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This is the kind of advice I need, thanks I was not aware rental income is taxed. As for capital gains, yes but I can subtract out the cost basis for the home so I am only paying capital gains on any net profit which is typical for any investment.
NO NO NO NO. You will also have to recapture the depreciation you will be taking on the investment property. Please have a CPA familiar with rental properties run these numbers for you.
I don't think this is a bad idea and the return is decent, but it is true that you could do much better if investing was your intention. Clearly if you'd like to retire there then this involves your personal enjoyment and is more than just a financial instrument, so I don't think I'd advise you to get out and invest purely for the numbers.
You must trust your PM. Please make sure they are really doing what they're supposed to be doing. Check up often when you are in the area. And I say all of this assuming that a $1200 2 bedroom rental is in a decent area with a well-run condo assoc. If it is not and the tenants would be undesirable then I would say no.
If you cannot comprehend how much damage someone else can and will do to your home, then don't become a landlord. Seriously. $3,000 is your profit max yearly, not including what you're not deducting since you really haven't done research as suggested. Since Jkgourmet is assisting with other financial obligations, I shall assist with other things. You aren't taking into consideration replacing all wear and tear items. You aren't realizing if ANYTHING breaks, it comes out of your pocket. It doesn't sound like you have any money saved up for this grand idea of yours. What happens when the pipes bust? When a hole gets punched into the wall? When a tenant decides to repaint the walls because it wasn't wyat they wanted? When unauthorized pets completely destroy the property, not limited to carpet, walls, padding, trimming, doors, blinds, cabinets, the tub. What about CHILDREN? Can be worse than pets. What about smoking? The smoke detectors? People can and will do it. What funding do you have when bedbugs appear? There are so many things that will happen, and you are NOT prepared for it. There are so many other things, but I hope you get the point.
Have you even looked at your state laws to see if you can even be an out of state (or country) landlord? Are there other state laws you aren't aware of?
The fact alone that you felt the need to ask strangers on the internet if this was right for you, means it's not.
Look up cwaggy's thread, I forgot what it was called, I'll post it in a second, but you want to read what could happen? Those problems are more common than you think. Not saying it's normal by any means, but it's not a 1% chance either, if you're not a pro.
OP, you have done so little research that you didn't even know that rental income was taxed. I mean, seriously, did you think of it as just "free money"? That is NOT a good sign.
And I say this as someone who became an "accidental landlord" myself back in 2012, when I wanted to buy my current house but did not want to sell my previous house. BUT I did a TON of research in advance AND, most importantly, I am not a long-distance landlord -- I live just 10 minutes away from what is now my rental house. There is no way I would have done it if I had been moving out of state or out of the country.
If you use a property manager, you cannot deduct the paper losses from your regular income (I CAN because I am an "active" landlord according to IRS rules -- I DON'T use a PM). You may also find, as many landlords have, that their PM company uses up all their reserve money in very short order -- well, why NOT hire the most expensive contractors to handle every tiny issue, and why NOT call someone in on a holiday (even if it's not an emergency), since it's not the PM's money, it's YOURS? The PM gets to charge you for all those things (not just the events themselves, but also for his time, of course -- and that can really add up). I simply would not trust someone else with my money that way.
I am also surprised that your condo's rules allow you to rent out your unit. There are no restrictions on that? Really? That's unusual, since condos get dinged badly if too many of their units are non-owner-occupied (e.g., prospective buyers of units may have trouble getting a mortgage if the building has too many renter-occupied units).
In addition, you ARE aware that your homeowner's insurance will change, right? (You will need a LL policy, which is more expensive than a homeowner's policy, although how MUCH more expensive seems to vary a lot by state.) Also, you mention PMI going away so your payment will be less -- but once you notify your lender that you are converting your primary residence to a rental (you DO know you have to do that, right?), don't be surprised if your PMI remains for longer (normally, investment properties require higher down payments than owner-occupied properties). It may not, but my point is, you clearly have not even checked on things like this -- you are just making assumptions that may very well not be correct.
I don't mean to rain on your parade (although I guess I am doing that) -- I have lucked out with my rental but a BIG reason for that is that I am just a few miles away so can check on anything just about any time I want to. That is the ONLY reason I considered becoming a landlord.
OP, you have done so little research that you didn't even know that rental income was taxed. I mean, seriously, did you think of it as just "free money"? That is NOT a good sign.
And I say this as someone who became an "accidental landlord" myself back in 2012, when I wanted to buy my current house but did not want to sell my previous house. BUT I did a TON of research in advance AND, most importantly, I am not a long-distance landlord -- I live just 10 minutes away from what is now my rental house. There is no way I would have done it if I had been moving out of state or out of the country.
