In down market, 'accidental landlords' face complex rental rules

Keith Vargo and his partner had planned to build their dream home in south Minneapolis, but the economic downturn forced them to rent out the property and reluctantly join the growing number of "accidental landlords."

The couple bought an aging 500-square-foot home for $80,000 during the real estate boom, hoping to take out a construction loan against its value, demolish the home, and build a new one. But when they applied for the loan this year, an appraiser said the property was worth only $30,000.

Vargo said his first instinct was to sell the home before its value declined further, but a banker and a real estate broker had another idea - renovate it and turn it into a rental property. The couple agreed, but the decision wasn't easy.

"At first we resisted," Vargo said. "We didn't want to be landlords ... It just sounded scary to us."

Vargo's experience is not unique. The number of "accidental landlords," the latest term for homeowners who rent out their property, has risen steadily as a result of the economic downturn, according to Minneapolis and St. Paul building inspectors. Some homeowners cannot afford their mortgage payments, while others find work in another state but cannot find anyone to buy their home. Others, like Vargo and his partner, David Preis, find themselves the victims of bad timing.

The situation poses a challenge for both homeowners and housing inspectors. Many accidental landlords don't know that they need to pay fees to the city and need to request a city inspection, according to housing inspectors in Minneapolis and St. Paul. New landlords also may not understand city housing regulations.

"If they're going to get into the business of rental, they need to find out what the rules and regulations are around that," said Joann Velde, deputy director of housing inspection services for the city of Minneapolis.

In Minneapolis, homeowners need to pay $1,000 for the inspection and $65 each year to maintain a rental license. In St. Paul, homeowners seeking to become landlords need a certificate of occupancy, not a rental license. It costs $50 to get on a list for an inspection, and $170 for the actual inspection.

Homeowners also need to comply with basic safety and housing regulations. Broken screens and missing smoke detectors are common, said Angie Wiese, spokeswoman for St. Paul's department of safety and inspections. Some of the violations are more serious - and more expensive to fix. Wiese said that inspectors often find homes that do not have windows large or low enough to allow tenants to escape during a fire.

The city of Minneapolis fines a homeowner $500 if the property has been rented without a license. In St. Paul, officials provide a warning, and require that homeowners then follow through with the inspection process.

Inspectors in St. Paul and Minneapolis routinely search Craigslist for properties being rented without an inspection.

"We find more and more every day," Wiese said.

Inspectors said it's difficult to track the exact number of accidental landlords. The city of Minneapolis began inspecting single-family homes in 2008, making long-term comparisons impossible. In St. Paul, the inspections paperwork does not distinguish between a family converting their home into a rental property and an investor buying up foreclosed properties and converting them into rentals.

For many, the decision to rent out their own home is the end result of a number of complicated financial problems.

Vargo and Preis decided to rent out their tiny home when their banker laid out a plan: spend $50,000 to renovate the home, rent it out for a few years, and then sell it. In the meantime, the bank would provide a loan for a new property.

Vargo said he and his partner were lucky compared to many accidental landlords. The couple never lived in the dilapidated home they purchased in 2007, and instead had been renting a nearby apartment while they prepared for the house to be demolished.

Over the summer, the couple instead began transforming the home into a rental property. They installed new flooring and appliances, and plan to schedule an inspection once the renovations are completed. Vargo compiled a list of electricians, plumbers, and others to call for emergency maintenance needs.

"You have to have somebody ready," he said. "Because as you know, if you've been a renter, suddenly your water goes out, you call yelling, 'We have no water. I'm in the middle of a shower. I have to get to work.' Those are the calls we're going to get."

Vargo also consulted with friends who own rental properties. He said the advice he received from one friend was surprising.

"She said, at wine group, 'You don't want to rent to poor people,'" Vargo said, adding that the woman encouraged him to increase the rent "to get a better quality tenant."

"We were aghast," he said. "That just sounded harsh."

The couple had planned to rent the two-bedroom home for $700 a month, but after consulting with their real estate broker, increased the rent to $950. Vargo said he's optimistic that they'll be able to find a renter as soon as the renovations are completed.

In June, the couple bought a vacant lot in Richfield and plan to build their dream home there instead.

Samantha Strong, the couple's real estate broker, said that she's seeing more and more clients interested in renting out their home. Many clients want to take advantage of the low housing prices and buy a larger house, she said, but they also don't want to sell their home for less than what they believe its worth.

"We're dealing with accidental landlords, and they're not excited about it," she said. "It's not a situation somebody would choose, but sometimes it's the only thing that's going to bridge the gap when you own two homes."

Strong opened a property management division of her real estate company two months ago to manage the rental properties of new landlords. She helps homeowners find tenants and coordinates repairs and maintenance.

She also offers practical advice - invest in good quality flooring and appliances, but avoid spending too much money.

"Things will break, and you also have to consider who's living there," Strong said. "The person who's renting it will never treat it as well as you did, never."

Strong should know - she turned her Minneapolis home into a rental property several years ago and moved into a duplex. She rents out one half and lives in the other.

"Being a landlord is stressful," she said. "It takes a stomach. It definitely does."

More information about how to turn your home into a rental property in Minneapolis and St. Paul is available on the cities' websites.

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