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We are potentially planning to buy a new home and rent out our current home. I am looking for any advice that experienced landlords might have for someone in this position who has never been a landlord. A few points for consideration:
1) The estimated rental income for the current property is $1600/month (our mortgage payment is $1000) according to a leasing company who gave me a quote. We had considered going with a management company, however, the one I spoke with told me that they won't work with my home warranty company. Any repairs would have to be paid out of pocket. We have had our warranty for several years and they have been excellent for the several repairs we have needed. I know that my hvac unit is pretty old and will need replacing soon. I would much rather the warranty company pay for it than me. Does anyone know if the unwillingness to work with warranty companies is a widespread thing for property management companies? Or might I find some that are willing to work with them? My husband is able to do some of the repairs renters may need but there will certainly be times we choose to call a professional.
2) Where might I find good guidelines for dealing with renters? I want to have a good tenant/landlord relationship, but obviously want to protect my interests. Do I just use a standard lease agreement for my state and if so can anyone provide a link for where to find something like that? How do I know how much security deposit I should collect? Is there a way of finding out the standard for my area? I'm in Raleigh, NC. Is first, last and security still the norm?
3) What about pets? Do you allow them? We have a 1/2 acre fully fenced yard so I'm thinking that might be a considerable draw to our property. The house is primarily hardwood floors with two rooms having carpet. Does that impact how much pet deposit I should collect?
4) I haven't yet considered the tax implications of owning a rental property. Please share any thoughts on that aspect.
5) Please share any experiences that you think might be helpful to someone embarking on this mission for the first time. As an aside, I am also preparing to get my real estate license so this won't simply be a hobby, but likely the first of a move into the real estate business.
In almost every instance you'll be far better off to sell the current home.
Use that equity to reduce the mortgage on the new home.
Invest any other money (and your time) elsewise.
In almost every instance you'll be far better off to sell the current home.
Use that equity to reduce the mortgage on the new home.
Invest any other money (and your time) elsewise.
Thank you for your response. Another aspect of the situation that concerns me with selling is that the property we are buying is out in the country in an area that won't see much appreciation for 10-15 years. It has some acreage and some other really nice perks that make up for the location. Our current home is in a very desirable neighborhood that has historically seen very good appreciation. Our primary reason for wanting to rent it is not so much for the rental income (which we figure would be mostly a break-even once we had some vacancy between renters and repairs that would need to be made), but for the property value appreciation over time.
edited to add... I just ran some numbers. If I take my current equity and invest it @ 5% interest, in 15 years I have $83k. If I hold on to the house and assume that any monthly profit will go toward maintenance costs and vacancy (so no real positive cashflow), at the end of 15 years I (or actually the renters) have paid down $70k on the mortgage and the property has increased 2% per year so that my equity is now $193k. That seems financially to be the better choice... I would love to hear insight into how this might be incorrect. I need specifics, not just general "don't do it!!" although I appreciate how much of a headache a rental property might be.
Last edited by Ellen Pitts; 02-27-2015 at 11:27 AM..
I would love to hear insight into how this might be incorrect.
Are you willing to bet the farm that the property will see a steady 2% increase in value over the next decade or so?
Are you also willing to bet the farm that you can find PERFECT tenants for 15 years straight?
Nobody has a magic crystal ball that tells the future. But some of the people on this forum are very experienced landlords, you should heed their advice.
Are you willing to bet the farm that the property will see a steady 2% increase in value over the next decade or so?
Are you also willing to bet the farm that you can find PERFECT tenants for 15 years straight?
Nobody has a magic crystal ball that tells the future. But some of the people on this forum are very experienced landlords, you should heed their advice.
Is there an investment that exists that is 100% safe? I am perfectly willing to take advice from people with experience, but I don't know too many people who would take advice without any details from people they don't know. I need advice like "you need to be prepared for X to happen and to understand Y risk and determine if you are willing to take that risk. Every investment is a risk. If people want to help me understand the risks, I'm all ears. If you just want to tell me what to do with my money without telling me what your experience is or even who you are, I would be a fool to listen.
And, no, I don't expect perfect tenants for 15 years. I do expect, and what I was hoping to find here, was a reasonable risk expectation such as X% of your tenants might default, you can expect roughly X months a year to have vacancy (obviously depends a great deal on location...our location turns very quickly and houses in our neighborhood are often sold before being listed) Just looking for real information... I actually don't plan to use any of the net income from the monthly rent. I am assuming that all of it will go back into the house for repairs and pay the mortgage during vacancies. Is that an unreasonable expectation?