If you use a property manager, you cannot deduct the paper losses from your regular income (I CAN because I am an "active" landlord according to IRS rules -- I DON'T use a PM). You may also find, as many landlords have, that their PM company uses up all their reserve money in very short order -- well, why NOT hire the most expensive contractors to handle every tiny issue, and why NOT call someone in on a holiday (even if it's not an emergency), since it's not the PM's money, it's YOURS? The PM gets to charge you for all those things (not just the events themselves, but also for his time, of course -- and that can really add up). I simply would not trust someone else with my money that way.
I am also surprised that your condo's rules allow you to rent out your unit. There are no restrictions on that? Really? That's unusual, since condos get dinged badly if too many of their units are non-owner-occupied (e.g., prospective buyers of units may have trouble getting a mortgage if the building has too many renter-occupied units).
In addition, you ARE aware that your homeowner's insurance will change, right? (You will need a LL policy, which is more expensive than a homeowner's policy, although how MUCH more expensive seems to vary a lot by state.) Also, you mention PMI going away so your payment will be less -- but once you notify your lender that you are converting your primary residence to a rental (you DO know you have to do that, right?), don't be surprised if your PMI remains for longer (normally, investment properties require higher down payments than owner-occupied properties). It may not, but my point is, you clearly have not even checked on things like this -- you are just making assumptions that may very well not be correct.
I don't mean to rain on your parade (although I guess I am doing that) -- I have lucked out with my rental but a BIG reason for that is that I am just a few miles away so can check on anything just about any time I want to. That is the ONLY reason I considered becoming a landlord.
Wow. Ok seriously, I have only been considering this for a week and you're treating me as if I am listing the property next week. Like I said I am not moving out for 6 months and am still in the works in gathering advice before I even do the research. Why waste my time if I decide not to rent? I appreciate the questions; this is how I learn. Obviously my research will go beyond city-data but like I said I am still investigating whether it is worth my effort to even go down this path and your responses and others' help.
As for Condo Rules, my association is in the process of enacting a rental rule but we have never had a rental rule. All units existing will be grandfathered in meaning I can rent until I sell the home to a new seller. Our Declaration and ByLaws do NOT have any rule against renting.
As for insurance yes I am aware. I have received quotes and it is not significantly different than what I am currently paying. As for PMI by law I can cancel after 20% and 5 years because it is an FHA loan regardless of it being a rental or not. I am not on a conventional mortgage.
I don't think being out of state is a big issue. This is very common for my area and very few landlords in my area live in the state.
If you cannot comprehend how much damage someone else can and will do to your home, then don't become a landlord. Seriously. $3,000 is your profit max yearly, not including what you're not deducting since you really haven't done research as suggested. Since Jkgourmet is assisting with other financial obligations, I shall assist with other things. You aren't taking into consideration replacing all wear and tear items. You aren't realizing if ANYTHING breaks, it comes out of your pocket. It doesn't sound like you have any money saved up for this grand idea of yours. What happens when the pipes bust? When a hole gets punched into the wall? When a tenant decides to repaint the walls because it wasn't wyat they wanted? When unauthorized pets completely destroy the property, not limited to carpet, walls, padding, trimming, doors, blinds, cabinets, the tub. What about CHILDREN? Can be worse than pets. What about smoking? The smoke detectors? People can and will do it. What funding do you have when bedbugs appear? There are so many things that will happen, and you are NOT prepared for it. There are so many other things, but I hope you get the point.
Have you even looked at your state laws to see if you can even be an out of state (or country) landlord? Are there other state laws you aren't aware of?
The fact alone that you felt the need to ask strangers on the internet if this was right for you, means it's not.
Look up cwaggy's thread, I forgot what it was called, I'll post it in a second, but you want to read what could happen? Those problems are more common than you think. Not saying it's normal by any means, but it's not a 1% chance either, if you're not a pro.
I bought my home as a short-sale 5 years ago. Everything had to be changed as the home had been trashed and uninhabited in years. The screens, the appliances, the furnace, the paint, the carpet. We paid $5000 to get it done. And it was in HORRIBLE shape when we got it. Yes I get it, but my point is I highly doubt the damage tenants can cause will exceed $3000 + security deposit every year. This money is not being reinvested but will sit in an account just for the home. The home will be self-sustaining. Blinds are not required in the state of Vermont for landlords.
Pipes are covered by HOA.
I still think people are being a bit unreasonable here. I cannot imagine having to put down more than $5000 A YEAR for an 865 sq ft condo in damage.
