The real estate market has long worked on a simple system: If you want to buy a new house, sell the old one and use the equity for a down payment.
But the past few years of low ownership costs and rising rents have some move-up buyers trying a new approach: Buy the new house. Keep the old one. And rent it out.
Real estate firm Redfin recently asked 1,900 prospective home buyers nationwide what they planned to do with their old house when they bought a new one. As you’d expect, the majority said they would sell. But 39 percent said they’d rent it out. In Western markets that have seen big price growth lately, like Los Angeles, the percentage was even higher.
“We certainly didn’t expect that,” said Ellen Haberle, Redfin’s real estate economist and the survey’s author.
It’s the first time that Redfin has conducted this kind of study. But real estate agents and property managers say they’re seeing the same thing: a noticeable uptick in the number of home buyers who want to rent out their old place.
If this trend holds, it could mean even fewer homes for sale in an already tight market. But for a certain type of homeowner, becoming a landlord could make a lot of sense.
Rents are up in parts of the country. Buyers who bought at the bottom of the market in 2009 got a bargain. Then came years of opportunity to refinance into record-low interest rates. That means many owners can rent out their home for more than it costs them each month, even with taxes and other ownership costs figured in.
With the tenant covering the note, they can build equity – especially if home prices continue to rise.
“It’s a market-based decision,” said Trevor Henson, managing partner at First Light Property Management in Manhattan Beach, Calif. “They know they can get really high rents right now. If I’m locked in on a 30-year fixed (mortgage) at 4 percent, and if home values are going up, it can make a lot of sense.”
Many of the new landlords are affluent and financially savvy, Haberle said. They’re not necessarily in it for the long haul, but they see a chance to profit right now.
“These amateur landlords aren’t people who are doing this for a living,” she said. “They just kind of happened into this opportunity.”
Vanessa Ginn, president of Platinum Property Management Group in Los Angeles, said she’s seeing a lot more people considering the idea and looking for help. But being a landlord has its challenges, including fair housing laws, tenant screening and the potential for costly repairs. It can be particularly difficult for first-timers or homeowners who move out of town.
“You don’t always know what’s going on with the property,” Ginn said. “Your tenant can tell you something that’s going on that you can’t see.”
Still, Haberle said, many new landlords that Redfin’s agents encounter are skipping the professional manager – and the fee they charge, typically 10 percent of the rent – and doing it on their own, perhaps with the help of a trusted neighbor. That’s what Angela Smith is planning.
The TV show that Smith works on is moving soon – either to Chicago or Atlanta – and she’s going with it. But if the show doesn’t work out in the long term, Smith wants to be able to come back to her home in El Sereno, Calif.
“I’d like to hold it for a while and see where things go with work,” she said. “I don’t know that I’d be able to buy back in and get what I have.”
Smith owes more on her home than it’s worth, so selling her house would be tricky. But a mortgage modification lowered her monthly payment enough that she figures she can afford to rent it for $2,500, which is competitive in the neighborhood and enough to cover payments, taxes and upkeep. Smith’s not yet sure if she’s going to buy a house in her new town. That depends on how the job goes – and the landlording.
“It’s nothing I would jump into,” Smith said. “I need a little time see how well I can manage this.”