To rent out our house or not

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fortysixandtwo
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To rent out our house or not

Post by fortysixandtwo » Mon Sep 24, 2018 4:08 pm

There is a strong chance we will be moving to another city. We’ve owned our home (a duplex) for 5 years. We’ve put a lot of money into it and I’m interested renting it out because I believe the value will go up a great deal over the next 5-10 years. We pay $2850 a month for our mortgage, insurance and taxes, and I think we could get $3300 to $3500 for it. Thoughts?

PFInterest
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Re: To rent out our house or not

Post by PFInterest » Mon Sep 24, 2018 4:20 pm

do you want to be a landlord?
do you want to pay someone to be a landlord?
is 3500 per duplex, or total?

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Nestegg_User
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Re: To rent out our house or not

Post by Nestegg_User » Mon Sep 24, 2018 4:37 pm

(I suggest that you read the numerous threads on long distance landlords)

the usual caveats:

if you rent too long, you give up the Home Sales Exclusion on capital gains...

if it’s a place like CA, they still will have their hands in your tax situation {especially if you return to the residence, they might claim that you never relinquished CA residency and are then on the hook for CA taxes and penalties; other states take a similar tack}

if you are far enough away, you’ll need a property manager, who then takes a slice

in a similar vein, who is going to interview possible renters and then keep an eye out on the property and help resolve renters issues

investment property is then passive, with its own tax considerations

a property is undiversified, and could go down, then you’ll be stuck trying to sell it long distance (and also trying to get it ready for sale)

yadda, yadda,....
(as I said, see the other threads)

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heartwood
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Re: To rent out our house or not

Post by heartwood » Mon Sep 24, 2018 4:39 pm

Insurance will probably change as a rental unit, and may be a different type of policy overall. I would discuss it with your agent. Any renters should be required to have their own insurance, but you might want to increase your liability limits.

Since you're 5 years into your mortgage its probably not an issue, but you might read your mortgage terms or talk to the lender. I'd guess that the mortgage was issued based on owner occupied, not on an investment property, and that might affect the ability to continue.

adamthesmythe
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Re: To rent out our house or not

Post by adamthesmythe » Mon Sep 24, 2018 4:40 pm

If you put a lot of money into it- maybe you want to sell it before it gets trashed.

delamer
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Re: To rent out our house or not

Post by delamer » Mon Sep 24, 2018 4:42 pm

How much of your net worth would be tied up in the rental property?

If you are going to buy in the new city, how much of your net worth would be tied up in residential real estate?

tesuzuki2002
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Re: To rent out our house or not

Post by tesuzuki2002 » Mon Sep 24, 2018 4:51 pm

fortysixandtwo wrote:
Mon Sep 24, 2018 4:08 pm
There is a strong chance we will be moving to another city. We’ve owned our home (a duplex) for 5 years. We’ve put a lot of money into it and I’m interested renting it out because I believe the value will go up a great deal over the next 5-10 years. We pay $2850 a month for our mortgage, insurance and taxes, and I think we could get $3300 to $3500 for it. Thoughts?
Just a guess... when you move you effective payment will increase to around $3300. Insurance increase and losing primary residence exemption.

Would you ever see yourself moving back into it at some point?

fortysixandtwo
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Re: To rent out our house or not

Post by fortysixandtwo » Mon Sep 24, 2018 5:01 pm

PFInterest wrote:
Mon Sep 24, 2018 4:20 pm
do you want to be a landlord?
do you want to pay someone to be a landlord?
is 3500 per duplex, or total?

I have a trusted handyman and family who live in town, so I dont think I’d mind being a landlord.

We own half of a duplex (1 unit). It would be 3500 for that unit.

fortysixandtwo
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Re: To rent out our house or not

Post by fortysixandtwo » Mon Sep 24, 2018 5:03 pm

tesuzuki2002 wrote:
Mon Sep 24, 2018 4:51 pm
fortysixandtwo wrote:
Mon Sep 24, 2018 4:08 pm
There is a strong chance we will be moving to another city. We’ve owned our home (a duplex) for 5 years. We’ve put a lot of money into it and I’m interested renting it out because I believe the value will go up a great deal over the next 5-10 years. We pay $2850 a month for our mortgage, insurance and taxes, and I think we could get $3300 to $3500 for it. Thoughts?
Just a guess... when you move you effective payment will increase to around $3300. Insurance increase and losing primary residence exemption.