This is the kind of advice I need, thanks I was not aware rental income is taxed. As for capital gains, yes but I can subtract out the cost basis for the home so I am only paying capital gains on any net profit which is typical for any investment.
Yes I am allowed to rent per HOA. As for PMI I cancel after 5 years and 20% per FHA regulations (I got the mortgage prior to the 2013 change in regulations) and currently have just 12 months left to wait out and am at 18% equity.
The majority of homes in my area (Vermont) have no A/C. It barely gets above the mid 80s in the summer. Some have window A/C's but are never included in any rentals I've seen or lived in here.
Edit: I can still deduct interest, tax, repairs, fees, etc from the rental income so it wouldn't be such a large hit to my net.
OP, please listen to the posters who have advised you that this isn't such a good idea. I've done it twice in my life during housing market downturns, and I wouldn't do it again, especially long distance. The first time was not only long distance, but international. Ended up renting that one for 18 months (rents were also depressed, so didn't make a dime) and finally sold for about a 33% loss.
The second time I lived about 50 miles away from the rental property (my former home). Yes, I had great tenants but it still was a hassle and I again didn't make any money on the property by holding on to it (sold at a small paper loss, but a real loss of over $100,000 -- you realize that the IRS will consider the value of the property to be what it was on the day you started renting it out, NOT what you paid for it, right?).
Bottom line: in each case I had to put up with the annoyance of being a landlord and ended up selling the properties at a sizeable loss, but even then couldn't deduct the real loss as a capital loss because the properties' IRS valuation was so much less than what I paid for them.
You are not taking the tax implications seriously. Unless you are an accounting professional yourself, you will need an accountant or enrolled agent to manage your taxes. Some of your repairs and upgrades may be allowable as deductions, others you will have to depreciate, and still others can be added to your basis when you sell. The tax law is incredibly dense on these topics.
The people who make money being landlords are those who own a number of properties and aren't paying mortgages on them; they manage the properties as a full-time job. They can afford accountants, property managers and handymen because they can spread the costs over several properties.
You are young and starting over in a new job far away. Sell the condo and leave the aggravation behind you.
OP, please listen to the posters who have advised you that this isn't such a good idea. I've done it twice in my life during housing market downturns, and I wouldn't do it again, especially long distance. The first time was not only long distance, but international. Ended up renting that one for 18 months (rents were also depressed, so didn't make a dime) and finally sold for about a 33% loss.
The second time I lived about 50 miles away from the rental property (my former home). Yes, I had great tenants but it still was a hassle and I again didn't make any money on the property by holding on to it (sold at a small paper loss, but a real loss of over $100,000 -- you realize that the IRS will consider the value of the property to be what it was on the day you started renting it out, NOT what you paid for it, right?).
Bottom line: in each case I had to put up with the annoyance of being a landlord and ended up selling the properties at a sizeable loss, but even then couldn't deduct the real loss as a capital loss because the properties' IRS valuation was so much less than what I paid for them.
You are not taking the tax implications seriously. Unless you are an accounting professional yourself, you will need an accountant or enrolled agent to manage your taxes. Some of your repairs and upgrades may be allowable as deductions, others you will have to depreciate, and still others can be added to your basis when you sell. The tax law is incredibly dense on these topics.
I appreciate the advice but I am still not convinced. I am not here to argue but to take advice, but I feel like the advice I am getting is not applicable to my situation.
I paid $113k in 2013 for a home worth $115k now (for retrospect this home was $121k in 2006, our market here is extremely cold so the bubble risk is not as bad as it is in other cities). I don't understand why this would be an issue for taxes.
I feel like I am being dismayed by those who had experiences from the 2006 bubble and housing markets. Where I live the market is vastly different than the rest of the United States. I still think I am on solid footing with a home that is locked in for 30 years at 3.25% in an area where rent has been historically high (college town area in Vermont, never an issue finding college-aged renters here). Heck, with inflation still under 2% but the historical average being greater than 3% and the home being in a high-renter college town, this is a steal...
Yes I may be young and naive but I have filed my own taxes for the last 8 years successfully. I've owned a small business and have numerous stock day trading investments that I file my own taxes for (you should see the length of schedules I have!). IF there are losses I will need to deduct this is something I would speak to an accountant with, but as of now I don't foresee any potential problems.
Now he adds college age renters to this plan. Good luck. You're gonna need it.
PS you STILL don't understand depreciation recapture rules.
Thanks. I'll let Uncle Sam take his cut.
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That is NOT a good sign.
