'Accidental' Landlords
Face Headaches, Costs

February 24, 2005 -- When Noteel Hosking's parents offered to help her with a down payment to buy a house, the 24-year-old Dallas resident thought it would be smart to make the most of their generosity.

"I figured I was throwing money away on rent," says Ms. Hosking, who is pursuing an M.B.A. while working as a planner for a defense contractor.

Last spring, she saw a listing for a 50-year-old two-bedroom home with hardwood floors and antique doorknobs, situated on a grassy lot with a large magnolia tree in front. Ten minutes from downtown Dallas, the house was exactly what she wanted -- and at $190,000, it was in her price range.

Ms. Hosking brought in a tenant/roommate to help her afford the $1,400 monthly mortgage payments.

That's how Ms. Hosking became what some real-estate professionals call an "accidental landlord." First-time buyers who decide to rent out a room or part of the house to help finance their purchase, may find the added role of a landlord comes with its own costs and headaches -- from chasing down tenants who don't pay up to bearing the brunt of unexpected home repairs.

More Than Dollars and Cents

With more young people buying property, there is a new generation of accidental landlords, who hardly resemble grouchy old Mr. Roper, the iconic landlord from the television show "Three's Company."

In 2004, people under age 25 bought 12% of all houses sold in the U.S., according to the National Association of Realtors. That's up from 9% of in 1995. Homes are also more expensive: The median price of an existing single-family home in the U.S. was $184,100 last year, up 8.3% from $170,000 in 2003. It was the strongest annual increase since 1980, when the median price rose 11.7%, says the NAR.

While there are benefits to being a homeowner, like taking a mortgage-interest deduction, there are also plenty of costs, from unforeseen maintenance expenses to unexpectedly high heating bills to property tax increases. That's where tenants come in.

But some young landlords discover that shouldering the cost of the property can pale in comparison to the financial and emotional burdens of having renters. Many twentysomething landlords struggle to balance their newfound responsibilities with the ties of friendship or simply a desire to be laidback and understanding toward tenants.

Put It in Writing

Ms. Hosking figured taking on a tenant, who was a friend, wasn't a big deal. But the tenant didn't make monthly rent payments on time, Ms. Hosking says, and the situation became difficult. "It was awkward because we both knew that I made more money than she did." While Ms. Hosking says she was sympathetic to her tenant's financial circumstances, the mortgage had to be paid. Eventually, her friend did pay, she says.

Janet Portman, an attorney and co-author of the book, "Every Landlord's Legal Guide," says that putting the terms in writing can be helpful -- even if you never intend to take your tenant to court. "It helps to make sure both people are clear on the terms, and brings a little moment of sobering reality that you are entering into a business relationship" even if you are friends, Ms. Portman says.

Having a lease or written agreement might have helped Ms. Hosking, too, when her tenant got a job offer in another city and needed to move quickly. With only two weeks' notice, the roommate moved out, leaving no replacement tenant, according to Ms. Hosking. She had thought that they had casually agreed 30 days' notice, but Ms. Hosking had no tangible proof.

A rental agreement doesn't have to be a lease with a fixed-term, Ms. Portman explains. "Most of the time when you are living with someone -- when you are sharing common space -- with someone who wants to leave, it doesn't make sense to force them to stay," she says. "It would be uncomfortable."

The document can be a simple month-to-month rental agreement that specifies such issues as how much notice the boarder needs to give and how the utility bills will be divided up. As for drawing up the documents, basic renters' agreements can be found at office-supply stores or online. Web sites such as Nolo.com offer plain-English tips for how to write your own. And just because an agreement is drawn up without a lawyer does not make it any less valid, says Ms. Portman, as long as both owner and tenant sign.

Dealing With the Unexpected

When the expenses start to add up -- and, ask any homeowner, they invariably do -- having a clear and definite agreement can be extremely important.

In 2003, Adam Meister, 28, paid $41,000 for a three-unit fixer-upper row house in Baltimore and rented out two of its apartments to friends, keeping the third for himself. When the boiler broke down last month, Mr. Meister was on the hook for $8,000 to replace it.

Mr. Meister's two tenants each pay monthly rent of $300, which more than covers his monthly mortgage payment. That's a fair amount, says Mr. Meister, because when something unexpected happens, such as the broken boiler, he is the one who is responsible. He also thinks he is more understanding than the typical landlord.

Stephen Peterson, one of Mr. Meister's tenants, agrees. "When I had car troubles and had to get a new set of tires, Adam was very nice about it," Mr. Peterson says. That month, he paid his rent a bit later, and it worked out fine for both of them.

"He's my friend," says Mr. Meister. "And I knew he was going to pay me when he could."

But the flip side is that it can be difficult to assert your financial rights when doing business with a friend. For example, for eight days last month, between when the old boiler broke and when Mr. Meister had the new one installed, Mr. Peterson had no heat in his apartment. Legally, Mr. Peterson isn't obliged to pay rent for those days -- Mr. Meister doesn't disagree. An apartment without heat in wintry weather is considered "uninhabitable," says Ms. Portman.

"It's complicated," says Mr. Peterson. "Adam is not going to be happy about it if I pro-rate the rent for those days." So Mr. Peterson says he plans to offer to help Mr. Meister out with work around the house or other nonfinancial compensation to make up for paying less rent that he's not obligated to pay.

When you are friends, keeping everyone happy counts for plenty. "There are a lot of good things," says Mr. Peterson. For example: "If need be, we take each other's cats."

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