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I'm new to these forums but hope someone can help. I am thinking about buying a house in the town next to mine (more land, larger houses, lower property taxes) and renting out my current house. I have heard horror stories about tenants, but I am trying to take them with a grain of salt as I was a tenant for a couple of decades before I bought my current house, and I was great (if I do say so myself :-) ). The house I would be renting out has 3 large bedrooms, 2 double-sink baths, a recently-renovated kitchen, lots of built-in's, etc. (in fact I did basically a whole-house remodel about 3 years ago, which is why I don't want to sell right now). I think the rent should basically cover my mortgage (including escrows), although I know I would still be responsible for maintenance etc. (which is fine of course -- it's still my house, after all!). My new-house-to-be is only 2-3 miles away so I would not be an absentee landlord, and I would likely allow pets (I have several cats myself) with an extra "pet security deposit" or something like that.
The house is in a great neighborhood with very good schools.
(Note, my job is VERY secure and my income is such that I could pay both mortgages without too much of a problem, although that would suck. I understand that the vacancy rate in my town -- Keene -- is pretty low so I assume there are prospective tenants out there.)
Do any of you with experience in rentals have any advice? I am brand new to this so ANY advice would be welcome.
Your chances of getting decent tenants in Keene are pretty good. However what it comes down to for me is:
1 - know the law inside and out
2 - screen your tenants thoroughly and legally.
I've been a mom and pop LL in Vermont for well over ten years and have made my mistakes and learned from them. Also do not be in a rush to rent the place out, take your time screening tenants and be prepared for applicants to lie, give you sob stories, BS you etc. Maybe you were a great tenant but a lot are awful. Since you said you are a cat owner, be prepared to get your place back with all the banisters and windowsills clawed beyond recognition . Funny how if it isn't your own place people don't care about it getting destroyed.
You might want to poke around in the "renting" subforum, although there are a lot of pros (both LLs and professional property managers) who can come across as very jaded to a potential new mom and pop LL. Once you've been burned a time or two by a dirtbag tenant it really changes your outlook.
What is your motivation for being a landlord? If the house is nice, freshly remodelled but you don't want to sell now do you think it will honestly be a better sale after being rented for a few years?
Nice house now = less money in a depressed market vs. rented/ beat up house later in the same or better market = more money? Probably not..... so why put yourself through the headache of being a landlord?
My current house (the one I would rent) is a nice house in a nice neighborhood with great schools, but the problem is, houses take a long time to sell these days, and if I want to buy the other house that I have in mind, I don't think I can make my offer contingent on selling my current house (i.e. I doubt that that owner would accept such an offer). So I figured renting out my old house would be better, especially since I could take my time (I can swing 2 mortgages for awhile, although I certainly don't want to do that forever!) and find good tenants. Why would it necessarily be beat up with renters?? And even if it IS a little beat up, wouldn't the security deposit cover any damages? (Unless the house is totally trashed, but how many tenants really do that? Are that many people really that nuts?)
Yes, I would screen tenants including a credit and references check, of course. I would actually try to get tenants from new professors at my college, who often rent for a year or two before they buy, just so they can get to know the area. (That's what I did my first year.) No students (I am far enough away from the college that students wouldn't want to live here anyway.)
I actually like the idea of holding on to my current house, even if I have to pay 2 mortgages for a few months each year. I would still be building equity, wouldn't I?
I am a little surprised at all the negative comments. Have people had problems even after screening tenants, doing credit checks, etc.? What kinds of problems?
I DO appreciate all the replies, I'm just surprised at the negativity. Maybe I am naive?!
People DO have problems even after screening tenants. It's very hard to evict someone for not paying the rent for example.
There are too many stories to tell. It's very easy to run up damages that are in excess of one months rent (standard security deposit). We used to have a summer home on the lake and to keep up on the taxes tried renting for a week at a time when we knew we wouldn't be there. Things get stolen.... One tenant decided to carve his and her initials in the bathroom wall in a romantic moment. While most people can have animals without a problem, it's the one that never changes the litter box or has a cat that thinks the entire house is a toilet that IS a problem. That's a stench that doesn't go away without professional cleaning like Servpro.
A 3 bedroom is desirable in Keene, especially to students. Professors might work out or they might not. Will you limit the parties? As the owner you will still be responsible if someone gets hurt on the property. Are you thinking short term (a year) or longer?
You also have to consider if your homeowner's insurance will cover damages if the property is rented out. It isn't always the case and you may have to purchase additional coverage.
You will also be responsible for maintenance and repairs on the property. How soon will you be available if the plumbing breaks down or if there is a leak in the roof? Heaven forbid if there is a fire....or some other disaster.
