You have been given the opportunity to transfer with your job, but you love your home and don’t really want to sell it. But your financial position is such that you cannot support two homes. What do you do, rent or sell?
Rent your house:
If you want to rent your house, you need to have a handle on the costs of renting your home. Typically, you will face the following costs as a Landlord:
- Taxes (Property and Income Taxes)
- Insurance (You will need to change Insurance coverage from a Homeowner policy to a Landlord Policy. This does increase the cost a little)
- Replacements of items like water heaters, roofs, decks, just as if you lived in the house.
- Repairs of broken items
- Preventative maintenance, like gutter cleaning, servicing your furnace
- Advertising for new tenancies
- Landscape maintenance between tenants
- Cleaning and painting (also called turning costs) between tenants
- Utilities – between tenants
- Association fees (If you live in a neighborhood that has a homeowners association)
- Property management (Usually property management costs from 9 -11% plus a lease up fee. This varies from town to town, city to city, state to state, property manager to property manager)
- Cost of vacancy (Mortgage, Taxes, Insurance)
- Cost of potentially canceling a lease (In Portland that could cost you $4,500 if you need to ask a tenant to move)
- City or county, Landlord registration fees
- The mortgage payment
Tenants are typically responsible for:
- Utilities (except for garbage service in some cities)
- Keeping the inside of the house clean and light yard work
You might look at this list and decide that this is too much to consider. But if you inherited your home or own it free and clear, your typical costs of operating a rental should not exceed between 40 and 50 percent of your income, so you can make 50 or 60 percent return on the house. Consider this, you get the cash flow and:
- Appreciation (in a strong housing market with increasing population)
- Debt reduction, since the tenant is paying down the mortgage (if there is one).
All this can add up to a significant return, depending on your individual circumstances.
(Disclaimer: Of course, you need to check your personal tax and income position out with your CPA ahead of time. Please choose a CPA that has real estate investments or a significant number of clients that own and invest in real estate, otherwise you will not be getting good advice. Candidly, the first thing you should do as you are pondering this decision is to find a knowledgeable CPA and property manager. The CPA will give you the tax and cash information and the property manager will provide an estimate of the rental rate for your home in the market place. It pays to talk to at least three of each.)
Tolerance for being a Landlord
It takes patience (and cash reserves) to be a successful owner of rental real estate. Some tenants will be late on their rent, not pay the rent, damage your property, complain about the property and want rent reductions. They will call you in the middle of the night to fix plumbing leaks and stopped up toilets (that is if you don’t have a property manager). You might have roof leaks or a landslide, or the tenant allows their new dog to scratch up your hardwood floors. Some tenants will lose their jobs or gamble away the rent money and not be able to pay the rent and you will need to evict them. You just need to be prepared for these expenses and experiences. Tenant screening is critical. Tenants to have a verifiable income and you can secure their behavior with damage deposits. The City of Portland, Oregon may make screening more difficult in 2019, so you will want to work closely with your property manager to reduce your risk as much as possible. If you don’t have the tolerance, don’t do it.
Sell your Home
You have decided you don’t have the tolerance, and the costs of keeping the house will outstrip the income and the potential appreciation of value. You are far away and cannot keep an eye on the house and you just don’t trust property managers. The decision is simple, find a great real estate broker and sell the house and trade the equity into your new home in your new town.
Where the decision gets tough is when the economy is in a down cycle and your house is worth less than the mortgage you have taken out. That is when you have to make a difficult decision. Typically, property values do come back, and you can pay off your mortgage, but you may have to deal with negative cash flow for a few years while the real estate market gets its legs back.
The best reasons to become a Landlord are that you want to return to your home to retire in or take advantage of appreciation and sell it later or better, yet you are building your net worth and want to trade into other real estate investments as it increases value. In any case, you need to decide if you and your family can handle that someone else will be living in your home while you are gone. If you have the right attitude and some financial reserves and a good property manager, it’s definitely worth considering becoming a Landlord.