There is a chance we would move back. Hard to say how high it is. Maybe 50/50 at most.

Would you ever see yourself moving back into it at some point?

fortysixandtwo
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Re: To rent out our house or not

Post by fortysixandtwo » Mon Sep 24, 2018 5:06 pm

delamer wrote:
Mon Sep 24, 2018 4:42 pm
How much of your net worth would be tied up in the rental property?

If you are going to buy in the new city, how much of your net worth would be tied up in residential real estate?

About a third of net worth would be tied up in current property.

Maybe a fifth would be tied up in the new city.

delamer
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Re: To rent out our house or not

Post by delamer » Mon Sep 24, 2018 5:09 pm

fortysixandtwo wrote:
Mon Sep 24, 2018 5:06 pm
delamer wrote:
Mon Sep 24, 2018 4:42 pm
How much of your net worth would be tied up in the rental property?

If you are going to buy in the new city, how much of your net worth would be tied up in residential real estate?

About a third of net worth would be tied up in current property.

Maybe a fifth would be tied up in the new city.
So a bit more than half in residential real estate.

I’d rather be more diversified and more liquid.

seychellois_lib
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Re: To rent out our house or not

Post by seychellois_lib » Mon Sep 24, 2018 5:11 pm

I wound up an accidental landlord as a result of the recession. Rented my place for 5 years while market recovered. Just sold a few weeks ago. I would never, ever rent a detached single family home voluntarily unless I intended to move back in and was prepared to do all of the repairs, renovations which will be necessary after 5 years of rental. In my situation I could just barely break even on a month to month basis. Fortunately I had the wherewithal to hang on. However I stayed awake at night worrying about a major maintenance issue cropping up - termites or roof or ??? Your rent potential vs expenses may be better. But as others have pointed out, you had better do your due diligence on costs and taxes related to long term rental.

Having family or a "trusted handyman" manage the place for you is a mistake IMO. You may burden them with middle of the night emergency calls and possibly tenant/landlord legal issues which could cause problems if not handled properly. Professional management might be a better choice given you will not be able to do it yourself.

Having said the above, we sold a smallish (1120#) condo in A HCOL area about 4 years ago. I might consider owning and renting a condo where all of the exterior maintenance and landscaping is covered by the HOA. Of course the financials would have to work. They sure would have worked in my case.

I think you really have to have high confidence with the appreciation potential and also have to fully understand the costs and hassles of ownership as a landlord, especially a distant one. It is not a trivial undertaking.

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unclescrooge
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Re: To rent out our house or not

Post by unclescrooge » Mon Sep 24, 2018 5:23 pm

fortysixandtwo wrote:
Mon Sep 24, 2018 4:08 pm
There is a strong chance we will be moving to another city. We’ve owned our home (a duplex) for 5 years. We’ve put a lot of money into it and I’m interested renting it out because I believe the value will go up a great deal over the next 5-10 years. We pay $2850 a month for our mortgage, insurance and taxes, and I think we could get $3300 to $3500 for it. Thoughts?
If I owned a home in SoCal I would never sell it. Unless I was moving to another country.

It will be worth more in 20 years.

fortysixandtwo
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Re: To rent out our house or not

Post by fortysixandtwo » Mon Sep 24, 2018 5:42 pm

seychellois_lib wrote:
Mon Sep 24, 2018 5:11 pm
I wound up an accidental landlord as a result of the recession. Rented my place for 5 years while market recovered. Just sold a few weeks ago. I would never, ever rent a detached single family home voluntarily unless I intended to move back in and was prepared to do all of the repairs, renovations which will be necessary after 5 years of rental. In my situation I could just barely break even on a month to month basis. Fortunately I had the wherewithal to hang on. However I stayed awake at night worrying about a major maintenance issue cropping up - termites or roof or ??? Your rent potential vs expenses may be better. But as others have pointed out, you had better do your due diligence on costs and taxes related to long term rental.

Having family or a "trusted handyman" manage the place for you is a mistake IMO. You may burden them with middle of the night emergency calls and possibly tenant/landlord legal issues which could cause problems if not handled properly. Professional management might be a better choice given you will not be able to do it yourself.

Having said the above, we sold a smallish (1120#) condo in A HCOL area about 4 years ago. I might consider owning and renting a condo where all of the exterior maintenance and landscaping is covered by the HOA. Of course the financials would have to work. They sure would have worked in my case.

