Why I'm Happy Losing Money as a Landlord
It's a Renters Market Out There
Much like a home buyer, a renter has a lot of purchasing power. It's a pure case of supply and demand if there ever was one. There are simply more homes on the market for rent in many parts of the country than there are renters. Renters have pricing power to force homeowners to lower the price of rent they pay each month, and as a landlord this causes me to personally lose about $300 a month.
But I'm fine with losing $300 a month. In fact, I'm actually happy about it. Let me tell you why you should be, too, if you're ever in the same situation.
My Tenants' Rent Doesn't Cover My Mortgage
Like many accidental landlords, I found myself stuck with a house a few years ago that I couldn't sell. Or, if I really wanted to sell it, I would've had to at a steep markdown from what I'd bought it for just six years ago during the housing market boom.
After a few tenant turnovers, I lowered the rent in order to find a new renter. (There were simply too many homes on the market. I couldn't compete.) The problem is that my lowered rent didn't cover my mortgage payment. In fact, after taxes, insurance, and private mortgage insurance, I pay about $300 out of my own pocket, in addition to my tenant's rent payment every month, just to pay my mortgage.
But I'm happy to continue taking a loss every month.
Should I take a $30,000 Loss Now or $300 a Month?
My wife and I bought our house in the Southeast at the height of the housing boom. We paid top dollar for our three-bedroom, 2.5-bath home. Today our home would sell for almost $25,000 less than what we paid for it. And we're one of the lucky ones. If we had to sell and take a loss, we'd be out of our entire equity because we placed a large down payment on the house.
At least we wouldn't owe any money out of pocket even after paying for closing costs. %VIRTUAL-article-sponsoredlinks%But I dread the idea of watching $30,000 in equity evaporate overnight. So that's why I'd rather hold on to the house and pay $300 out of my own pocket every month instead of taking the huge bite all at once.
I've Got 8 years to Wait for a Turnaround
In the end, being a homeowner comes down to what your long-term goals are. Why did you buy the house in the first place? Was it simply a place to live? Or did you dream it would provide you with a passive income in retirement after you paid off your mortgage?
I've got a long-term outlook on housing in America. I think that prices will eventually stabilize, and we're seeing that now in many parts of the country. Because I'm paying $300 a month (or $3,600 a year) out of pocket to keep my home, I figure that I have about eight years before I hit that $30,000 mark that I would've lost selling the home right away. So I've got some time on my hands. Surely I can close the gap between the rent I receive and my mortgage payment by then.
I think that home prices will eventually increase on pace with inflation. And if that's the case, it wouldn't be unusual to see the price of rent rise like inflation, as well. So, for example, a landlord with a home that rents for $1,000 a month could see a rent increase to $1,450 a month, assuming 2 percent annual inflation. Of course, your mortgage will remain the same, and you can once again reap a profit from your rental.
Like most investors, I'm not a big fan of taking a loss. But for many accidental landlords, the choice comes down to whether you want to take a large loss now or small ones for years in the hopes of a housing rebound. I'll choose the latter.
Have you ever taken a loss on an investment during the short-term hoping for a long-term gain? How do you know when it's time to throw in the towel?
More from Hank Coleman
- The Trials and Tribulations of a First-Time Landlord
- How Credit Cards Can Make Your Household Budget Work Better
- 5 Money Moves to Make Before You Pay Off Your Debt