My one piece of advice is don't listen to any sad tales when picking tenants. Do background checks, credit checks, references and income verification. My wife is a sucker for sob stories. We've just spent 3 months and $20K+ on repairs after another one of her lame ducks trashed the place. Be firm on tenant qualification and visit the place often - keep an eye on what is going on.
We are potentially planning to buy a new home and rent out our current home. I am looking for any advice that experienced landlords might have for someone in this position who has never been a landlord. A few points for consideration:
1) The estimated rental income for the current property is $1600/month (our mortgage payment is $1000) according to a leasing company who gave me a quote. We had considered going with a management company, however, the one I spoke with told me that they won't work with my home warranty company. Any repairs would have to be paid out of pocket. We have had our warranty for several years and they have been excellent for the several repairs we have needed. I know that my hvac unit is pretty old and will need replacing soon. I would much rather the warranty company pay for it than me. Does anyone know if the unwillingness to work with warranty companies is a widespread thing for property management companies? Or might I find some that are willing to work with them? My husband is able to do some of the repairs renters may need but there will certainly be times we choose to call a professional.
THE REASON THEY WONT WORK WITH A WARRANTY COMPANY IS BECAUSE MOST PMCs HAVE THEIR OWN PEOPLE. THIS WAY THE MONEY AND REPAIRS ARE MORE IN CONTROL ON THEIR END. HOPEFULLY THE REPAIRS TOO BUT THAT ALL DEPENDS ON HOW GOOD THE GUY THEY HIRE FOR THE REPAIR IS. WHAT THEY CHARGE YOU IN NO WAY HAS ANY BEARING ON HOW GOOD THE REPAIR IS. i GUARANTEE THERE IS A UPCHARGE IN WHAT THEY PAY THE SUB AND WHAT THEY CHARGE YOU. AND THEY DONT ALWAYS USE LICENSED PEOPLE.
I HAD TO USE A PMC ON SOME PROPERTY WE HAD OUT OF STATE. NEVER AGAINPART OF THE REASON WHY I SOLD YEARS AGO. I ONLY OWN RENTAL PROPERTY WHERE I MANAGE IT. IF YOU ARE LOCAL TO THE HOUSE i WOULD NOT USE A MANAGEMENT COMPANY. YOURE SIMPLY GOING TO PUT 20% OF YOUR TOTAL REVENUE IN THEIR POCKET. AND THAT DOES NOT COUNT REPAIRS. YOUR COST WILL BE ABOUT $160 A MONTH IN MANAGERIAL FEES. THE COST TO AQUIRE A TENANT IS GOING TO BE ONE MONTH RENT. OFF THE CUFF HERE
1600X12=19,200 TOTAL REVENUE
1000X12=12000 YOUR MINIMUM BASE OVERHEAD ( HOPEFULLY IMPOUNDED TAXES)
19,200-12000=7200 YOUR TOTAL PROFIT
160X12=1,920 YEARLY MANAGERIAL FEES
1600= AQUIRE TENANT COST
1920+1600=3520 TOTAL BASE MANAGEMENT FEES COST
7200-3520=3680 YOUR ACTUAL YEARLY PROFIT WITH NO OTHER COSTS.
3680 / 12 = 306 YOUR MONTHLY PROFIT.
AND THIS IS ESTIMATED ON A 1600 DOLLAR MONTHLY INCOME. IM NOT ADDING IN RENTERS INSURANCE HOA OR ANY OTHER FEES OR COSTS THAT ARE ASSOCIATED TO THE HOUSE. IF YOU SELF MANAGED I WOUDL SAY OK GIVE IT A SHOT. AS IT IS
IM INCLINED TO SAY SELL. THERE ARE WAY EASIER WAYS TO MAKE MONEY WITH LESS HASSLE
2) Where might I find good guidelines for dealing with renters? I want to have a good tenant/landlord relationship, but obviously want to protect my interests. Do I just use a standard lease agreement for my state and if so can anyone provide a link for where to find something like that? How do I know how much security deposit I should collect? Is there a way of finding out the standard for my area? I'm in Raleigh, NC. Is first, last and security still the norm?
NOLO.COM FOR HOW TO LEGALLY DEAL WITH A TENANT AND YOUR RIGHTS AND THEIR RIGHTS. AND JOIN A MANAGER/LANDLORD GROUP OR MEMBERSHIP SITE. LOTS OF INFO ON THIS SITE. LOTS OF PAST AND PRESENT LLs TOO.
3) What about pets? Do you allow them? We have a 1/2 acre fully fenced yard so I'm thinking that might be a considerable draw to our property. The house is primarily hardwood floors with two rooms having carpet. Does that impact how much pet deposit I should collect?