I think you really have to have high confidence with the appreciation potential and also have to fully understand the costs and hassles of ownership as a landlord, especially a distant one. It is not a trivial undertaking.
Thanks for this.

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ClevrChico
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Re: To rent out our house or not

Post by ClevrChico » Mon Sep 24, 2018 5:51 pm

It's a sellers market now, I'd sell it.

riverguy
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Re: To rent out our house or not

Post by riverguy » Tue Sep 25, 2018 9:16 am

seychellois_lib wrote:
Mon Sep 24, 2018 5:11 pm
I wound up an accidental landlord as a result of the recession. Rented my place for 5 years while market recovered. Just sold a few weeks ago. I would never, ever rent a detached single family home voluntarily unless I intended to move back in and was prepared to do all of the repairs, renovations which will be necessary after 5 years of rental. In my situation I could just barely break even on a month to month basis. Fortunately I had the wherewithal to hang on. However I stayed awake at night worrying about a major maintenance issue cropping up - termites or roof or ??? Your rent potential vs expenses may be better. But as others have pointed out, you had better do your due diligence on costs and taxes related to long term rental.

Having family or a "trusted handyman" manage the place for you is a mistake IMO. You may burden them with middle of the night emergency calls and possibly tenant/landlord legal issues which could cause problems if not handled properly. Professional management might be a better choice given you will not be able to do it yourself.

Having said the above, we sold a smallish (1120#) condo in A HCOL area about 4 years ago. I might consider owning and renting a condo where all of the exterior maintenance and landscaping is covered by the HOA. Of course the financials would have to work. They sure would have worked in my case.

I think you really have to have high confidence with the appreciation potential and also have to fully understand the costs and hassles of ownership as a landlord, especially a distant one. It is not a trivial undertaking.
You barely broke even because you tried to force something to work that likely wasn't a good rental in the first place.

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Sandtrap
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Re: To rent out our house or not

Post by Sandtrap » Tue Sep 25, 2018 9:30 am

fortysixandtwo wrote:
Mon Sep 24, 2018 5:01 pm
PFInterest wrote:
Mon Sep 24, 2018 4:20 pm
do you want to be a landlord?
do you want to pay someone to be a landlord?
is 3500 per duplex, or total?

I have a trusted handyman and family who live in town, so I dont think I’d mind being a landlord.

We own half of a duplex (1 unit). It would be 3500 for that unit.
This is a big plus.

Lot's of good input so far from others.

Some additional thoughts to ponder:
1. Is "family" experienced with rental management? Do they also own rentals? (huge plus)
2. Would "family" be able to monitor and supervise the trusted handyman if:
a. Tenant requests repairs from the handyman the are not authorized by you?
b. Handyman becomes unreliable?
3. Would "family" be able to replace the handyman or is there a relationship with the handyman that makes that awkward?
4. If the rental unit has beautiful hardwood floors, how would you feel if it was damaged and the tenant abandoned the unit?
5. Would you be able to absorb the costs of an expensive plumbing repair if a tenant put aquarium sand down the toilet and it worked its way into the main line and it needed to be torn up?
6. Who will be screening tenants? Many property management companies are more interested in keeping 100% occupancy while sacrificing the time it takes to find an ideal tenant.

There doesn't need to be a hard and fast decision made now. You can rent it out on a 6 mos lease and if you change your mind, sell the property. No long leases that will tie you up.

fortysixandtwo
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Re: To rent out our house or not

Post by fortysixandtwo » Tue Sep 25, 2018 9:53 am

Sandtrap wrote:
Tue Sep 25, 2018 9:30 am
fortysixandtwo wrote:
Mon Sep 24, 2018 5:01 pm
PFInterest wrote:
Mon Sep 24, 2018 4:20 pm
do you want to be a landlord?
do you want to pay someone to be a landlord?
is 3500 per duplex, or total?

I have a trusted handyman and family who live in town, so I dont think I’d mind being a landlord.

We own half of a duplex (1 unit). It would be 3500 for that unit.
This is a big plus.

Lot's of good input so far from others.

