Reason not to rent out your old house?

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justsomeguy2018
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Reason not to rent out your old house?

Post by justsomeguy2018 »

If you buy a new house and you can rent out your old house for more than your monthly mortgage payment (+taxes/insurance), is there a reason WHY you shouldn't do that? Don't you get to have your mortgage paid for, have a small income stream, and hold onto the property and capture rising home equity?

Or is the argument that you could take the profits from the house sale and put it in the market and that would provide a better and more stress-free return?
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simplesimon
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Re: Reason not to rent out your old house?

Post by simplesimon »

There's nothing necessarily wrong with it, but most people aren't rational about it. Look up "endowment effect".

If you had the home equity in cash, would you buy the house and rent it? Or invest it in mutual funds? Or do something else with it?
MathWizard
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Re: Reason not to rent out your old house?

Post by MathWizard »

The latter.

I have no desire to have someone in possession of a large amount of my assets when they could trash it.

That happened to my mother.

I'm much more comfortable owning pieces of a businesses (stocks).
KlangFool
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Re: Reason not to rent out your old house?

Post by KlangFool »

justsomeguy2018 wrote: Fri Sep 18, 2020 9:54 pm If you buy a new house and you can rent out your old house for more than your monthly mortgage payment (+taxes/insurance), is there a reason WHY you shouldn't do that? Don't you get to have your mortgage paid for, have a small income stream, and hold onto the property and capture rising home equity?

Or is the argument that you could take the profits from the house sale and put it in the market and that would provide a better and more stress-free return?
justsomeguy2018,

<<Don't you get to have your mortgage paid for, have a small income stream, and hold onto the property and capture rising home equity?>>


What is your safety margin?

What if you cannot rent out the house? And the house costs you money while the house depreciates.


It can go wrong. And, normally, it goes wrong at the most inopportunate time.

The stock market may or may not make money. But, it does not cost you money (mortgage) to maintain.

KlangFool
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AerialWombat
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Re: Reason not to rent out your old house?

Post by AerialWombat »

This is my entire real estate investing strategy. I move annually, converting prior home to rental. This is my primary retirement plan.
Hiker8
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Re: Reason not to rent out your old house?

Post by Hiker8 »

KlangFool wrote: Fri Sep 18, 2020 10:08 pm
justsomeguy2018 wrote: Fri Sep 18, 2020 9:54 pm If you buy a new house and you can rent out your old house for more than your monthly mortgage payment (+taxes/insurance), is there a reason WHY you shouldn't do that? Don't you get to have your mortgage paid for, have a small income stream, and hold onto the property and capture rising home equity?

Or is the argument that you could take the profits from the house sale and put it in the market and that would provide a better and more stress-free return?
justsomeguy2018,

<<Don't you get to have your mortgage paid for, have a small income stream, and hold onto the property and capture rising home equity?>>


What is your safety margin?

What if you cannot rent out the house? And the house costs you money while the house depreciates.


It can go wrong. And, normally, it goes wrong at the most inopportunate time.

The stock market may or may not make money. But, it does not cost you money (mortgage) to maintain.

KlangFool
KlangFool provide a simple yet very accurate answer.

Not to mention, as the current owner of a 100 year old house, I cant even imagine owning 2 properties.. Every month there is something new to fix.. :confused :dollar
John Doe 123
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Re: Reason not to rent out your old house?

Post by John Doe 123 »

I believe if you haven't used the home as a primary residence for 2 of the past 4 calendar years, then you have to pay capital gains on the sale of the home.
TropikThunder
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Re: Reason not to rent out your old house?

Post by TropikThunder »

John Doe 123 wrote: Fri Sep 18, 2020 10:41 pm I believe if you haven't used the home as a primary residence for 2 of the past 4 calendar years, then you have to pay capital gains on the sale of the home.
It’s 2 out of the last 5, but your point is still valid. Also, how many people can qualify for two mortgages?
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Brianmcg321
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Re: Reason not to rent out your old house?

Post by Brianmcg321 »

What happens when it goes unoccupied for 6 months?
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.
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JoeRetire
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Re: Reason not to rent out your old house?

Post by JoeRetire »

justsomeguy2018 wrote: Fri Sep 18, 2020 9:54 pm If you buy a new house and you can rent out your old house for more than your monthly mortgage payment (+taxes/insurance), is there a reason WHY you shouldn't do that?
The reason for me is that I wouldn't want to be a landlord. I don't need the headaches.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
onourway
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Re: Reason not to rent out your old house?

