America is becoming a nation of ‘accidental landlords’ as rising mortgage rates make homeowners reluctant to give up their cheap deals, experts say.
Interest rates are now just below 7 percent but many households secured 30-year deals when they were 2 percent about two years ago.
Determined to hold on to their low rates – but needing more space – some are opting to rent their homes rather than sell. But many say they are not profiting from the initiative, they are simply going broke.
Among them is advertising executive Gino Sesto, 52, who outgrew his $460,000 West L.A. condo after the birth of his daughter Penelope 15 months ago.
He and his wife Bettina, 37, paid 2.8 per cent on the one-bedroom property – when they bought it four years ago.
Gino Sesto and his wife Bettina outgrew their $460,000 West LA condo after the birth of their daughter Penelope. The couple were locked into a 2.8 per cent lease which they wanted to keep so ended up renting the property out as ‘accidental landlords’. The family is photographed together
According to data from government-backed lender Freddie Mac, the average 30-year fixed-rate mortgage is now 6.96 percent — up from 2.9 percent in July 2021.
Last year, they quickly moved into a larger, rental home — while giving up their condo — but planned to buy as soon as possible.
They had budgeted to spend $7,000 a month on their mortgage but, after a sudden rate hike, they are now looking at between $11,000 and $12,000.
Feeling stuck, the couple decided to rent a 3-bedroom property — for $7,000 a month — while letting out their condo.
‘We’re emptying our house from rent, we’re not making any money,’ Sesto, who runs his own advertising agency Dash2, told Newstimesuk.com.
‘But it just made the most financial sense. It would be madness to give up the losses we have.’
Sesto rents his home for $2,800 a month which covers their $1,970 mortgage and additional taxes and insurance costs incurred for being a landlord.
And the family is not alone. Homeowners are increasingly cautious about putting their properties on the market because they don’t want to part with their low mortgage rates.
The problem has been compounded by a volatile real estate landscape that has seen prices fall in some areas – holding steady in others. This has prompted owners to delay putting their homes on the market.
New home listings fell 25 percent in May — the third lowest level on record, according to data from property portal Redfin.
Separate research from government-backed lender Freddie Mac found that 82 per cent of homebuyers felt they were ‘locked’ into their home because they took out a mortgage when rates were low.
In fact it’s little wonder that the average homeowner now faces paying $1,000 more per month on their mortgage than they did two years ago.
For example, if a family buys a $400,000 home — with a 5 percent downpayment — in July 2021, they’ll face a monthly bill of $1,582. At the time, the rate was 2.9 percent, according to Freddie Mac.
In all, they will pay $189,403 in interest over the course of their 30-year loan.
However, the same family on the same home would now pay $2,505 at a rate of 6.91 percent. What’s more, over the 30-year period, they would pay a total of $521,880 – a difference of 332,477.
Realtor Eddie Kriegstein, who founded the NYC Experience team at Compass, told Newstimesuk.com: ‘We’re seeing more people interested in renting across the board with properties of different sizes.
Author and podcast host Ginny Prim, 43, pictured, considers herself an ‘accidental landlord’ after acquiring three homes in ten years in Minneapolis. Prime rents out his first two properties and lives in his third
Ginny started renting out properties after she couldn’t find a seller for her first home in downtown Minneapolis, pictured in 2013. The house is closed with a mortgage rate of 4 percent and he rents for $1,575 a month
‘There’s a lot of uncertainty, it’s making people very cautious. I have a client on my books who recently decided to move out of town so he rented out his apartment here while renting elsewhere. It’s definitely becoming a trend.’
Author and life coach Ginny Prim, 43, who considers herself an ‘accidental landlord’ – after acquiring three properties in ten years.
Prim, from Minneapolis, Minnesota, said he became a first-time landlord in 2013 after failing to sell his first home.
And when he moved again in 2017, he decided to do the same – keep his old property as a rental.
Currently he is paying 4 percent interest on his first home, 3.75 percent on the second and 4.375 percent on the third. All three properties are in Minneapolis.
He rents the two properties for $1,575 and $2,695 respectively.
‘When I bought my second house, my previous house wasn’t selling so I rented it out,’ Prime – who also works as a keynote speaker – told Newstimesuk.com.
‘I never wanted to turn one of these into a rental but now they are both! Interest rates on them are so low, it doesn’t make sense to sell them.
‘I want to sell them next year but now the price is so high that not many people want to buy.’
Although being a landlord is generally seen as a lucrative business, there are often complaints that it can be a tax headache.
The Internal Revenue Service (IRS) treats rent money as a form of income and taxes it at the same rate. You must report advanced rent – including the security deposit – on your tax return.
New York realtor Eddie Kriegstein says he’s seeing more and more homeowners interested in renting rather than selling. The trend ‘applies to properties of all sizes,’ he told Newstimesuk.com
The lowest federal tax rate is 10 percent and applies to anyone earning up to $11,000 a year in rental income.
By comparison, the highest levy is 37 percent — but that’s reserved for those generating more than $578,125 by disclosing their property.
However, landlords are eligible for some deductions. For example, you can deduct your mortgage interest, property taxes, depreciation, repairs and maintenance, insurance and legal fees from your tax bill.
Landlords must pay state income tax – which can vary widely. And they are also responsible for covering property taxes on any houses they occupy.
Like all homeowners, they must pay capital gains tax after selling the property. This tax is levied on any assets that are sold at a profit.
It is currently 18 per cent for basic tax-rate payers and 28 per cent for additional-rate payers.
The rate you pay depends on how much profit you made on the sale, the tax bracket you fall into, your deductible expenses and any tax relief you qualify for.
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