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Anyone know anything about renting out a house?


mhdousa
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Hi all -

 

As a follow up to my thread about asking what I should do about a move (http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/move-for-a-job-or-stay-for-personal-reasons/), we decided to make the move to Philly.

 

Now I have to decide what to do about our house that we bought about a year ago. We don't plan to buy in Philly right away, and so are thinking about putting our current house up for rent. We've gotten some advice against this because of the hassles of managing the house from a distance. The house is 4 BR, 3 BA and is in great shape (built in the 50s, gut renovated in 2007). Because we'll be about 2 hours away, and we're not handy people, we thought we might use a property management company. Comparable houses in the area rent for about $5000/month.

 

The pros are to continue to get the tax benefit and to continue to hold real estate in case the market takes off in the next couple years. The downside is having to be a landlord.

 

Anyone have any thoughts about this sort of thing?

 

Thanks!

M

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Assuming you don't need whatever capital you could extract from a sale, I'd be all for it - run the numbers on what your free cash looks like 15-20 years out on a rental property, it's phenomenal. Also, as I'm sure everyone knows, the transactional costs of exiting a property are egregious. Might as well hold onto what you've got as long as it's not an uneconomic endeavor.

 

If you're only looking to hold onto it for another couple of years, then perhaps it might not make as much sense.

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Assuming you don't need whatever capital you could extract from a sale, I'd be all for it - run the numbers on what your free cash looks like 15-20 years out on a rental property, it's phenomenal. Also, as I'm sure everyone knows, the transactional costs of exiting a property are egregious. Might as well hold onto what you've got as long as it's not an uneconomic endeavor.

 

If you're only looking to hold onto it for another couple of years, then perhaps it might not make as much sense.

 

Thanks. I don't think there would be free cash flow as our rental price would probably just cover our current principal+interest+property taxes. But maybe I didn't totally understand what you were implying.

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Assuming you don't need whatever capital you could extract from a sale, I'd be all for it - run the numbers on what your free cash looks like 15-20 years out on a rental property, it's phenomenal. Also, as I'm sure everyone knows, the transactional costs of exiting a property are egregious. Might as well hold onto what you've got as long as it's not an uneconomic endeavor.

 

If you're only looking to hold onto it for another couple of years, then perhaps it might not make as much sense.

 

Thanks. I don't think there would be free cash flow as our rental price would probably just cover our current principal+interest+property taxes. But maybe I didn't totally understand what you were implying.

 

I'm saying if you run the numbers for 15-20 yrs (or some period of reasonable length), you see the compounding benefit of even 2-3% inflation adjustments on rental income. Presuming you've got a fixed mortgage, the only real variables on the cost side are property taxes, mgmt fees, and maintenance. During that period, you will have also (presuming you've got a good rate on a fixed mtge) paid down a large chunk of your principal, such that if you did ever decide to sell, you've increased the equity value substantially...

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I don't know anything about renting a house, but I know that there's a pretty big community of people who are obsessed with all kinds of real estate investing, being landlords, etc. I'd start by digging around this site:

 

http://www.biggerpockets.com/

 

http://www.biggerpockets.com/renewsblog/2013/01/04/how-to-rent-your-house/

 

Sorry if it's not what you're looking for.

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Do you realize the damage a bad tenant can do?  If you have a current gain you would probably be giving up the tax free aspects of it. You probably can't deduct the loss as I think I remember you are a M.D. and your income is probably too high.  You should talk to your tax advisor befor doing anything.

jmho

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Do you realize the damage a bad tenant can do? ...

 

This is exactly what I would ask too. A bad tenant can do tens of thousands in damage pretty gosh darn quickly. If you can afford not to have it rented, I would keep it empty while it's up for sale. If you need the money, rent it. A bad tenant is very unlikely, but they can do serious damage.

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You probably can't deduct the loss as I think I remember you are a M.D. and your income is probably too high. 

jmho

 

There is an exception for "Real Estate Professionals".  They can deduct all expenses no matter what income level they're in.

 

I took advantage of that when I was a software engineer... my spouse qualified as a "real estate professional", she was a full time realtor.  It didn't even matter that the properties were in my name and I did all the property management -- we still got to deduct unlimited expenses without being limited by our income levels.