Post by onourway »

If I were going to be a landlord, it would be an intentional business decision where I purchased a property with the express intent of renting it, almost certainly a multi-unit, and I'd be fully prepared to be a landlord. Renting a single family home by happenstance is a gamble, and I don't like to gamble.

There is no guarantee of price appreciation, and you are not accounting for vacancies or expenses (which are awfully high on a sfh). You are only considering the upside while ignoring the many potential downsides.
hudson
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Re: Reason not to rent out your old house?

Post by hudson »

justsomeguy2018 wrote: Fri Sep 18, 2020 9:54 pm If you buy a new house and you can rent out your old house for more than your monthly mortgage payment (+taxes/insurance), is there a reason WHY you shouldn't do that? Don't you get to have your mortgage paid for, have a small income stream, and hold onto the property and capture rising home equity?

Or is the argument that you could take the profits from the house sale and put it in the market and that would provide a better and more stress-free return?
It works for several friends. They would rather do that than invest in stocks or fixed income.
It wouldn't work for me. Even if the place was a high end place with very nice renters, it's way too much work. I don't want to deal with even ONE extra phone or problem a year. One house is enough.
If you think that it would work for you, give it a try. It works for many.
My son wanted to do the same thing a several months ago. I gave him the above unsolicited advice. He took it and he's glad that he did.
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Harry Livermore
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Re: Reason not to rent out your old house?

Post by Harry Livermore »

KlangFool wrote: Fri Sep 18, 2020 10:08 pm
It can go wrong. And, normally, it goes wrong at the most inopportunate time.

The stock market may or may not make money. But, it does not cost you money (mortgage) to maintain.

KlangFool
... or costs in the form of taxes, heat in the winter, cool/ dehumidify in the summer, etc.
KlangFool brings up excellent points here. Like many things in life, going wrong at the most inopportune time seems to be the rule.
Make sure you have deep pockets, or deep credit.
Having said that, we have collected rent equivalent to 76% of the value of our single family home, in 9 years of renting it. The cash flow will end up paying over 50% of our three kids' college costs. However, after the current tenant vacates, we will need to do some overdue updates including kitchen counters, kitchen appliances, new washer/ dryer, new water heater, re-grouting in the master bath, and (hopefully only) screening and new poly on the hardwood floors. 9 years of (honestly the nicest and very professional) people living in the house, but not really caring about the house, has taken its toll.
So it's going to be a pretty big spend.
There have been a few surprises along the way: The town paved the road (great) but put down way more asphalt than they milled, resulting in a mis-match of the cobblestone apron... $3K to the mason. We had a chimney inspection done that revealed the very efficient boiler's exhaust was condensing in the terra cotta chimney and the resulting acid eating away at it. Stainless liner, slid in and grouted, required the contractor working from scaffolding on the high-pitch roof (it would have been cheaper to do it, as I proposed, while we were building the second floor and raising the chimney, but our otherwise excellent contractor talked me out of it as being unnecessary) so another $4K. The biggest has been our longest running tenant announced that she was unable to pay the rent due to her deteriorating financial condition (AFTER she signed the lease one month prior!) In that case, going into the winter and with few other prospects, we simply lowered the rent 30% and she left in the spring. It was amicable but stressful.
TL/DR:
There is no reason not to do this if it's something you want to pursue. But be prepared for all manner of expenses, surprises, and setbacks.
Cheers
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Harry Livermore
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Re: Reason not to rent out your old house?

Post by Harry Livermore »

TropikThunder wrote: Fri Sep 18, 2020 11:23 pm
It’s 2 out of the last 5, but your point is still valid. Also, how many people can qualify for two mortgages?
We did, and right after the GFC when the banks had REALLY tightened things up. But I can assure you that there have been times when it has been personally very stressful. I will be glad in 2 years and 11 months when the mortgage on the rental is done.
When we purchased our vacation rental, we did so in cash. NO WAY was I personally comfortable with THREE mortgages. But investors who are "into" real estate might have three, four, or a dozen and not care.
Cheers
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Harry Livermore
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Re: Reason not to rent out your old house?

Post by Harry Livermore »

onourway wrote: Sat Sep 19, 2020 6:56 am
There is no guarantee of price appreciation, and you are not accounting for vacancies or expenses (which are awfully high on a sfh). You are only considering the upside while ignoring the many potential downsides.
I wish there was a "like" button on Bogleheads. For simple and concise truisms like the above, it would suffice.
But listen to onourway. Consider the downsides as well as the upsides.
Cheers
Kelrex
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Re: Reason not to rent out your old house?

Post by Kelrex »

It really just depends on if you want to be a landlord and heavily invested in real estate or not.

Some people really like real estate and some don't. Some consider landlording an easy, low stress task, and others consider it a hassle or a risk.