I ALWAYS WILL TAKE A TENANT WITH NO PETS FIRST. i HAVE ONE RENTAL WHERE I ALLOW A DOG. ONCE ITS REMODELED NO PETS ALLOWED. THOSE PROPRTIES ARE ALSO ONLY MONTH TO MONTH TERM. i WOULD MUCH PREFER NO PETS. iF i WERE TO TO TAKE ON ANOTHER TENANT WITH PET I WOULD GIVE SERIOUS THOUGHT TO CHARGE THE MAXIMUM ALLOWED BY LAW IN MY STATE.
4) I haven't yet considered the tax implications of owning a rental property. Please share any thoughts on that aspect.
yOU WILL HAVE DEDUCTIONS OF THE MORTGAGE INTEREST, REPAIRS, TRAVEL TIME, MANAGEMENT FEES, ETC. YOU CAN GO TO IRS.GOV AND YOU WILL GET A LIST OF EVERYTHING YOU CAN DEDUCT ON A RENTAL PROPERTY.
5) Please share any experiences that you think might be helpful to someone embarking on this mission for the first time. As an aside, I am also preparing to get my real estate license so this won't simply be a hobby, but likely the first of a move into the real estate business.
i STRONGLY SUGGEST YOU HAVE A RE LAWYER GO THROUGH AND WRITE UP A SITE/PROPERTY SPECIFIC LEASE. THATS WHAT I DID. WHILE A BOILER PLATE OFF THE SHELF LEASE SOUNDS THEY REALLY ARE LACKING IN DETAILS AND SPECIFICS.
Thank you for your response. Another aspect of the situation that concerns me with selling is that the property we are buying is out in the country in an area that won't see much appreciation for 10-15 years. It has some acreage and some other really nice perks that make up for the location. Our current home is in a very desirable neighborhood that has historically seen very good appreciation. Our primary reason for wanting to rent it is not so much for the rental income (which we figure would be mostly a break-even once we had some vacancy between renters and repairs that would need to be made), but for the property value appreciation over time.
edited to add... I just ran some numbers. If I take my current equity and invest it @ 5% interest, in 15 years I have $83k. If I hold on to the house and assume that any monthly profit will go toward maintenance costs and vacancy (so no real positive cashflow), at the end of 15 years I (or actually the renters) have paid down $70k on the mortgage and the property has increased 2% per year so that my equity is now $193k. That seems financially to be the better choice... I would love to hear insight into how this might be incorrect. I need specifics, not just general "don't do it!!" although I appreciate how much of a headache a rental property might be.
You are counting on constant appreciation and tenant occupancy/revenue. As 2008-2011 taught us its not always a up market. what happens if in 5 years youre left with a hot potato with no value cause the market pooped the bed again? None of those things are guaranteed to happen. and in some cases you may get someone who rips the house apart or damages it. you could have high repair costs due to simple wear not covered by insurance. things do wear out.
Im not trying to discourage you from being a LL. Just understand there are a lot of hurdles. Physical mental and financial.
I, personally, have never been a LL. I have been a tenant (in the same SFH for 5 years) and I have 3 relatives that are LL's. My advice would be to screen very carefully...it's all business. Don't get personal, don't make arrangements for 1st, last or deposit (all up front before move in), make sure your prospective tenants qualify with credit and income records. Do inspections regularly. Don't stalk your tenants, but make sure they know that you are around.
I would also suggest not using a PM, if you are going to be in the area.
With the fencing and land you described, I would consider allowing one large outdoor dog. Be sure to have your tenants pay a pet deposit, so you can use that to restore any dead grass areas or anything else that is caused by the pet.
You are counting on constant appreciation and tenant occupancy/revenue. As 2008-2011 taught us its not always a up market. what happens if in 5 years youre left with a hot potato with no value cause the market pooped the bed again? None of those things are guaranteed to happen. and in some cases you may get someone who rips the house apart or damages it. you could have high repair costs due to simple wear not covered by insurance. things do wear out.
Im not trying to discourage you from being a LL. Just understand there are a lot of hurdles. Physical mental and financial.
Thanks for all your input. Yes, I think my eyes are open to those risks. One thing that I think is the biggest risk is the fact that I only have one property. I was reading another post on this forum where a property manager said that she only sees about 2% of her rentals that are bad renters and destroy things. (Obviously a lot of that is adequate screening.) With only one property I have a lot more risk involved because I have all my eggs in one basket. If you have 100 properties and 2% are bad apples, the profit from the 98 properties helps to balance the risk. With one, I wouldn't have anything to balance out any loss.
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