Finding a home with a rental unit or a nice income-producing condo to purchase may seem like investment no brainer, but in D.C., it’s only a safe one if it’s done by the books.
Tenants and landlords in the District should be extremely aware of the rights afforded to tenants, even non-paying ones, by D.C.’s tenancy laws. Landlords wishing to sell should also be very aware of TOPA, or Tenants’ Opportunity to Purchase Act, which affords tenants the first right of refusal for any offer received on their property and also prohibits landlords from evicting a tenant simply because they wish to sell the unit.
In fact, D.C. Law is so tenant-friendly (often deemed one of the tenant-friendliest jurisdictions in the country), that a tenant cannot be asked to leave a rental property except under the terms of breached lease contract (including nonpayment of rent), owners wishing to move back in to the unit (for which owners must give the tenants 90 days notice, the lease must be month-to-month and the owner must live in the unit for at least a year afterwards), or for owners who plan major necessary renovations that would cause the displacement of the tenants (but there are other complications with that method too).
Most tenants and landlords assume that the lease is king, and that once the lease is up, they may be asked to leave. In fact, D.C. law allows for tenancy for life; effectively, a tenant cannot ever be asked to vacate, except for the reasons outlined above. A landlord who ups the rent significantly (and rent increases of any kind are only allowed once every 12 months, incidentally) can be sued for “constructive eviction” by the tenant, in that the rent increase effectively is a form of illegal eviction. Rent can increase in the District, but if a landlord owns five or more units in D.C., they must abide by rent control laws which govern the amount of rent increase allowed year to year (tied to the official cost of living), or between tenants.
Assuming you do rent by the book, though, renting out an investment property can be a profitable venture and a sound investment in uncertain economic times. The typical rate of return for rentals in the area is around 5 percent (not bad compared to recent ups and downs in the stock market), and if you are able to find a rental with a return of 8 or 9 percent, you should consider yourself quite lucky. The rate of return is calculated easily by dividing the total net yearly income, after the payment of taxes, repairs, fees, etc., by the purchase price. Typically the cost of financing is not included in the equation, but if you were to do so the rate of return would certainly go down.
In addition to the investment potential of the actual income from the tenant, the home should appreciate in value over a long-term period. Despite the volatile housing market nationwide, prices in the area have been stable locally and have even grown modestly in the past three years. Over the long haul, an investment property should prove profitable year over year and from purchase to sale, proving that real property has real value.
To loop back, though, it’s important you understand your responsibilities completely as a landlord, even if you’re just renting out a room or a basement in your home and even if your tenant is a friend or relative. There may be serious repercussions for landlords who don’t follow the rules in the District.
David Bediz is a principal of the Dwight & David Group of Coldwell Banker Dupont. He can be reached through DwightandDavid.com or 202-352-8456.