The question you are asking is kind of like asking: "why doesn't everyone just buy a business and get all of the profit instead of working for someone else?"

Each path to wealth has its own risks, benefits, and level of effort. It's up to each person to determine which of those fit best for their goals and circumstances.

For some, real estate is ideal. For others it isn't.
Put simply, if it seems like an obvious thing to do, but few people are rushing to do it, then you should probably start looking for the downsides that you aren't seeing.

If you are considering it for yourself, then research it until you feel that you can intuitively understand how it's risks and rewards would fit into your life and goals.
tibbitts
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Re: Reason not to rent out your old house?

Post by tibbitts »

justsomeguy2018 wrote: Fri Sep 18, 2020 9:54 pm If you buy a new house and you can rent out your old house for more than your monthly mortgage payment (+taxes/insurance), is there a reason WHY you shouldn't do that? Don't you get to have your mortgage paid for, have a small income stream, and hold onto the property and capture rising home equity?

Or is the argument that you could take the profits from the house sale and put it in the market and that would provide a better and more stress-free return?
It works for some people, but not others - sort of like getting a new job, and continuing to work part-time for your former employer (assuming no conflicts.) Some people want two jobs, some don't. But you're conflating investing in a SFH and investing in a fund, and they are completely different experiences in terms of effort required and diversification. There is no given "rising home equity", especially without a corresponding rising investment. Property itself does tend to appreciate, on average probably roughly with inflation, but obviously much more or much less in some cases and at some times. Homes generally depreciate.
mrmass
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Re: Reason not to rent out your old house?

Post by mrmass »

I recall signing a form at closing stating I would occupy the house. That may or may not be relevant if your situation.
SchruteB&B
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Re: Reason not to rent out your old house?

Post by SchruteB&B »

Everyone I personally know who rented out their old house had problems with tenants. One tenant simply stopped paying rent and it took over a year to get them out of the property. Another tenant stopped paying rent AND trashed the place. They all turned into to huge headaches and money losers. Plus, I live in an area where property values have been declining since 2008 so “rising home equity” is not a guarantee.
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Bruce
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Re: Reason not to rent out your old house?

Post by Bruce »

3 big considerations
Liability, lack of diversification, a careful look at your own aptitude for dealing with tenants.

It also means your tax return is more complex going forward, as this is a business you are now running, with demands for your time, energy and ongoing attention.

You need to go into this more fully informed.

One good set of unbiased info is at
https://store.nolo.com/products/nolos-l ... llbun.html

Nolo's Landlord Bundle
Effectively manage your rental property using this complete set of books written specifically for landlords. Nolo's Landlord Bundle provides the information and legal forms crucial to the success of your landlording business in two easy-to-read volumes. Find out how to:
prepare leases and rental agreements
choose the best tenants
avoid liability


Perhaps the best source of wisdom I stumbled across when I became a involuntary landlord for 16 years was this book,


Landlording: A Handymanual for Scrupulous Landlords and Landladies Who Do It Themselves

Author Leigh Robinson looks at the power of human psychology to aid in a better landlord tenant relationship and Help make your tenant incentivized to pay early and take responsibility for normal repair and maintenance items, so you are not getting weekend and middle of the night phone calls about plumbing issues, broken appliances, and other common expected items.

https://www.amazon.com/Landlording-Hand ... 0932956254

I had one tenant for the entire time, and eventually sold it for a profit to that tenant, but it was not without challenges and am happy to no longer be a landlord.

Some other good threads with info on this same topic At bogleheads if you just search “landlording”, including this one started by the White Coat Investor.

viewtopic.php?t=80368

Good luck to you whatever you decide.
Bruce | | Winner of the 2017 Bogleheads Contest | | "Simplicity is the master key to financial success."
tjf9
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Re: Reason not to rent out your old house?

Post by tjf9 »

It's worked out well for us. I took advice from a friend who has a few rentals and has had a lot of success with tenants. His advice: screen really well up front, then do everything in your power to keep good tenants. We moved out of our 90 year old house 7 years ago, and we've had the same tenants the whole time. We do keep up on maintenance (using a handyman company) by doing a walkthrough once a year and fixing up the little things that come up. If they have an issue, we get the handyman there right away, or if they can't, allow the tenants to call whoever they need. (This has happened maybe 3 times in 7 years). We've kept rent increases reasonable (2-5% every other year) and we forgave 2 months of rent during Covid because they all work restaurants and everything shut down. Once their employers started back up, they were happy to pay rent.