Renting your home can work out, but it's a chance you have to take.
Wow, I am appalled at what some of your lake house tenants did. Maybe I AM naive, but I do tend to think that if I wouldn't do something (like carving my initials in someone else's house!!), most reasonable people wouldn't.
I would not rent to students (and my house is a few miles from campus so not in a desirable neighborhood for them), and given how quiet my neighborhood is, I would put something about that in the lease. (I can't stand noisy neighbors -- that's why I don't live in an apartment any more!!)
I had in mind a lease of at least 1 year and preferably 2 (although I realize that 2 years might not be reasonable).
I have other questions RE: financing. My bank has told me that they count 75% of rental income to account for possible months when there are no tenants, and that is fine. But I am wondering exactly how this is calculated. I had been assuming that if the rent is $1,200, they would count $900 as going toward that house's mortgage, so if my actual mortgage is $1,300, they would take the difference between the $900 rent and my $1,300 mortgage, $400 in this case, and just add it to my monthly expenses, which of course have to be below a certain ratio (i.e. the debt-to-income ratio). If they do it this way, I will have no problem at all qualifying.
(This way seems logical, especially given that I almost bought an investment property and it sounded like they were especially interested in the rental income covering that mortgage, and if it didn't, I would of course have to cover the difference. But it required a very large down payment.)
BUT I vaguely remember a loan officer saying something about them adding the rental monies to my income and then counting the entire mortgage as an expense, in which case they would actually be counting WAY less than 75% of rental income in terms of funds I could put toward that mortgage. (EG if the top ratio is 41%, they would count 75% of rental funds as income but then only count 41% of those same funds to put toward my expenses -- but my expenses would include the ENTIRE mortgage, not 41% of it. So instead of counting 75% they are actually counting 75% x 41% = 30.75% of rental funds that could go to the mortgage. I don't know if I am expressing this very clearly.)
Sorry, I know this is long and convoluted, but needless to say I am hoping they do it the first way. The second way would make things tighter financially of course ... I think I would be right at the top of the ratio instead of way below it. But is that second way the way they do it? (I would likely go through the bank that holds the mortgage on the first house; I've banked with them for almost 10 years with zero problems, although I don't know if that matters!)
If they are counting 75% of your Gross Potential Income as income, that would be very generous.
Figure you have a vacancy rate - 10 %? 20 %?
Then figure that your insurance will go UP. You can no longer insure the home with a simple and inexpensive homeowners policy, you have to insure it with a business owner's policy. As soon as you make any change, some inspector will come out and give you a list of things that need to be done before you can be insured - egress windows in all bedrooms, CO and smoke detectors hardwired and where they are supposed to be, toilet paper roll mounted on a wall at a height consistent with building code yada yada.
Also figure that if you are providing utilities that your renters will max them out to the hilt. If heat, water and electricity are "free," the house will be 75 F, they will invite their friends over to wash their cars in your driveway, and all the lights will be on all the time. On your nickel.
Finally, since you are intending to sell this house, be aware that your tax situation changes. As long as the house is considered a rental (commercial) property, you MUST take depreciation on your tax return. This could come back to bite you when you sell, as it changes your basis. (Look up "adjusted cost basis"). I am not a tax expert by any means, my understanding is that if you live in the home for two of the five years prior to it being sold, it will still be considered the sale of your primary residence and you can get the better treatment from the IRS.
This link seemed helpful and informative to me.
Should You Rent Out Your House or Sell It? - SmartMoney.com (http://www.smartmoney.com/spend/real-estate/should-you-rent-out-your-home-or-sell-it-14396/ - broken link)
You might want to talk with your accountant and run the numbers not only as far as the rental goes but as far as the value of the home, what your basis is, whether you really really will sell in three years etc. If the value is high and your capital gains would be high because you bought in at a low price, you might be better off gritting your teeth and dumping it or making darn sure you sell it within three years to meet the 'two out of five' rule.
You may also be opening yourself up to a discrimination lawsuit if you refuse to rent to students. Be aware of all the possibilities as the result of exclusion when you offer your home for rent.
On choosing tennants: There is no requirement to tell anyone why they were not chosen.
On utilites: You are not required to provide utilites unless you have more than four units in any one building. At least thet's what I discovered three years ago when deceiding to rent out our former home.
Homeowners insurance will cost more when you rent out the place but I'll tell ya first hand the cost of insuring an unoccupied building is much, much greater.
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Once you've been burned a time or two by a dirtbag tenant it really changes your outlook. 