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I don't know anything about renting a house, but I know that there's a pretty big community of people who are obsessed with all kinds of real estate investing, being landlords, etc. I'd start by digging around this site:

 

http://www.biggerpockets.com/

 

http://www.biggerpockets.com/renewsblog/2013/01/04/how-to-rent-your-house/

 

Sorry if it's not what you're looking for.

 

This is super helpful. Thanks!

 

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but he is hiring a professional to manage, so how can he qualify as a "real estate professional"?

 

He would still qualify if his wife were a realtor.  However it would not meet the "active" management test -- it would fall under "passive" criteria if he were to hire a professional manager.  So that would would prevent him from deducting losses against earned income. 

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I don't rent out anything but I read a bit about it over the years.

 

To your bad tenant concern, apparently the best tenants are middle aged single ladies.

Most people default to the "responsible" young professional couple since they usually have a good job having just started their careers etc. Or to families.

 

Typically these types care little of your property and aren't thinking about staying long term. Young couples may have people over regularly on weekends (noise) and families may have young kids (noise).....

 

A single middle aged lady is looking for a long term home, she will let you know of the little problems before they become big ones (families and young couples really don't care about these things if they don't directly impact them) and when you talk to them, the ladies will let you know of everything that's going on in your area. It's like you have a full time employee onsite AND she pays you to be there.  ;D

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A single middle aged lady

 

Would a single middle aged lady rent a $5000 per month house?  :o

 

If she does, can I have her phone number?  :-*

 

..............

 

Seriously, the situation is rather tough. Like Buffett said, currently 30 year mortgage is one of the best investments. So you don't want to lose this asset (even though it's a liability theoretically). However, you might be better of selling and buying while mortgages are still low. Especially if you don't plan to return.

 

If you decide to rent, you either rent for market price and accept that some tenants may cost you (a lot) - there's randomness involved. Or you rent way below market and expect the tenant to be your property manager. This may or may not work - depends on location/etc. Or you leave it empty - which also has costs and issues depending on location, etc.

 

I was looking into a reverse of this: buying property in Florida and being out-of-state landlord. I decided that it's not worth the trouble. However, it depends on what kind of person you are too. Usually this works best for hands-on handyman types even if they manage from out-of-state. They at least know the warts of the house and know if the tenant is scamming them or ruining the property.

 

I've heard some positive stories about using pros to manage the rental, but not many.

 

Good luck

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A single middle aged lady

 

And BTW, depending on the state... in MA you cannot discriminate against families with children, so you cannot tell your rental agency to rent only to single middle aged ladies.

 

And again in MA, if you rent, you have to delead the whole house... since you might not care about your own kids, but you can get sued for $Ms if your tenant kids get lead poisoning.

 

So kinda state-specific issues :)

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A single middle aged lady

 

Would a single middle aged lady rent a $5000 per month house?  :o

 

It was just an example.

 

I'm aware you can't discriminate but I would imagine a property management company could tailor the ads etc toward whomever their target demographic is.

 

When I was a renter almost every place I went to said upon arrival when we/I started asking questions about the place that they had more showings later already booked and they showed the place earlier in the day or the day before.

My wife said the same when she rented.

 

They always want the "out" if you're not their ideal tenant.

Sorry sir, the person who saw the place earlier in the day wanted it and "to be fair", I have to give it to him.

 

Edit: yes, I did miss the 5000 part.  :P

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There have been some good comments on this topic. I will add the following points:

 

1. If you use a management company the activity for tax purposes will most be likely 'passive' in nature and thus any taxable loss you incur (which is most likely factoring in the non-cash expense of tax depreciation on the rental property) you will not be able to deduct on your current return (if you make above $150,000 of adjusted gross income and neither spouse meets the 'real estate professional' rules) and will be carried over to future years or until you ultimately sell the property and 'free-up' the losses.

 

2. The Federal Section 121 capital gain exclusion can still be used (even if you convert your old house into a rental). There are rules regarding this (qualifying and non-qualifying use), but bottom line is that 5 years after conversion (from home to rental property) the Section 121 gain exclusion is not applicable if you sell the property. Note that any tax depreciation claimed on the converted rental will ALWAYS be 'recaptured' and taxed at a higher rate (25%) and can not be reduced by the Section 121 gain exclusion, if applicable.

 

3. I think it would would be money well spent to sit down with a CPA or EA in your state to run some tax projections for you in addition to your own cash flow analysis to give yourself some more ammunition to make the best financial decision.

 

 

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