All of this is possible because I saved the difference between rent and mortgage for the first 2 or 3 years until I had enough of a buffer for anything major to go wrong. The choice to forgive their rent was an acknowledgement that I've earned more than enough over the last 7 years to cover their rent for 2 months, and they have been such great tenants, I don't want to lose them. The horror stories scare me too.
BashDash
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Re: Reason not to rent out your old house?

Post by BashDash »

An index fund never calls at 3am that the toilet is broken.
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LilyFleur
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Re: Reason not to rent out your old house?

Post by LilyFleur »

Harry Livermore wrote: Sat Sep 19, 2020 7:43 am
TropikThunder wrote: Fri Sep 18, 2020 11:23 pm
It’s 2 out of the last 5, but your point is still valid. Also, how many people can qualify for two mortgages?
We did, and right after the GFC when the banks had REALLY tightened things up. But I can assure you that there have been times when it has been personally very stressful. I will be glad in 2 years and 11 months when the mortgage on the rental is done.
When we purchased our vacation rental, we did so in cash. NO WAY was I personally comfortable with THREE mortgages. But investors who are "into" real estate might have three, four, or a dozen and not care.
Cheers
An acquaintance of mine was highly leveraged with probably 50 rentals. A downturn in the economy and a divorce, and now this person owns one house.
retiredjg
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Re: Reason not to rent out your old house?

Post by retiredjg »

justsomeguy2018 wrote: Fri Sep 18, 2020 9:54 pm If you buy a new house and you can rent out your old house for more than your monthly mortgage payment (+taxes/insurance), is there a reason WHY you shouldn't do that? Don't you get to have your mortgage paid for, have a small income stream, and hold onto the property and capture rising home equity?
The rent needs to be some notches higher than "your mortgage payment (+taxes/insurance)". That might make it hard to rent.

I did this many years ago when the market was slow and I had to move but could not sell. After 2 years, I had made about $2k "profit" and thought that was pretty good....until the a/c compressor went out a few weeks later and I had to replace it pdq......Luckily, at that time, it only cost about $2k to fix and I was able to "lease with option to buy" and get rid of the house without losing a lot.

It was just not worth the headache to me.
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familythriftmd
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Re: Reason not to rent out your old house?

Post by familythriftmd »

BashDash wrote: Sat Sep 19, 2020 4:17 pm An index fund never calls at 3am that the toilet is broken.
Yeah, but isn't that why you hire a third-party management company? Sure, lower margin, but also no toilet calls. Funny how it's always 3 AM, no matter whom you ask! Must be a lot of people for whom the third watch of the night is very cathartic! :D
Thrift stores, outlets and market corrections have this in common: you're buying on sale.
barberakb
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Re: Reason not to rent out your old house?

Post by barberakb »

Brianmcg321 wrote: Sat Sep 19, 2020 1:22 am What happens when it goes unoccupied for 6 months?
You pay the mortgage while you wait for renters...

Seriously, I have been renting out houses since 2004, currently have 6, and not once have I had a vacancy even for 3 months. Especially not 6.
I'm sure it has happened but the odds are it won't. If it does, something is wrong with your house, or its overpriced.
barberakb
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Re: Reason not to rent out your old house?

Post by barberakb »

TropikThunder wrote: Fri Sep 18, 2020 11:23 pm
John Doe 123 wrote: Fri Sep 18, 2020 10:41 pm I believe if you haven't used the home as a primary residence for 2 of the past 4 calendar years, then you have to pay capital gains on the sale of the home.
It’s 2 out of the last 5, but your point is still valid. Also, how many people can qualify for two mortgages?
Probably most Bogleheads...
jjface
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Re: Reason not to rent out your old house?

Post by jjface »

I haven't the time to look after my own house properly :x
Nomar
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Re: Reason not to rent out your old house?

Post by Nomar »

I am recently retired, single and beginning to look at this option in Southern CA. I have paid off the mortgage and house would have significant capital gains if sold after 25 years of ownership.

I can't think of an alternative investment that would generate similar returns (income) on the capital invested in this ongoing low interest environment. In this area rent would be $4-5,000/month on a 2,000sf single family house near the beach. My investment (original cost, mortgage expenses and interest, accumulated maintenance and improvements, plus the effects of inflation) mean that in today's dollars I have invested roughly $500,000 into it. A sale would be for $1.2-1.4m. CG would be about 500k after federal deduction.

Scenario 1 Sale
Pros- liquidity, free from hassles and potential downsides of rental ownership
Cons-fed capital gains tax, CA taxes capital gains as income, still need a place to live, loss of consistent appreciation

Scenario 2 Rental
Pros--a gross return of +/-10% on the $500,000, asset may continue to appreciate in value, likely able to mitigate risk from bad renters and ongoing maintenance
Cons--the work of being a landlord, complexity, downside risks of bad renters and/or expensive maintenance.

