One of the side effects of a slowing market is reduced liquidity. Home prices make selling less attractive, which has resulted in many people choosing to rent their homes instead. But these accidental landlords have a thing or two to learn.

Earl Hoppenrath owns Intown Properties, urban-focused sales and rental agencies in Austin and Dallas. He says what's happened nationwide is a loss of a lot of momentum.

"One-third of the market was non-occupying buyers at one time," says Hoppenrath. "Now investors can't get loans, so even if you're losing only 10 percent of buyers, that's significant."

That's left a lot of amateur investors stuck with properties they can't sell at a profit, so they look at renting as an alternative, but that solution isn't perfect either.

One in-town client had bought a condo in a high-rise as an investment, and didn't intend to live there. He came to Hoppenrath to rent it out. What the client didn't know was there were 27 other people in the 95-unit building who had the same idea. His expenses were $2,900 a month, but reverse auction rental prices among the other homeowners drove rents steadily down to $2,100, $2,000 and finally $1,900 per unit.

That left the client with lousy options -- hold out for $2,900 and remain vacant, or rent for $1,900 and lose $1,000 a month. He took the rental.

Here are the top four concepts accidental landlords should know.

1. You're not the only with a great idea. There's a reason one-third of homebuyers were investors or second home buyers in 2005 and 2006 -- money flowed like water, so a lot of people had the same idea -- get rich with real estate. Today, those same people are renting the homes they bought, and the sheer numbers are driving rental prices downward.

2. Underpricing works.. It's more cost effective to keep a property rented than it is to hold out for higher rent. Remember, it's about momentum. The market is a reality check, everybody does comps, but they are history, that's what happened yesterday, says Hoppenrath. "If you have your unit, and the one next door is exactly the same and they're cheaper, their's will rent first."

3. Meet your tenant. Whether you are using an agency or not, it's crucial to meet your prospective tenant before allowing them to sign the lease. The best thing to do is a walk-through so that you and the tenant can take stock of the condition of the property. The tenant is the custodian of your property. Use your instincts and rely on information other than the credit report. Just make sure you're not violating any fair housing laws. If there are issues from both standpoints, you both need to know.

4. Understand the true costs of renting vs. selling. Amateur investors think, "My mortgage is this, I should get that." Smart investors understand cash flow. If you declare another property as your homestead, you lose the homestead exemption on your rental. There's insurance, maintenance fees, the cost of make ready and the costs of clean up when the tenant moves out. If you use an agency to rent your property because you're out of state, you could pay as much as one month's rent in fees annually.

   You also need to guesstimate your vacancy costs. If you have a property as an investment for the long haul, and you do year-long leases, you probably have two weeks a year where you're not collecting rent, if you're pricing your unit to rent quickly.

"It all goes back to vacancy," says Hoppenrath.

Published: June 2, 2008

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