the Law: Every jurisdiction has laws that guide housing and rentals, with a focus on protecting tenants and their rights. (DC is notorious for being the most tenant-friendly jurisdiction in the U.S.) You’ll want to ensure the space you intend to rent is legal to rent, know what registrations and licenses you may need (and how much they cost) and understand regulations regarding important things like managing security deposits. As a reminder, laws are constantly evolving and you need to stay on top of those changes. One of the most recent changes that has impacted many owners limits short-term rentals for non-owner occupants but also introduces the need for short-term landlords to register with DCRA.
  

• Be Prepared to Handle Issues: As the landlord, the responsibility falls on you to address any issues — from a broken toilet to pesky pests. This means, just as any homeowner should, you want to ensure you have funds to pay for fixes and upgrades, as needed, and ensure you make yourself available and responsive to the concerns of your tenant(s). If this gives you anxiety or is not consistent with how you want to live, landlording may not be for you. Of note, landlords who don’t share properties with their tenants sometimes will hire a professional property manager for this purpose, but that comes at a cost and is likely not a fit when you’re on site.

• Talk to a Tax Professional: As you add another income source, you’ll want to ensure you account for that appropriately on your taxes. Make sure to talk to your CPA.
  

Do you think sharing your home may be right for you or your path to homeownership? Reach out and let’s dig in, crunch the numbers and see!

Amber Harris is the owner of At Home DC, an interior decorator and a licensed real estate agent with Keller Williams Capital Properties working with clients in DC, Maryland and Virginia.

From Homeowner to Real Estate Investor: What You Need to Know

A good financial planner will advise you that you want to have diversity in your investment portfolio, with the mix depending on your risk profile, stage of life and short- and long-term goals. Homeownership is a great way to build wealth, as your housing costs are helping you gain equity (instead of paying someone else’s mortgage and expenses) and realize other advantages (from tax savings to simply enjoying making a home your own).

Photo Credit: PT Money

Many individuals and families will own a primary or secondary residence, perhaps a vacation home, but others will jump back into the market with the goal of acquiring a property purely as an investment. Some will join a REIT (real estate investment trust), while others will buy and hold (waiting to sell when the time is right) or flip (making improvements and selling right after). However, many investors will buy and become landlords, having someone else pay most or all of their mortgage (and, ultimately, securing equity over time).

In the DC area, we have a very fluid population, with people constantly coming to and leaving the area for work and study — meaning there’s a strong demand for rentals. And, while DC’s rate of population growth rate has slowed down a bit, the region continues to be a draw for individuals and businesses. So, what should you ask yourself if you and your financial advisor agree a new real estate investment may be right for you?

• What’s my budget? Adding a property to your personal portfolio will require an initial investment and ongoing maintenance and carrying costs. You’ll want to consider the upper limit on your investment and then calculate the associated expenses — down payment (with higher requirements from lenders for investment properties), closing costs, professional fees (for the purchase, finding tenants and perhaps property management), maintenance reserves, etc.

• Where’s the “sweet spot” in the market? An investment property may or may not be a property you could see yourself in. As an agent, I advise my clients on the state of the rental market and what types of properties (size, location, price point, etc.) are the most likely to be consistently in demand and rented with limited gaps in tenancy. Just because it doesn’t meet your needs, tastes and location preferences doesn’t mean it isn’t a good investment.

• What’s my required capitalization rate and/or cash flow? Investors often evaluate potential properties by looking at their capitalization rate, or cap rate. Simply put, the cap rate is your annual return, calculated by dividing the net income by the market value of the property. In more competitive markets, like DC, lower rates might be expected. Another key consideration is your projected cash flow. Ideally, your rental income should cover the mortgage principal, interest, taxes and insurance on the property at minimum. If you are looking at investments that may have a slightly negative cash flow, take the time to even further evaluate if this is the best investment for you now. Perhaps you’d be better served by putting your funds into another short-term investment so you can increase your down payment and lower your PITI or by finding another property.

• What type of landlord will I be? If you are buying an investment property near your home (or where you have a network already established), you may be able to self-manage your property. While this will require you to invest time and be on call 24-7, you will be reducing your ongoing expenses. However, carefully consider the trade-offs in time and stress if your budget allows you to outsource the property management (with fees running up to 10% of the rental income). Either way, if you haven’t already, familiarize yourself with landlord-tenant laws in your area. You’ll want to ensure, whether you are hiring a property manager or self-managing, that you are a well-respected landlord , abiding by rules and regulations and understanding the processes for handling any potential issues.

If you’ve asked yourself these questions and think acquiring an investment property may be right for you, reach out to an experienced agent to dig in deeper and talk about next steps in evaluating your readiness!

Become a Landlord or List?

It is rare that a person’s first home purchase is their “forever home” for a variety of reasons — from the cost of entering the market (especially in pricier markets like DC) to ever-evolving needs (as people marry, divorce, have children, grow older, etc.). When you make that decision that it’s time to find a new home, you also may have to decide if you want to keep your current home or find a new owner…and that can sometimes be an even tougher decision.

If you have paid off or down the mortgage on your first property, you may be in a position to buy your next home without selling (either your cash on hand and DTI ratio will allow or you may be able to apply some of the equity in your current home to help purchase your new home). When that’s the case, you are going to want to ask yourself a few key questions:

• Do I want to be a landlord? If the answer is a definite “no,” proceed ahead talking with your agent about the best way to maximize your exit from your current property (considering timing and the three P’s). Similarly, if you live in a condo or coop that won’t allow you to rent out your unit (perhaps there is a blanket restriction or a limit on the percentage of units that can be rented), get ready to sell. However, if the answer is “maybe” or “yes,” proceed to the next question.
  