In my rough sketch the net benefit to monthly income would be $2,000 as I would downsize. The house if sold would represent about 1/3 of my net worth.

Any thoughts appreciated. What am I missing?
barberakb
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Re: Reason not to rent out your old house?

Post by barberakb »

Since retired have you thought about moving? Your $ would go ALOT farther in a low COL area
rich126
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Re: Reason not to rent out your old house?

Post by rich126 »

You hear a lot of horror stories about renting and I'm sure many are true but like a lot of stuff online, situations are very different. My place for 9 years was rented out and the only period of vacancy was in the very beginning where the property manager had to change a few things to avoid lawsuits and be compliant with state laws about renting (smoke detectors, issues with the swimming pool, etc.). And it was in the Thanksgiving/Christmas time frame (not usually a prime moving season).

I had no real damage to the house other than wear and tear. Of course renters, sometimes trying to be low maintenance, don't always report minor issues that can lead to bigger issues.

I had success but it isn't something I would seek out. My main drivers was a house in a very desirable area, high demand for rentals (post housing collapse), desire to keep the house to return to, and a strong belief the house was at its low price and would very likely go up substantially. All of those things proved correct (from my move out date to the current time when I'm living in it and may be selling it the house went up several $100Ks).

I certainly understand the fear of renting especially in certain states and clearly you could get a terrible renter who is a nightmare. Hopefully insurance would help fix that up but the main thing is to be very careful of who you rent to. Nothing is 100% but it can certainly greatly reduce the risk.

I would also be careful of renting a place that was recently remodeled since it is likely owners may use higher end items than would be typical of rentals and I wouldn't want renters wear and tear on a nice new remodel. Normally you'd just keep it clean, do basic painting and fixtures, etc.

Not an easy decision.
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galving
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Re: Reason not to rent out your old house?

Post by galving »

There's a wide distribution of the quality of renters.
The fact that the rent covers the taxes/mortgage payment & insurance may not be sufficient return to deal the inconveniences associated with being a landlord.
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Ben Mathew
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Re: Reason not to rent out your old house?

Post by Ben Mathew »

justsomeguy2018 wrote: Fri Sep 18, 2020 9:54 pm Or is the argument that you could take the profits from the house sale and put it in the market and that would provide a better and more stress-free return?
That is one of the reasons. The opportunity cost of your equity in the property, if invested in stocks and compounded over many years, can add up to a surprisingly large amount.

I think the attraction of real estate for many people is that it's tangible property and therefore feels safe. But if one remembers to view stocks as businesses, it it also becomes tangible--a highly diversified, resilient, and profitable business owning real assets, producing real things, and making real profits. Owning this great business can feel psychologically safe in spite of the price fluctuations. To me, it feels safer than buying and renting out a house in my neighborhood. Leveraged real estate has its risks. Real estate has done well over the last fifty years. Whether it will do nearly as well over the next fifty years is not known. And a single property in a single location is a concentrated bet.

Also, renting out property is a lot more hassle than buying stocks.

All told, I'm not sure why renting out property is so popular. Owning your own home has some compelling tax benefits--the rent you pay yourself is income, but is not taxed. It also serves as a hedge against rising rent in your neighborhood. Renting out a house to others seems a lot less compelling to me.
Valuethinker
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Re: Reason not to rent out your old house?

Post by Valuethinker »

Hiker8 wrote: Fri Sep 18, 2020 10:16 pm
KlangFool wrote: Fri Sep 18, 2020 10:08 pm
justsomeguy2018 wrote: Fri Sep 18, 2020 9:54 pm If you buy a new house and you can rent out your old house for more than your monthly mortgage payment (+taxes/insurance), is there a reason WHY you shouldn't do that? Don't you get to have your mortgage paid for, have a small income stream, and hold onto the property and capture rising home equity?

Or is the argument that you could take the profits from the house sale and put it in the market and that would provide a better and more stress-free return?
justsomeguy2018,

<<Don't you get to have your mortgage paid for, have a small income stream, and hold onto the property and capture rising home equity?>>


What is your safety margin?

What if you cannot rent out the house? And the house costs you money while the house depreciates.


It can go wrong. And, normally, it goes wrong at the most inopportunate time.

The stock market may or may not make money. But, it does not cost you money (mortgage) to maintain.

KlangFool
KlangFool provide a simple yet very accurate answer.