Some additional thoughts to ponder:
1. Is "family" experienced with rental management? Do they also own rentals? (huge plus)
2. Would "family" be able to monitor and supervise the trusted handyman if:
a. Tenant requests repairs from the handyman the are not authorized by you?
b. Handyman becomes unreliable?
3. Would "family" be able to replace the handyman or is there a relationship with the handyman that makes that awkward?
4. If the rental unit has beautiful hardwood floors, how would you feel if it was damaged and the tenant abandoned the unit?
5. Would you be able to absorb the costs of an expensive plumbing repair if a tenant put aquarium sand down the toilet and it worked its way into the main line and it needed to be torn up?
6. Who will be screening tenants? Many property management companies are more interested in keeping 100% occupancy while sacrificing the time it takes to find an ideal tenant.

There doesn't need to be a hard and fast decision made now. You can rent it out on a 6 mos lease and if you change your mind, sell the property. No long leases that will tie you up.
Thanks for this. Very good things to think about.

Jack FFR1846
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Re: To rent out our house or not

Post by Jack FFR1846 » Tue Sep 25, 2018 10:21 am

Get some numbers together.

Insurance: Non-owner occupied is going to increase your rates. Ask your agent how much.
Mortgage: If you have an owner occupied residential mortgage, that could be called if the bank finds out it's now a rental. Or find a new mortgage for the rental.
Loss of owner occupied upon sale: If you get tired of the complaints, maintenance issues, pet damage even though the lease says no pets, water issues, lockouts with broken window to get in....and decide to bail and it's too late to get owner occupied exemption, that's going to cost you big money.

Having rented my house once....where I was coming back in 2 years....had I to do it over again, without question, I would sell and be done with the house.
Bogle: Smart Beta is stupid

EddyB
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Re: To rent out our house or not

Post by EddyB » Tue Sep 25, 2018 10:48 am

Jack FFR1846 wrote:
Tue Sep 25, 2018 10:21 am
Get some numbers together.

Insurance: Non-owner occupied is going to increase your rates. Ask your agent how much.
Mortgage: If you have an owner occupied residential mortgage, that could be called if the bank finds out it's now a rental. Or find a new mortgage for the rental.
Loss of owner occupied upon sale: If you get tired of the complaints, maintenance issues, pet damage even though the lease says no pets, water issues, lockouts with broken window to get in....and decide to bail and it's too late to get owner occupied exemption, that's going to cost you big money.

Having rented my house once....where I was coming back in 2 years....had I to do it over again, without question, I would sell and be done with the house.
I have never seen a mortgage that treated a switch to rental use as a default (assuming it doesn’t evidence intent at the time of taking the loan), although anything’s possible. One can read the mortgage to know whether that’s applicable, though.

Losing the capital gains exclusion is only one side of the tax picture; e.g., for the rental, there’s depreciation, mortgage deductibility even if not itemizing, capped rates on depreciation recapture, and possibly the ability to offset tax loss against ordinary income.

I don’t know what the right answer is for the OP, but would suggest s/he look at something like the Nolo publications to get a more down-the-middle presentation.

evilityb
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Re: To rent out our house or not

Post by evilityb » Tue Sep 25, 2018 11:42 am

fortysixandtwo wrote:
Mon Sep 24, 2018 4:08 pm
We pay $2850 a month for our mortgage, insurance and taxes, and I think we could get $3300 to $3500 for it.
Your mortgage is $2850/month but that is not your only expense for this house that needs to be taken into account. First, there is maintenance. You can assume this to be roughly 1% of the value of the home on average. Some years it will be less, some more, but 1% is a good place to start for your estimate. That includes fixing things, not routine care like lawn services. If you have a $500,000 house, on average you should assume $5k/year in maintenance, or an average of $416/month for a house that price (I think yours is more than a $500k house, adjust accordingly).

Second, you need to assume there will be some vacancy between renters. You need to see what your area's vacancy rate is to estimate that. Generally, assuming 10% vacancy is a good place to start. If you expect to bring in $3,400 a month in rent, monthly, that is $40,800 annually, multiplied by 90% -- $36,720. You can expect an average of $3,060/month when you deduct vacancy assumptions.

Third, you will be paying taxes on that rental income. Let's call it 15% federal and 5% state. So, $36,720 multiplied by 80% -- $29,376 annually or $2,448 monthly.

There is a good chance you will need to hire a property manager, so subtract another ~6% from the monthly rental payment. Then you have the potential for legal fees. Et cetera, et cetera.

