Thinking about moving and renting out current house

[CJones]

We're almost to the stage of life where we have outgrown our current house (boys are getting to the age where sharing a room isn't cool - even with a custom bunk-bed setup). Also, it turns out the middle school we're zoned for isn't a slam dunk like the elementary school was. We have one with two more years left at the MS and one that has one more year at ES before moving to the MS. We could move a few miles down the road and get into a drastically different MS zone and remain in the zone we're currently in for future HS (which we like).

We're in a good spot financially with the current house. Bought at the bottom of the market in 2011 when prices and interest rates were record low. Comps in our neighborhood are selling for 3x what we paid for this place in 2011. We've upgraded mechanical and recently did a downstairs remodel. Right now really the only 'big' expenses looming over us are needing to replace the nearly 30 year old (currently leak-free) roof and a similar 'refresh' of upstairs.

As we ponder things, we have a couple of options.

1. We could sell this house and cash out on our 'buy low, sell high' scenario. We could comfortably walk away with $100-200k (likely more, but I'm being uber conservative) in our pockets - even after putting on a new roof and potentially doing the upstairs remodel. The cash could go to offset some of the inflation price on a new place.

OR

2. We could keep this house and rent it out. We think (just scanning ads locally), we could rent our current place in the neighborhood of $2500/mo. That would help offset the payment payment on a new house, which would basically mean we would still be paying close to our current house payment amount, but for an upgraded and larger house.

I understand the pains of maintaining a rental property. I worked for an apartment management company in college and was after-hours on-call there, so I have a working understanding of the stupidity of renters. My parents also own a rental property elsewhere, and they have horror stories to share as well.

We like the idea of having the rental property sitting here as an income source, but are we missing the 'big payout' of 'buy low, sell high' with this place? Will we look back and say "Yeah, $2500/mo is nice, but if we had cashed out back then..." For folks that are already in the housing rental game, are you buying new properties right now, are you holding steady, or are you selling off to cash out and waiting for the market to come back down to jump back in?

What else am I missing? I know we'll lose the 'Homestead exemption' on property taxes for the current house b/c it is only valid for your 'primary residence'. I assume homeowners insurance would go up for a rental property - does anyone have an idea of what that difference is - 1x, 1.5x, 6x?

Anything else?

 

[TCABM]

Q1: If you had the money to buy the current house and become a landlord, is that what you would do?

Q2: Do you intend to run your rental property as a business or would you rather just watch income and expenses flow through the account?

 

[MountainDude]

If you rent it out for $2,500, you will have to pay taxes on it, so won't have 2500 for your new mortgage.

 

[Mikey52]

If you rent it out for $2,500, you will have to pay taxes on it, so won't have 2500 for your new mortgage.

But he would be able to write off most if not all of the expenses, plus depreciation and property taxes. Could be an active loss he could claim against his personal income.

 

[CJones]

Q1: If you had the money to buy the current house and become a landlord, is that what you would do?

Q2: Do you intend to run your rental property as a business or would you rather just watch income and expenses flow through the account?

A1: Possibly. We have talked about how (hindsight 20/20) we wish we had bought two houses like ours at the time to have one as a rental. That's kind of what I'm trying to figure out. What else am I missing for negatives of being a landlord?

A2: No idea. Haven't gotten down the path far enough yet. Curious if you know of pros/cons of either direction?

 

[Chrisgoesflying]

I would sell. i tried the whole “keep old house as rental” thing. first tenant was a pita, then house was sitting empty. now it’s an airbnb which is an equal pita. now it’s on the market for sale but market has slowed significantly.

 

[Tools]

Selling in an up market actually has its limitations.

1. If you upgrade, you upgrade less as the property you are buying is also over inflated. Upgrading makes most sense in a down market.

2. Not reinvesting exposes a lot to capital gains.

I’ve rented quite a bit over the years. Never bothered me.

1. GOOD rental manager. NOT a friend of the family, or your realtor.
2. Just do it yourself.
3. Research eviction process and execute IMMEDIATELY if ANY problems.

 

[TCABM]

…A2: No idea. Haven't gotten down the path far enough yet. Curious if you know of pros/cons of either direction?

If you’re going to run it like a business, you need margin between income and expenses with the reality that you can only adjust income once a year on average.

If you just want to watch money flow you will likely operate at a net loss until you sell. When you do sell, if you don’t time it appropriately you’ll be subject to capital gains taxes; non-commercial investment property (rent houses) can’t be 179 exchanged.