Not to mention, as the current owner of a 100 year old house, I cant even imagine owning 2 properties.. Every month there is something new to fix.. :confused :dollar
And don't talk to me about the heating bill. Ours was built in 1896 ;-). Even w totally modern insulation 9" thick in the loft.

Friends in Toronto just sold the 1920s home their grandfather built. Mum lived in it her whole life until she was 94. During which time population of the metropolitan area probably rose x6.
av111
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Re: Reason not to rent out your old house?

Post by av111 »

OP

Since real estate is very very location specific, it is better to know your specific location before advising you on what to do. Your market could have gone up like bay area CA where rentals have given several multiples ROI to investors in 8 years or it could be in sleepy Midwest where appreciation does not happen.

Asking for advice on rental business here is like asking for index investing advice on an annuity or bitcoin forum. People here do not have experience in running rental businesses so they, bless their heart, try to help you with what they know or what they have heard. So also try biggerpockets forums

Rental property investment is a business. It has its own returns and challenges. It is not the same as index investing. So asking to do one or the other is not a good question. They are comparable only in the way like stocks have returned 8% in the last 100 years and a neighborhood subway returned 20% in 2019. Should I own stocks or subway?
AV111
Nomar
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Re: Reason not to rent out your old house?

Post by Nomar »

barberakb wrote: Sun Sep 20, 2020 11:36 am Since retired have you thought about moving? Your $ would go ALOT farther in a low COL area
Yes. I would move to a lower cost area. I would still owe CA taxes if I kept it as a rental.
killjoy2012
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Re: Reason not to rent out your old house?

Post by killjoy2012 »

Being a landlord sounds like a great a gig on paper. I'd suggest you go talk to some before jumping in.

If you find the perfect renter, it can be a very good and profitable experience. However, most people who are renting are renting for a reason, and trying to find that perfect one is difficult. Time also pressures you into compromising on how high your 'bar' is to rent to someone. You also have property taxes, maintenance, repair and general upkeep. Not to mention you better be pretty extroverted in personality since you're going to have to keep tabs on the renter, your house, etc. to ensure nothing is going sideways.

I have 3 co-workers who have rented their starter homes -- purchased when single, rented out after getting married. 2 of the 3 have had marijuana grow ops setup in their house causing damage. 2 of the 3 have had to evict people (which is very costly and time consuming). And every day/week/month you don't have the house rented, you're covering the mortgage and other costs.

Again, if you can find the little old lady with no animals who cleans daily and is alight touch to the house - you found nirvana. But you're also hunting for unicorns to some extent, and you'll likely have to compromise, take some risk on who you rent to, and will get burned eventually.

If it's a smaller, less expensive house that limits some of your risk, that's probably the better approach. There's no way I'd rent a decent size / nice home that you care about and have any type of personal attachment/sentiment to.
barberakb
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Re: Reason not to rent out your old house?

Post by barberakb »

Nomar wrote: Sun Sep 20, 2020 3:05 pm
barberakb wrote: Sun Sep 20, 2020 11:36 am Since retired have you thought about moving? Your $ would go ALOT farther in a low COL area
Yes. I would move to a lower cost area. I would still owe CA taxes if I kept it as a rental.
Have you been living in the house the last few years. If so, I would sell it, youd make a huge profit tax free.

Then you take that 1 million or whatever you get after selling and move somewhere thats a LCOL area with lower priced housing and live off or invest the rest.
Sunrise
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Re: Reason not to rent out your old house?

Post by Sunrise »

justsomeguy2018 wrote: Fri Sep 18, 2020 9:54 pm If you buy a new house and you can rent out your old house for more than your monthly mortgage payment (+taxes/insurance), is there a reason WHY you shouldn't do that? Don't you get to have your mortgage paid for, have a small income stream, and hold onto the property and capture rising home equity?

Or is the argument that you could take the profits from the house sale and put it in the market and that would provide a better and more stress-free return?
When you rent out your old house, you become a landlord. Being a landlord is work. You also need to budget for maintenance and repairs on the house in addition to mortgage+taxes+insurance. You have to worry about finding a good tenant that will pay the rent and not damage the house and be a good neighbor.

With that said, yes ideally you get mortgage balance paydown and a small income stream if you do it right. In my opinion, unless you are very handy and can do a lot of the repairs yourself, your repair/maintenance budget will go through the roof. You will capture rising home equity, unless you buy at the peak and the market crashes.

Selling house and putting profits in market? Better return? Who knows..... Less stress than being a landlord? Probably, unless the stock market crashes.....

Personally, I like being diversified and holding both, essentially a 3-fund portfolio and a couple rental houses. But the rentals are work/a second job. Do you want to work on the rental on your weekends? And again, if you have to hire all maintenance and repairs, that can get expensive real quick, and it can be a hassle to find good people to do the work.

