Smart Moves by Ellen James Martin

Homebuyers: Should You Consider a Rental Property?

COVID-19 has led to a surge in demand for suburban houses from those living in cramped urban apartments. Among the lures: extra work-at-home space and a backyard big enough for a barbecue. But many who own such suburban properties are reluctant to sell. The result? A monumental shortage of supply.

“Housing demand is robust, but supply is not, and this imbalance will inevitably harm affordability and hinder ownership opportunities,” says Lawrence Yun, chief economist for the National Association of Realtors (realtor.org).

The worsening shortage has meant ascending prices and more competition among rival buyers in many suburban areas. First-time buyers are especially frustrated in multiple bidding situations.

One potential solution for buyers is to consider a property that’s served as a rental unit.

“There’s a big stigma attached to any house renters have been occupying. That causes lots of folks to automatically reject such a place without good cause,” says Mark Nash, a real estate industry analyst.

Granted, some tenants can be rough on a place they’re leasing -- given they have less at stake in home upkeep than do owner-occupants. Yet some issues -- like soiled carpets or blemished walls -- can be merely cosmetic and easily remedied.

“A formerly rented house could be a true diamond in the rough you might obtain for a fair price despite the crush of demand,” says Nash, the author of “1001 Tips for Buying and Selling a Home.”

But Fred Meyer, a longtime real estate broker and appraiser, cautions those considering a once-rented property to thoroughly investigate the place to ensure it doesn’t have any severe structural problems, such as a sinking foundation or a leaky roof.

Most landlords wait until their tenants leave to put their property on the market. But if a place you’re considering is still occupied by tenants, Meyer suggests you ask them about any issues.

“The tenants may be disgruntled if they’re forced to move against their will. But they have no incentive to gloss over problems with the house,” Meyer says.

What typically prompts the sale of a rental unit? Sid Davis, the author of “A Survival Guide for Buying a Home,” says many landlords eventually tire of their tenants’ demands.

Of course, some landlords hire a management company to look after their rental unit. But that can be costly and doesn’t necessarily protect them from tenant abuses.

“With or without a manager, many owners eventually want to free themselves of their white elephant to simplify their lives,” says Davis, an independent real estate broker.

Here are a few pointers for buyers pondering a rental:

-- Make doubly sure to get an in-depth home inspection.

Though many rental properties are overseen by professional managers, they rarely receive the same level of attention as owner-occupied properties. That’s why it’s critical to make any offer contingent on a satisfactory home inspection.

To locate a highly qualified home inspector, Davis recommends you ask your agent for the names of at least 10 candidates. Then interview three by phone to determine the best one. Another source for referrals is the American Society of Home Inspectors (homeinspector.org).

Avoid choosing an inspector who’s also in the home improvement business.

“That represents a major conflict of interest, especially if the guy presses you to hire him for repairs,” Davis says.

-- Seek cost estimates for all the repairs you’ll need.

Davis once owned six rental houses. This taught him that tenants often fail to tell their landlord about problems unless they become serious.

“Perhaps the dishwasher has malfunctioned for many months. But the landlord never heard about the problem until a home inspector finds that the dishwasher leaks and must be replaced, along with the subflooring beneath,” he says.

Davis says the prospective buyers of a rental property should determine in advance how much needed repairs will cost. He recommends they get estimates for all the repairs on the inspector’s list before finalizing their bid. Then they should make sure these expenses are factored into the price they negotiate.

-- Don’t let a good deal blind you to a weak location.

In many popular neighborhoods, buyers now greatly outnumber sellers. Yet even now, few purchasers prowling the market are willing to consider a rental, says Ashley Richardson, an agent affiliated with the Residential Real Estate Council (crs.com).

“These days, most buyers only want a house in pristine condition -- one babied by its owners. Very few people will take a ‘fixer’ because of all the hassles that might bring. That means you’ll have fewer competitors in pursuit of a fair deal,” says Richardson, who sells homes through the Long & Foster real estate firm.

You could get a doubly favorable deal if you find an only superficially problematic house in an excellent neighborhood -- like one with manicured yards and well-rated neighborhood schools.

“As with all real estate, location should overtake every other priority when making your decision,” Richardson says.

(To contact Ellen James Martin, email her at ellenjamesmartin@gmail.com.)