In either choice, you can DIY it or you can use a property manager and a healthy cash reserve is an upfront requirement. You’ll likely also require a landlord policy vs homeowners and your current mortgage (if any) may not allow that.

 

[GaryM]

Occasionally you will get the tenant from hell, despite your best efforts at screening who you rent to. Doesn't happen that often, but consider how eviction laws work in your state. In some states the landlord has reasonable recourse, other states make it dang near impossible to evict a deadbeat tenant.

 

[dcat127]

What state? What are the landlord tenant laws like in your location? I used to own a number of rental properties in New York. With the current legal structure unless you are large enough to have your own inhouse legal team you are probably just asking for trouble.

 

[Mason]

There are two kinds of tenants: Those who pay on time but beat up the property, and those who treat the property well but are late or worse to pay.

 

[Tarheelpilot]

You could just drive your kid to the middle school of choice and save yourself the stress of all the house drama.

I’m accidentally doing what you are considering. Fortunately a lifelong friend asked to rent the house so that parts been ok but as soon as he moves out I’m trying to sell it again. Have owned rentals and hated it.

 

[X3 Skier]

Since the kids will be moving out (Maybe?), think what the situation will be in 4-5 years. Will you be downsizing then and have two houses to sell?

Being a landlord is not a ball of fun.

 

[NealRomeoGolf]

I've done this three times. Not a big fan of being a landlord. If you do this, I would make sure you manage the lawn care and make sure you change the air filters. Your tenants won't care about either.

 

[midwestpa24]

If you sell now you can avoid capital gains altogether. If you hold it and rent it for a few years, any future sale of the house will be subject to capital gains.

Being a landlord does get old. I helped my parents with it when I was younger, and I've done it myself for the last 17 years. I am ready to be done with it personally. The passive income has been nice and has helped set up other things in my life, but I'm done.

 

[2-Bit Speed]

I've done this three times. Not a big fan of being a landlord. If you do this, I would make sure you manage the lawn care and make sure you change the air filters. Your tenants won't care about either.

BS

We had to fight with our property managers for about a month to get the right filter installed when we could have bought said filter from the grocery store. We are being charged $90 per filter and had no ability to opt out.

As far as lawn care... the yard floods. We're digging trenched to let it drain properly. Once that's done, we'll start mowing.

 

[SkyChaser]

Here is our Saturday project...painting the front porch, because it was uglier than sin and had all sorts of bugs and bees trying to make their homes in all the exposed cracks and crevices. First coat is done and in about an hour, we'll put a second coat on and probably a third tomorrow just to be sure.

If you rent out, be very careful who you rent to. Some renters will treat your property like crap because it isn't theirs. Avoid those ones. Some of them will care for the property because it's their home even if they don't own it. If you get one of those, please be nice to them and make allowances for their care and responsibility instead of treating them like they are adult toddlers.

For example, air filters. We were unable to opt out of the management company's "renter's benefit package" because they had subscribed to a filter program that mails filters every three months. We have to pay $30 extra a month for an absolutely garbage filter that comes once every three months. It would have cost me less than $15 at the grocery store - and it would have beena much higher quality filter. I changed it every three months or when it was dirty, whichever came first at our last place. I am being a diligent tenant now and not switching filters until they come in the mail and using the absolute garbage that is being sent to us - because I am not spending over $100 just to switch my air filter.

I understand that not everyone is conscientious, and even that most people aren't, but please leave a little wiggle room for those of us who are.

 

[NealRomeoGolf]

BS

We had to fight with our property managers for about a month to get the right filter installed when we could have bought said filter from the grocery store. We are being charged $90 per filter and had no ability to opt out.

As far as lawn care... the yard floods. We're digging trenched to let it drain properly. Once that's done, we'll start mowing.

Ok fine. MY tenants never cared. When we moved back into the house the filter hadn't been changed in over 2 years. And I'm about to nuke the lawn because they never fed it and it looks like garbage now.

 

[Larry in TN]

Being a landlord is a job. It can be a very good job, if that's something you want to do, but it's still a job. People get into it for the wrong reasons and it often doesn't go well.

If rental real estate is something you want to do, get out of debt first. That reduces risk and the pressure when you have big expenses, vacancy, or a bad tenant.

Another way to look at the decision is to imagine being in the situation of living in the new house you'd like, in the financial condition you'd be in if you made that move. Consider, from that position, if you'd still want to buy your current home to have as a rental.