You will be able to write off the maintenance, house depreciation, possibly the mortgage interest. Based on these numbers, I'm not expecting this house to cash flow, at least not right away. You might be building some great equity with this property, which is something you need to really assess realistically and plus into your equation. Assign a value to your time and to your sanity, as well. Also, think of the opportunity cost -- if you sold this house, what would you do with that money? How much would you expect it to grow in the same amount of time you would hold on to this house? Compare the two outcomes and decide if it's worth it.
Make sure the fortune that you seek is the fortune that you need - Ben Harper

Nate79
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Re: To rent out our house or not

Post by Nate79 » Tue Sep 25, 2018 1:27 pm

You didn't provide enough information to even come close to deciding if this is a good idea but for a general approx do you know based on the rental rate would this fit the 1% rule? (Rental rate per month is 1% of the value of the unit) Based on $3500/month rental rate it would mean the sales price of the unit should be less than $350,000.

Momus
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Re: To rent out our house or not

Post by Momus » Tue Sep 25, 2018 1:52 pm

If it's making money or break even, I'll rent it out, even if the cap rate isn't great. Some people are opposed on this idea but whatever.

It's nice to know in 20-30 yrs, you will have 1 income producing property that could potentially making 4-5k/mo until you die. Diversification away from stocks.

fortysixandtwo
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Re: To rent out our house or not

Post by fortysixandtwo » Tue Sep 25, 2018 2:28 pm

evilityb wrote:
Tue Sep 25, 2018 11:42 am
fortysixandtwo wrote:
Mon Sep 24, 2018 4:08 pm
We pay $2850 a month for our mortgage, insurance and taxes, and I think we could get $3300 to $3500 for it.
Your mortgage is $2850/month but that is not your only expense for this house that needs to be taken into account. First, there is maintenance. You can assume this to be roughly 1% of the value of the home on average. Some years it will be less, some more, but 1% is a good place to start for your estimate. That includes fixing things, not routine care like lawn services. If you have a $500,000 house, on average you should assume $5k/year in maintenance, or an average of $416/month for a house that price (I think yours is more than a $500k house, adjust accordingly).

Second, you need to assume there will be some vacancy between renters. You need to see what your area's vacancy rate is to estimate that. Generally, assuming 10% vacancy is a good place to start. If you expect to bring in $3,400 a month in rent, monthly, that is $40,800 annually, multiplied by 90% -- $36,720. You can expect an average of $3,060/month when you deduct vacancy assumptions.

Third, you will be paying taxes on that rental income. Let's call it 15% federal and 5% state. So, $36,720 multiplied by 80% -- $29,376 annually or $2,448 monthly.

There is a good chance you will need to hire a property manager, so subtract another ~6% from the monthly rental payment. Then you have the potential for legal fees. Et cetera, et cetera.

You will be able to write off the maintenance, house depreciation, possibly the mortgage interest. Based on these numbers, I'm not expecting this house to cash flow, at least not right away. You might be building some great equity with this property, which is something you need to really assess realistically and plus into your equation. Assign a value to your time and to your sanity, as well. Also, think of the opportunity cost -- if you sold this house, what would you do with that money? How much would you expect it to grow in the same amount of time you would hold on to this house? Compare the two outcomes and decide if it's worth it.
Thanks for this thorough breakdown. Extremely helpful.

fortysixandtwo
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Re: To rent out our house or not

Post by fortysixandtwo » Tue Sep 25, 2018 2:28 pm

Momus wrote:
Tue Sep 25, 2018 1:52 pm
If it's making money or break even, I'll rent it out, even if the cap rate isn't great. Some people are opposed on this idea but whatever.

It's nice to know in 20-30 yrs, you will have 1 income producing property that could potentially making 4-5k/mo until you die. Diversification away from stocks.
Thanks for the thoughts.

fortysixandtwo
Posts: 106
Joined: Fri Feb 12, 2016 10:40 am

Re: To rent out our house or not

Post by fortysixandtwo » Tue Sep 25, 2018 2:29 pm

Nate79 wrote:
Tue Sep 25, 2018 1:27 pm
You didn't provide enough information to even come close to deciding if this is a good idea but for a general approx do you know based on the rental rate would this fit the 1% rule? (Rental rate per month is 1% of the value of the unit) Based on $3500/month rental rate it would mean the sales price of the unit should be less than $350,000.
Thanks for the thoughts.

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