Also, I would never own rental(s) that were not close to where I live/work.....you need to keep an eye on them.....
j0nnyg1984
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Re: Reason not to rent out your old house?

Post by j0nnyg1984 »

Because I have zero interest in being a landlord. It isn’t worth the hassle to me at ANY profit level.
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Harry Livermore
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Re: Reason not to rent out your old house?

Post by Harry Livermore »

jjface wrote: Sun Sep 20, 2020 2:10 am I haven't the time to look after my own house properly :x
This may be the BEST answer I have seen on BH on this topic. Touche!
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refinedchain
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Re: Reason not to rent out your old house?

Post by refinedchain »

Nomar wrote: Sun Sep 20, 2020 8:55 am My investment (original cost, mortgage expenses and interest, accumulated maintenance and improvements, plus the effects of inflation) mean that in today's dollars I have invested roughly $500,000 into it. A sale would be for $1.2-1.4m. CG would be about 500k after federal deduction.

...

Scenario 2 Rental
Pros--a gross return of +/-10% on the $500,000, asset may continue to appreciate in value, likely able to mitigate risk from bad renters and ongoing maintenance
Cons--the work of being a landlord, complexity, downside risks of bad renters and/or expensive maintenance.

In my rough sketch the net benefit to monthly income would be $2,000 as I would downsize. The house if sold would represent about 1/3 of my net worth.

Any thoughts appreciated. What am I missing?
In March, I bought NLY preferred stock for $7 paying $1.74 in dividends; 25% yield! It rose shortly thereafter to 22. I was tempted to say my yield was still 25% and thus was vastly superior to every other option. But the people of the Internet claimed my Yield on Cost didn't matter because it didn't make for a valid comparison to other investments. Worth considering.
refinedchain
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Re: Reason not to rent out your old house?

Post by refinedchain »

justsomeguy2018 wrote: Fri Sep 18, 2020 9:54 pm Or is the argument that you could take the profits from the house sale and put it in the market and that would provide a better and more stress-free return?
Suppose you didn't own this house, would you still consider this house to be the ideal rental?

Do you have builder grade fixtures, roofing, and laminate flooring? Fiberglass tubs? Easily maintained and replaced HVAC?

Is the cap rate above the market cap rate? If you pay yourself 3x your regular hourly wage for valuable spare time spent landlording/repairing, is that remaining rate of return still better than other options?

These were some of the things I weighed when looking for potential rentals.
Nomar
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Re: Reason not to rent out your old house?

Post by Nomar »

barberakb wrote: Sun Sep 20, 2020 5:59 pm
Nomar wrote: Sun Sep 20, 2020 3:05 pm
barberakb wrote: Sun Sep 20, 2020 11:36 am Since retired have you thought about moving? Your $ would go ALOT farther in a low COL area
Yes. I would move to a lower cost area. I would still owe CA taxes if I kept it as a rental.
Have you been living in the house the last few years. If so, I would sell it, youd make a huge profit tax free.

Then you take that 1 million or whatever you get after selling and move somewhere thats a LCOL area with lower priced housing and live off or invest the rest.
I have considered it. There is no tax free profit except a sale upon my death. The gains will 2-3x the federal exemption and CA taxes gains as regular income. For me the decision is less about the risks or work of being a landlord, but the alternative uses of capital. Walking away with a $1+m sounds great but I have to live somewhere and produce a return on the remaining assets. The prospects for retirees as income investors is not looking so good with low rates for the foreseeable future.
TimeTheMarket
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Re: Reason not to rent out your old house?

Post by TimeTheMarket »

Reasons not to include, and are not limited to:

- opportunity cost of the equity tied up in your old house
- not wanting to be a landlord and watching your nice (?) house trashed
- not wanting to be a landlord when the government has decided they can issue concurrent eviction moratoriums
- not having enough cash flow to cover maintenance and repairs while making it worth your time
Username is not serious :)
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TomatoTomahto
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Re: Reason not to rent out your old house?

Post by TomatoTomahto »

jjface wrote: Sun Sep 20, 2020 2:10 am I haven't the time to look after my own house properly :x
+1

I love my house, and would love to rent it rather than own it. Perhaps I could hire one of those management companies that I always read about as being the best thing since sliced bread.
Okay, I get it; I won't be political or controversial. The Earth is flat.
panhead
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Re: Reason not to rent out your old house?

Post by panhead »

justsomeguy2018 wrote: Fri Sep 18, 2020 9:54 pm If you buy a new house and you can rent out your old house for more than your monthly mortgage payment (+taxes/insurance), is there a reason WHY you shouldn't do that? Don't you get to have your mortgage paid for, have a small income stream, and hold onto the property and capture rising home equity?