• How will being a landlord impact my bottom line? If you have an outstanding mortgage, use that as the base for figuring out your break-even costs. Then take into account additional recurring costs, like condo and HOA fees, ongoing maintenance and paying a property manager (if applicable). Next, compare this to the going market rate for similar rental homes (have your agent gather comps for you and make a recommendation). If the carrying costs exceed or are close to your carrying costs, are you prepared to subsidize the difference to maintain ownership of the home? Also, don’t forget to keep in mind that your home will most likely not be rented 100% of the year and you will have costs to clean and prepare the home for the next tenant(s). Be conservative and calculate a 70-80% utilization if finances may be tight and re-run your numbers.
  

• How will this impact my lifestyle? If you can’t afford to hire a property manager (or prefer not to), are you prepared to play that role, potentially getting late night calls when something goes wrong? If so, will you be local and be able to be hands on to ensure repairs are completed and handled in a timely manner? What if you run into larger issues with your tenant? For many people, this isn’t a bother at all. Thinking about how finances impact your lifestyle, if you will be running in the red to maintain ownership, don’t forget to consider how this will impact your purchasing power for your new home and your budget for daily living.
  

• What are the potential long-term financial implications? Real estate is an investment and often the largest source of wealth for people. If you are more risk-adverse, real property can feel like a safe way of saving money (in fact, it is forced savings). However, if you prefer to play the stock market or identify other opportunities to invest, you may be able to put proceeds from a sale to a higher and better use. This is very personal consideration and there are no guarantees on returns in any investment, so engage your financial advisor to model out potential scenarios and choose what fits your risk profile and investment strategy. If you’ve dreamed of becoming a real estate mogul, this could just be the first step!

These are just a few of considerations I discuss with my clients during our one-on-one consultations. Being a real estate agent is about more than selling houses; it’s about helping people make their best housing and life decisions. There’s no singular best conclusion, but by enlisting the help of subject-matter experts — from your CPA and financial planner to a local Realtor — you can best discern the right path to your happiness at home.

And a shout out to Pearl and all the landlords out there…may you never have a tenant like this:

Amber Harris is the owner of At Home DC and a licensed real estate agent with Keller Williams Capital Properties working with clients in DC, Maryland and Virginia. 

Am I Ready to Be a Landlord?

After you transition from being a tenant to being a homeowner, many people come upon a new decision point: becoming a landlord or not. That juncture could come about for a few reasons, including:

1. You have to leave your beloved city/neighborhood for work, family or other pursuits.

2. You need to up or downsize in the same market.

3. You are contemplating investing in real estate and building a secondary (and maybe, eventually, primary) income source.

Whatever the reason, there are several important factors to consider before becoming Mr. (or Ms.) Roper (pretty sure at least 50% of my audience might need to Google this reference). In no particular order:

• What is your motivation? Perhaps the property holds sentimental value for you or you see an opportunity for even more equity by holding onto it. Either way, make sure you can articulate your motivation and use that to evaluate whether you become (and remain) and landlord.
  

• What is the rental market like currently? Do you live in a neighborhood near a hospital where you are likely to get residents or in a community that has a large expat population? And, just as when you are buying or selling, you must consider inventory levels - total volume but also the availability of and demand for homes like yours.
  

• Does it make financial sense? It is hard to perfectly predict what will happen to any given market or economy, but you should start by running the numbers. Look at what similar properties are renting for in your neighborhood, itemize other anticipated expenses such as maintenance and costs for acquiring tenants (whether or not using a real estate agent) and determine if you want to manage the property yourself (harder to do if you are moving out of town) or higher a professional company (and pay a percentage of each month's rent). This is where a spreadsheet with formulas will help you run various scenarios. And don't forget that you may not have a tenant 12 months of the year, so you have to be prepared to carry your mortgage (if you have one) during periods of vacancy.
  

• What are the business and legal implications? In order to be a landlord, you should make sure your property is legal and licensed (UrbanTurf has a great writeup). You also need to make sure you are in compliance with any condo/HOA bylaws (if applicable) and are insured appropriately. Every market is different but some (like Washington, DC) are more tenant friendly - meaning a problem tenant can be an even bigger problem. If you're in D.C., you likely have heard of (or are familiar with) the Tenant Opportunity to Purchase Act (TOPA). If not and you intend to rent a property in DC, familiarize yourself with it.
  

• Will this impact other real estate transactions? If you intend on buying a second (or third) home, keep in mind that your existing mortgage on a rental property still counts toward your debt-to-income ratio (most lenders don't want to see this higher than 36% of your monthly pre-tax income) and can affect being approved for (and your interest rates and down payment required for) any additional mortgages. Talk to your mortgage broker to understand your options.
  

• Do you want to be a landlord? Your time is money. Whether or not you higher a property management company, think about the demands (and potential stress) being a landlord places on you and proceed with what feels right!

Finally, remember that real estate is not an incredibly liquid asset, meaning that it cannot be quickly sold (in comparison to stocks, etc.). If you anticipate a scenario where you may need the capital invested more readily, you might want to consider investing your dollars in other ways.

I have several clients that are thinking through becoming a landlord or selling right now, and there isn't one right answer for everyone. Consult with your Realtor and financial advisor to land on what's best for you - personally and financially.

Amber Harris is the owner of At Home DC, an interior decorator and a licensed real estate agent with Keller Williams Capital Properties working with clients in DC, Maryland and Virginia.