 

[Albany Tom]

I'll do my typical dissent thing. Middle schools don't matter, in the grand scheme of things. It's glorified daycare, and some extra variety is good. Sounds like the HS is fine there.

Renovate or add-on to get an extra room. I say this because no matter what, it sounds like if you buy a new place you're going to end up paying up and elevated price AND paying elevated interest. You may make some of that up in equity if you don't keep the original place, but you're going to lose the low interest rate you have now.

Everyone on the planet suffers from lack of time, and most suffer from too much stress. Adding "landlord" to you list of things isn't going to help either. You're talking about short term conditions. Focus on getting the kids through school so they'll actually be able to afford to leave, and do your planning around where you and your spouse are going to live when you retire.

Just my 2 cents...

 

[FancyG]

There's a correct number of rental properties to have and one is not that number.

 

[mandm]

Do you like your house, neighborhood and location? Are your property taxes capped on their annual increases?

I’d probably lean towards waiting it out if you like your home. Once your mortgage is paid off, you’ll enjoy life a lot more. I am not sure that I’d go through the steps of changing home just so your boys can enjoy a few more years there. Before you know it, they’ll be off to college then what you’ll want to downsize?

When you sell, you’ll have real estate fees, transfer taxes and if you have a new mortgage you’re looking at origination fees on that. Let’s say you will want to downsize and counting 2 transactions, fees are easily going to be 15%+ in total (7-8% each transaction) and then you’ll have higher mortgage rates on top.

I’ve usually seen landlord insurance policies as being cheaper as you are not covering your personal property part of the policy.

You’ll eventually run into a bad tenant and yes you can do this and that. But you could also avoid running into a bad tenant by never being a landlord too. There is money to be earned yes. But it’s up to you if you want to deal with a tenant or not. Tenants always get entitled and ask for this and that, and it seems they always do that on a Friday night or weekend when you are probably celebrating a wedding or birthday party you’ll receive those emergency phone calls.

 

[CJones]

Thanks for the responses, folks. Definitely a lot to think about.

We like where we are currently, other than the MS situation which, in reality, isn't 'bad', it just isn't as stellar as we hear from other schools in the district. We have a new principal starting after this school year, so I'm going to try to schedule some time to go talk to her and get the low-down on her going-in view of why other schools post about their extra-curricular (academic) activities and students competing in and placing in state and national STEM competitions and the only thing our school can post about is how important attendance is. But I digress...

We aren't in a rush to do anything and really aren't looking to do anything until after this election cycle to see how the economy is going to respond. I work in Consulting, so when CapEx dollars are hard to come by, my team's high-dollar projects get a little more sparse than I like when thinking about paying two mortgages.

I appreciate all the discussion around how the 'passive' income isn't as hands-off as some may think.

Definitely a lot to ponder and I'll be sure to share these viewpoints with my wife and we continue to kick around the concept.

Thanks,
CJ

 

[CJones]

I'll do my typical dissent thing. Middle schools don't matter, in the grand scheme of things. It's glorified daycare, and some extra variety is good. Sounds like the HS is fine there.

Renovate or add-on to get an extra room. I say this because no matter what, it sounds like if you buy a new place you're going to end up paying up and elevated price AND paying elevated interest. You may make some of that up in equity if you don't keep the original place, but you're going to lose the low interest rate you have now.

Everyone on the planet suffers from lack of time, and most suffer from too much stress. Adding "landlord" to you list of things isn't going to help either. You're talking about short term conditions. Focus on getting the kids through school so they'll actually be able to afford to leave, and do your planning around where you and your spouse are going to live when you retire.

Just my 2 cents...

This is a great perspective and honestly where my mind was at when the idea first came up, but the idea of a shiny new house with more space in a slightly nicer neighborhood lured me in. ha.

You hit the nail on the head - even what we're looking at would be viewed as a short-term play in that we likely would not stick around here once the kids are out of school, so your point about paying inflated prices and higher interest for a short-term plan doesn't make a lot of sense (cents?).

Thanks for taking the time to share the dissent. It's appreciated.

 

[2-Bit Speed]

This is a great perspective and honestly where my mind was at when the idea first came up, but the idea of a shiny new house with more space in a slightly nicer neighborhood lured me in. ha.

I love that word, Lure. It's such a cruel word. When using bait, the fish at least gets a last meal. A lure? We pluck it from its home, kill and eat it, and don't even give it a last meal... Something to consider when you find something alluring.