Or is the argument that you could take the profits from the house sale and put it in the market and that would provide a better and more stress-free return?
I did this with my first house. I'd say it ended up just ok. I started renting it in 2006 if I recall correctly, somewhere near the top of the housing market. I could have sold it for quite a bit more than I had into it at that point. I decided to rent it instead. I rented it for years. I had pretty good luck with tenants and never had to evict anyone, though it was close with one tenant. My last tenants ended up buying the place in 2015. I did some calculations, had I just sold it for what I could have gotten for it in 2006, I would have ended up about the same as keeping it and renting it. Obviously keeping it required much more work on my part.

I didn't know much about rentals then, and just thought it was a good idea. What I should have done is a comparative analysis:

1) take into consideration rents with a reduction factor for vacancies (20%-40%), add up all fixed costs, estimated maintenance (depends on property but say 1% of value of house), Increased cost of complication to taxes. Also take into account my end game understanding depreciation and the clawback that results if you sell a rental, realtor and lawyer costs to sell, etc. Also, if I had lived there for 2 of the last 5 years, understand the benefit of the tax free capital gain. If you are diy person and do lots of the maintenance yourself, don't fool yourself into thinking this is free. You need to account for your time and consider its actual cost as an expense.

2) Alternative investments. Bogleheads would focus on the stock/bond markets of course. Decide how I would invest the net cash should I sell the property instead of rent it. Take a look at history to get an idea of what the average return this investment would produce. If there is a mortgage on the house, this needs to be factored in as well. You could invest in the stock market on margin, or you could quantify the reduced risk of not using leverage and reduce the required return of the alternative investment accordingly.

3) Compare return on 1 to return on 2. If (2) is a truly passive investment such as the stock market, then (1) needs to have the potential to net me a considerable (X, 5%? 10%? It's up to you) larger return than (2). If this is unlikely, the right thing to do is to sell the property.

Once you do the math, you will likely find that most single family homes aren't that great of an investment. The economy of scale that multi-family housing and apartment buildings provide make them a much better investment in most places.

Just my $0.02, it was worth what you paid for it.
Nomar
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Re: Reason not to rent out your old house?

Post by Nomar »

TimeTheMarket wrote: Mon Sep 21, 2020 6:27 am Reasons not to include, and are not limited to:

- opportunity cost of the equity tied up in your old house

- not wanting to be a landlord when the government has decided they can issue concurrent eviction moratoriums
Thanks. These two are particularly relevant for me. CA due to its housing crisis will keep having rent control proposals on the ballot. One day will pass.
barberakb
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Re: Reason not to rent out your old house?

Post by barberakb »

Nomar wrote: Mon Sep 21, 2020 6:14 am
barberakb wrote: Sun Sep 20, 2020 5:59 pm
Nomar wrote: Sun Sep 20, 2020 3:05 pm
barberakb wrote: Sun Sep 20, 2020 11:36 am Since retired have you thought about moving? Your $ would go ALOT farther in a low COL area
Yes. I would move to a lower cost area. I would still owe CA taxes if I kept it as a rental.
Have you been living in the house the last few years. If so, I would sell it, youd make a huge profit tax free.

Then you take that 1 million or whatever you get after selling and move somewhere thats a LCOL area with lower priced housing and live off or invest the rest.
I have considered it. There is no tax free profit except a sale upon my death. The gains will 2-3x the federal exemption and CA taxes gains as regular income. For me the decision is less about the risks or work of being a landlord, but the alternative uses of capital. Walking away with a $1+m sounds great but I have to live somewhere and produce a return on the remaining assets. The prospects for retirees as income investors is not looking so good with low rates for the foreseeable future.
Im confused. Why would you not have at least a partially tax free gain? I believe you can get $500,000 tax free gain for married, 250K for single If you owned the home for at least 24 months (2 years) out of the last 5 years leading up to the date of sale. You could take that gain, even after taxes. Pay cash for a nice house and still by 2 or 3 rentals if you wanted to in a LCOL area. A house worth over 1 million dollars is not a good rental if it only rents for 5000 a month. Trust me, Im all for rentals. I have 6 myself. But your #s dont work as a rental there.
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cchrissyy
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Re: Reason not to rent out your old house?

Post by cchrissyy »

One key difference i don't see written yet is if you keep it as a rental, the ongoing income will be taxed every year, whereas, if you invested in the stock market and don't sell shares only the interest and dividends would be taxed. So you have control about if and when to take those gains.
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