While many people dream of having enough money to start a real estate investing career, scores of existing homeowners have become investors by default.
Dubbed “accidental landlords,” these homeowners have wound up collecting rents after refusing to lower the sales price on their primary residence, preferring to convert it to a rental property until interest rates drop and they can sell the home for what they feel it’s worth.
Such has been the extent of the trend that these newbie landlords with full-time jobs are influencing the rental market, forcing institutional landlords to rethink their plans and creating fewer opportunities for homeowners.
Accidental Landlords: How They’re Changing Rental Supply
According to a recent Parcl Labs report, stubbornly high mortgage rates, increased inventory, and waning buyer demand have forced many homeowners to delist their homes and instead try their hand at landlording.
In Sunbelt markets such as Atlanta, Dallas, Phoenix, Houston, Tampa, and Charlotte, this has put them in direct competition with large institutional single-family rental (SFR) owners. Rental inventory has swelled by around 20% year over year, with much of it coming from formerly owner-occupied properties.
“When these home sellers cannot find buyers, they face three choices: delist and wait, cut [the] price to find market-clearing level, or convert to rental,” Jesus Leal Trujillo, principal data scientist at Parcl Labs, wrote in his report.
Parcl Labs analyzed the impact. In the six Sunbelt markets where large-scale institutional landlords, such as Invitation Homes, American Homes 4 Rent, and Progress Residential, hold over one-third of their collective assets, the number of accidental landlords has risen dramatically, with Houston experiencing a 41% increase and Dallas a 32% increase in former sellers turned landlords.
Rent Growth Has Slowed
The deluge of new homes on the market has threatened to slow annual rent growth.
Haendel St. Juste, a senior equity research analyst at Mizuho Securities, told CNBC:
“You’re not going to see big reductions in rent, but maybe you won’t be able to get 4% or 5% increases on your rent. Maybe it’s just 1% to 2% in some cases. But the professional big guys, INVH, AMH, have been getting 4% to 5% renewal rates and 75% retention in their portfolio. So keeping people in the homes at 4% to 5% rent is a key part of their business model.”
The result of added inventory has complicated forecasts for rent growth and landlord profitability, scaring big investors away from the single-family market and instead to more predictable build-to-rent communities, CNBC reports. The lack of accidental landlords and entirely purpose-built rental communities enables corporate investors to control their environment, offering luxury finishes, schools, stores, and more.
The Broader Context: Why Institutional Investors Got Into Single-Family Homes
After the housing collapse of 2008, institutional investors, including private equity and REITs, rapidly grew their portfolio of single-family homes due to low prices. At its peak, Invitation Homes held about 80,000 homes at the end of 2020.
However, the escalating fees associated with institutional owners have squeezed tenants financially, resulting in the FTC filing a complaint against Invitation Homes, accusing them of providing renters with misleading information about the cost of their leases, adding hidden fees, failing to conduct pre-move-in inspections, and improperly withholding security deposits once tenants had vacated.
These types of practices, as well as the algorithmic rent-fixing practices allegedly conducted by corporate landlords using rental software company RealPage, have resulted in a negative image of large-scale landlords compared to smaller-scale mom-and-pop investors, including accidental landlords.
How to Smoothly Transition to Landlording if You Decide to Rent Out Your Home
If you are considering joining the ranks of accidental landlords by renting out your residence for the first time, either as a long-term or short-term rental, there are some essential steps to follow.
1. Get your property ready: A personal home is not a rental residence
First, invest in any essential repairs and modest cosmetic updates, such as fresh paint and curb appeal tweaks, and ensure safety systems like smoke alarms are up to code. Give your home a tenant-proof skin by replacing older carpet with harder-wearing vinyl plank flooring.
If you are converting your home into a short-term or mid-term rental, you will need to make additional adjustments, such as installing encased smart thermostats, exterior cameras, and keypad entry systems.
2. Use landlord insurance and adjust financing
Convert your homeowner’s insurance to landlord coverage and explore recasting your mortgage if feasible, so your cash flow can help cover costs.
3. Leverage technology
Rental management software can help simplify tenant screening, payments, and maintenance.
4. Decide whether to self-manage or outsource
Property management isn’t for everyone, especially if you have a demanding day job/life or travel a lot. While numerous property management companies are available, they are not all created equal. Conduct thorough research and request testimonials. There’s nothing worse than having to manage the manager and giving up a percentage of the rent for the privilege.
5. Understand the legal and tax implications
Talk to your accountant before you list your property for rent to understand the tax implications of owning a rental and how best to take advantage of the deductions. Opening a separate bank account, keeping personal and business expenses separate, and having a clear understanding of local landlord-tenant laws in your area are essential.
6. Research local rent amounts, and budget wisely
Go online or canvas a real estate agent about rental prices in your area. Price your property competitively and factor in vacancies and additional expenses, especially if you are running a short-term rental business (such as cleanings, laundry, toiletries, teas, coffee, and toilet paper restocking). Invest in a professional photographer to help your rental stand out.
7. Stay on top of your obligations: Don’t set it & forget it
Passive income is rarely passive. Even if you hire a property manager, you can’t take your eye off the ball and expect everything to be OK. Your rental is ultimately your responsibility.
Be prepared for the unexpected and set aside some cash to cover unforeseen expenses. If you are cash flowing, try not to touch the money—chances are, you’ll need it.
Final Thoughts
Blessings often come in disguise, and not being able to sell your primary residence for the price you want could set you on the path to real estate investing. It’s not an easy journey, but if you don’t try to take out equity, stay liquid, and implement these steps, there’s no reason why it can’t be the start of a wonderful side hustle—and maybe more.
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