 

[CJones]

Here is our Saturday project...painting the front porch, because it was uglier than sin and had all sorts of bugs and bees trying to make their homes in all the exposed cracks and crevices. First coat is done and in about an hour, we'll put a second coat on and probably a third tomorrow just to be sure.

If you rent out, be very careful who you rent to. Some renters will treat your property like crap because it isn't theirs. Avoid those ones. Some of them will care for the property because it's their home even if they don't own it. If you get one of those, please be nice to them and make allowances for their care and responsibility instead of treating them like they are adult toddlers.

For example, air filters. We were unable to opt out of the management company's "renter's benefit package" because they had subscribed to a filter program that mails filters every three months. We have to pay $30 extra a month for an absolutely garbage filter that comes once every three months. It would have cost me less than $15 at the grocery store - and it would have beena much higher quality filter. I changed it every three months or when it was dirty, whichever came first at our last place. I am being a diligent tenant now and not switching filters until they come in the mail and using the absolute garbage that is being sent to us - because I am not spending over $100 just to switch my air filter.

I understand that not everyone is conscientious, and even that most people aren't, but please leave a little wiggle room for those of us who are.

Agree wholeheartedly. Before we bought our place, we were always the 'hands-on' tenants that treated the place like our own. We got burned once when we moved out and didn't get our deposit back, and when I called to ask about why, the landlord told me "Well, you had a piece of tape stuck to the carpet in the living room and the whole room had to be replaced." First off, you don't replace an entire room of carpet for one corner where I had a wire taped down and two, I said "What about the outdoor light fixtures that we fixed on our own, and what about the labor that I didn't charge you for to replace the CARPET that you had in the KITCHEN with laminate, and what about the hole in the wall that the previous tenants' dog had licked through the sheetrock in the time between when you showed us the place and when we moved in that we just fixed on our own?" He just said "You didn't bill me for it when you sent me the expenses for the things you had done." So yeah, I appreciate the concept of 'good will' between landlord and tenant.

 

[judypilot]

There are two kinds of tenants: Those who pay on time but beat up the property, and those who treat the property well but are late or worse to pay.

Well, three. There are the kind who beat up the property AND don't pay.

 

[Brad W]

We thought we had our old house sold when we bought our current house, then the deal fell through about the same time as the market tanked.... we ended up renting it out for a few years.

The best thing I did - after a time trying to manage everything myself and self-repairing most anything that came up, I bought one of those home warranties. Then on, whenever there was a plumbing problem, or an appliance problem, etc.... I had one phone number to call, or even submit the request online...and they found an appropriate repairment to come out for a fixed service call fee
Now it probably wasn't the best repairment usually, but they took care of it.
My tenant worked close by and didn't mind letting them in so I rarely ever had to go there anymore...which was good, since I'm nailed to a desk full time and I never had the time
It was a HUGE monkey off my back.
If I had to do it over again, I'd probably find a management company to take the calls and deal with collections....even though I know that cuts deep into the profits.

No scratch that...that was prob the second-best thing....
First was letting go... at some point, it became no longer my baby and most things didn't need to be done to my standards.... looking at it purely as an investment property was the best thing.


And not regarding my house but after a similar situation with an office condo we owned for my wife's business where I learned something else.... I would get a real lease written up from a lawyer, and not use some random template your wife found online. I found out that a lot of the stuff in there won't float with the law.
And when they are late with payments, follow-up ASAP and often with a bill and reminders. And the minute the lease termination trigger is met, do it and evict them...don't wait when they promise they will pay...etc....

 

[Sundancer]

In an urban area or deep blue state? Explore the eviction process - the real world experiences - what the laws are and how they are applied can be very different. When I left Maryland it never crossed my mind to keep my house as a rental; too many friends with six month and longer horror stories about getting deadbeats removed. . . think about setting the bar high (within local laws) for security deposits. A buddy would start the eviction process immediately on a late or missed payment - didn't hesitate, just got straight to it.

 

[Tools]

And then there’s Minnesota… a bud told me his renters hadn’t paid in 9 years or something crazy. I’m like WHAT?????

Oh no problem, the state picks up the bill for them. They NEVER pay late…

Wow…

 

[CJones]

In an urban area or deep blue state? Explore the eviction process - the real world experiences - what the laws are and how they are applied can be very different. When I left Maryland it never crossed my mind to keep my house as a rental; too many friends with six month and longer horror stories about getting deadbeats removed. . . think about setting the bar high (within local laws) for security deposits. A buddy would start the eviction process immediately on a late or missed payment - didn't hesitate, just got straight to it.

