- The rapid rise of rents and mortgage rates has combined to make renting out houses instead of selling them an appealing option.
- Experts say there has been an increase in “accidental landlords” in recent years as homeowners have become reluctant to give up low mortgage rates secured during the pandemic or before.
- Renting property can be risky and property owners need to be prepared for expenses like repairs.
D.A. Taylor never planned to be a landlord. The housing market had other plans.
Taylor, a self-employed tech worker, owned and lived in a three-bedroom house in Lompoc, Calif., she refinanced in 2016 with a 2.9% mortgage. When she inherited half of her mother’s home in 2022 after all the upheavals in the housing market in the intervening years, average rates were nearing 6%, and owning a sub-3% fixed rate mortgage was like owning a gold mine.
Taylor planned to move into her mother’s old house, and in a normal housing market, she might have just sold the property. But rents and property values had both spiked during the pandemic. Why sell the property when she could rent it out for much more than her mortgage?
“It didn’t make sense to give up the old place since the mortgage payment was very low,” she told Investopedia in a social media direct message.
With a mortgage payment of $1,548, she was able to rent out the property for $2,300 a month, on the low end in her market.
A Rise in ‘Accidental Landlords’
Taylor wasn’t alone in becoming something of an accidental landlord. Selma Hepp, chief economist at real estate data website CoreLogic, has noticed the same trend. While the company does not track the kind of data that would show how popular such decisions have become, she has participated in the phenomenon, having rented out her Southern California home last year after moving to a new house, she told Investopedia.
Changes in mortgage rates and home prices over the last few years have pushed more property owners in that direction, said Greg Schwartz, founder of Tomo, a real estate listing website. Homeowners who buy a new home choose to keep their old one in 15% to 20% of the transactions they handle in the Dallas market, he said.
Mortgage rates are a major reason for the trend. Before the pandemic, rates for 30-year fixed mortgages were unusually low, in the 3% to 4% range. After the pandemic hit, they plunged even further as the Federal Reserve cut its benchmark interest rate to near zero to stimulate the economy. That helped push the average mortgage rate to a record low of 2.65% in early 2021, according to Freddie Mac.
When inflation flared in late 2021, mortgage rates began rising, eventually reaching nearly 8% in Oct. 2023. That’s made many homeowners reluctant to sell—89% of mortgage holders have rates under 6%, according to a Jan. 2024 Redfin (RDFN) analysis of data from the Federal Housing Finance Agency (FHFA), so getting a new mortgage would mean accepting a much higher rate. The mortgage “lock-in” effect has kept for-sale inventories low, and in cases like Taylor’s, has pushed those homes into the rental market instead.
At the same time, rents have surged, especially for in-demand single-family homes, which have seen rents rise almost 30% since the pandemic began, according to recent CoreLogic data.
Other Things To Consider Before Becoming a Landlord
However, Schwartz cautioned becoming a landlord is riskier than it might seem. Some homeowners fail to consider the many costs of home ownership besides mortgages. That includes homeowners’ insurance (which is also soaring in price), property taxes, and maintenance. Then, you’ll either have to manage the property yourself or hire someone to do it for you, incurring yet another expense.
Taylor isn’t sure she’s going to come out ahead. She paid $12,000 to fix up the place to rent, and $1,800 in property management fees since then.
“Every time I turn around, the property manager calls me for another fix,” she said. “Financially, it’s a mixed bag.”