This would be in Georgia. Not sure what the laws are here - but obviously I need to figure it out.

 

[iamtheari]

30 posts and no mention of section 1031? @CJones, you need to get some advice from a smarter group of people. (Not saying it's a great idea to do a 1031 exchange, but you don't want to find out the day after you close on the deal that you left the perfect stone unturned.)

As far as eviction laws, there's more to it than the laws. Our local laws can have a tenant on the street, security deposit in the landlord's general account, and money judgment for the excess back rent and damage on the 12th-17th of the month. (5 days grace period to pay rent, 3-day notice of termination of lease, and 3-day notice of the eviction hearing, plus a maximum of 5 days from the hearing to the locks being changed but the judge can give as little as 0.) And you can do that on your own without a lawyer if the landlord isn't a corporate entity. But our local law enforcement and court scheduling mean that sometimes you have to wait 2 months to get an eviction hearing, you need to pay a private process server to jump through the right hoops at the right time of day, and you need to know which Sheriff's deputy to have on speed dial to actually remove the tenant after the judge's deadline to move out expires.

What you're talking about doing can work out great. I know of someone who moved to another state but wanted to keep the house and furniture for eventual retirement. They have been renting to the same doctor for 5 years without any problems and only come to check on the place every couple of years. But for every story like that, I know five landlords who paid $10,000 to fix "wear and tear" from tenants who didn't pay rent for 3 months while trying to get a court date because the judges only hear evictions one Monday a month, which happened to fall on a series of holidays.

If it were me, I'd sell the house. Let someone else chase his tail trying to turn the investment into a return, and capture the return on the investment you've already made. But that's only because it's your house. If it were mine, my sentimentality would make me do all sorts of irrational things to keep it.

 

[MauleSkinner]

Just to throw another thought into the mix…what about renting an apartment or room in a house in the area of the middle school you’re looking at for the duration of middle school? Heck, maybe you could call a storage unit your residence.

I doubt that it would actually pencil out, but you can’t win if you don’t enter.

 

[TCABM]

30 posts and no mention of section 1031?

It’s not a bad option if you want to get into the landlord business.

I’ve never bought a primary residence with the intent that it would next become a rent house and that’s kind of the delta, because the carrying and operating costs likely negate profit except in unusual circumstances.

I could paint with a broom and sat we’re in ‘unusual circumstances’, but I don’t know the details of the specific market in question.

 

[Ventucky Red]

As far as eviction laws, there's more to it than the laws. Our local laws can have a tenant on the street, security deposit in the landlord's general account, and money judgment for the excess back rent and damage on the 12th-17th of the month. (5 days grace period to pay rent, 3-day notice of termination of lease, and 3-day notice of the eviction hearing, plus a maximum of 5 days from the hearing to the locks being changed but the judge can give as little as 0.) And you can do that on your own without a lawyer if the landlord isn't a corporate entity. But our local law enforcement and court scheduling mean that sometimes you have to wait 2 months to get an eviction hearing, you need to pay a private process server to jump through the right hoops at the right time of day, and you need to know which Sheriff's deputy to have on speed dial to actually remove the tenant after the judge's deadline to move out expires.

2 months for a hearing???? Many moons ago I had to go down this road... it was 7 months...

We got them our prior to that as they didn't respond to the summons. As we were going over to clear them out, they were in the process of leaving..

I tried to put a "hammer clause" in the lease agreement where they would waive their rights to eviction in consideration of a month to month lease vs. a year. Nope, no can do, can't override local and state laws

 

[Ventucky Red]

This would be in Georgia. Not sure what the laws are here - but obviously I need to figure it out.

I am sure the process may be the same as other places... maybe some nuances in the time frames etc...

Advice...

My mentor with real-estate told me to walk to a potential tenant's car and look inside. If it is clean and well maintained.. good Tennent, not, keep looking.

Also, you can subscribe to a service that will do a background check on your potential tenant. Well worth the money.

 

[Brad Z]

If you want to get in the rental business, get in the rental business. My experience and research suggests that a house you buy to actually live in is rarely a good investment property. A good investment property maximizes ROI. That means getting a good rental rate for a house that is low maintenance. Basically a house that looks nice to the tenants but renter-proof (i.e. built tough like a jail cell). Smaller rooms, simple systems, modern plumbing, etc. floors that don’t cost an arm and a leg to maintain. Some things that increase the value of a property mean more to buyers than they do to renters.

If your house was on the market would you buy it as a rental investment property? If not, don’t go down the rental path.