Rent out our big house and live in smaller rental?

[James]

I currently have a house about 4000 sq ft on a lake in northern WI.  It's about 5 miles from work and school, which is way too far since it keeps me from biking when I'm on call, and we have to drive much of the winter instead of walking.

We listed the house a month ago and haven't had a single showing.  (our realtor said our list price was plenty low to start with, but obviously not, there is just no market for a house like that in our area right now)  Our realtor let us know last week that a doctor who has signed a lease for two years in town is interested in renting, but not buying.  I said we would be interested in renting, but he would have to at least cover mortgage and taxes, which are $2400 per month right now, and prefer a two year lease. (he is coming to see it tomorrow)  The idea would be to get a lease from this guy and rent a place in town for my family with three kids.  I've found a wonderful small 3 bedroom house in town just two blocks from school and less than a mile from work.  I'm going to see it tonight.  I could get a one year lease on that house, and we are planning to leave town next summer for someplace half way across the country.  The house in town is $1100 per month, which I'd be happy with. (there is not much to rent in town, I could only find two places with 3 bedrooms in town)

The idea is that we would avoid both the mortgage and high costs of heating/cooling the big house for the next two years, as well as the cost of frequent travel into town which I calculate at $100/mo in gas alone.  Once the two year lease is over we would hope that the housing market would be turned around enough in the area to sell quickly while still getting back what we owe or slightly more.

Right now we owe $364k and have the house listed for $399k.  To get interest at this point might take dropping the house to $350k.  I purchased the house 4 years ago for $450k, and have spend $50k+ on improvements.  My plan if I don't lease the house is to drop the price by $30k now, and probably another drop down mid spring next year if there is no interest.

My question is whether I'm doing the right thing.  Selling for anything less than $380 is a short sell, which is fine but nothing is selling in the area at ANY price, so I can't guarantee a sell by dropping the price even significantly.  Would leasing for two years be a big mistake, especially given we are planning to leave the area next summer?  I know that despite a lease things can happen and then I'm really out lots of money.  I have the cash flow to tolerate that, but it would really suck obviously and drastically hurt savings.  But worst case scenario we are spending the extra $1100 to live in town, and since we can keep the house costs lower by not living there and are spending less on gas by being in town, the end result would probably be less than $1000 per month loss until we sell.

I would put it in the lease that I would list the house in the last three months of the lease, so hopefully I could sell for what it is worth pretty quickly then, or even make a little cash since I'll be paying down the principle while leasing and hopefully the market will creep up a little.

Anyway, I'm not a landlord at heart, and have a lot of trepidation about this, hoping to get some feedback about my ideas and options, and advice for what to do or not do if I go ahead with the lease.

[AJ]

FWIW, I would rent it to the doctor (assuming his credit checks and everything). Everything you describe sounds ideal (you get a place close to work and school for less than half what you're paying now). I don't have much to add...are you just nervous about becoming a landlord? Renting to a high-income tenet is a good way to start...

[Zoot Allures]

A doctor willing to sign a two-year lease sounds like an ideal tenant! It doesn't sound like a very good time to sell your place. You could certainly incur some unexpected costs as a landlord, but it might still be worth it to keep the property for a while.

I joined the "accidental landlord" trend about six months ago, when the combination of (a) wanting to move closer to work, (b) wanting to rent an apartment for a while, and (c) recognizing the strength of the rental market in my city led me to rent my house out rather than try to sell it. So I was in a somewhat similar position as you, though on a smaller scale (I owe $150K on my $200K-valued house). I, too, felt a little trepidatious about being a landlord for various reasons, so I decided to hire a property manager. You might consider that, though I realize it's not quite the mustachian way. My property manager did all the advertising and background checks, they found my tenants for me, and they take care of all maintenance calls. (They have to call me for authorization of any repair over $200.) I've heard that property managers make a lot of their money on maintenance calls, but so far I haven't seen any gratuitous charges.

The company charged me half of the first month's rent and then 7% of each month's rent thereafter. In months where we don't hear a peep from the tenants, the management fee feels like a bit of a waste, but overall I'm glad I did it this way. My net rental income still covers my mortgage every month plus some. I may sell the house someday when the market is doing better, but I'd love to hang onto it.

[KittyWrestler]

I would rent and hold on to the big house and hopefully the market will turn around for you.. It's too much of a loss for you to take right now. If the doctor can cover all of your cost and your small house cost less, might just do that for 2 years and re-evaluate. I think it's a wise thing to do.

[James]

Just got back from looking at the potential rental in town.  It's certainly very nice, would work just fine.  It would be a huge drop down in space, I don't know the sq ft but I would guess not much more than 1200.  It would certainly work though.

I think the biggest factor at this point is how low I would be willing to go on the rent for my current house.  I'm asking $2400 and I'm expecting one of two answers after he looks at it tomorrow.  Either "No thank you", or some offer much less than $2400.  My current mortgage payment pays $542 of principle each month, and if I subtract that from my mortgage+taxes I come to about $1800.  In other words, at $1800 he would be paying interest and taxes only, and I would be paying principle.  I would also be paying for anything that went wrong with the house.  My gut tells me not to go any lower than $2000, but I really really want to get out of this house.  I would save hundreds over the winter in heating costs, saved gas from walking to work, etc.  And it would be a step in the right direction lifestyle wise.  I had settled myself on being here another year, but now with the possibility hanging out there it's got me wishing.

Anyway, regarding the property manager, that's a good idea.  If I get a two year lease and move next summer then I should look into hiring a property manager for the year I'm out of town.  But as for finding a renter, I don't think they would be of much help around here, but I'll look into it.

[smedleyb]

James, this house is an emotional and financial drag on your life.   I hope you kick its ass.

There is no question renting out the house for 2.4K and moving into a smaller unit for half that amount will put a little more jingle in your jeans.  I'm just wondering if the hassle of moving twice in the  next 12 months and -- more importantly -- not being home to actively market your property (through proper staging, cleanliness, etc) outweighs whatever improved cash flow you might find.  Damn, it's a tough call.  I think if Doc comes up with $2400 for two years, you lean toward renting it.  When you start talking about 2K, maybe less, for rent, the risk/reward tilts the other way.  It seems like a numbers game at this point. 

The house needs to kicked to the curb, but in a way that mitigates some of harm it's done to your balance sheet.  On the upside, I think housing is improving, I think quiet markets are beginning to perk up, I think 30 year rates consistently under 4% will lead many to consider bigger and badder mortgages (you know, the kind of thinking that lead many of us to buy more home than we needed).  There are many reasons to be optimistic about the trend in house prices, etc.  The only question is, does that additional 10-30K in home appreciation offset the time/money/emotion that will still need to go into the house in order to sell 2 years from now?  Also, what's you plan when you move, housing wise?  How does selling this home affect your next home purchase -- or are you renting when you move?  Damn, why are you moving at all -- that sounds exciting too!   

On the other hand, 4000 square feet on the lake?   Sounds absolutely beautiful.   Are you sure you can't make it work a little longer? lol.

 

[James]

James, this house is an emotional and financial drag on your life.   I hope you kick its ass.

There is no question renting out the house for 2.4K and moving into a smaller unit for half that amount will put a little more jingle in your jeans.  I'm just wondering if the hassle of moving twice in the  next 12 months and -- more importantly -- not being home to actively market your property (through proper staging, cleanliness, etc) outweighs whatever improved cash flow you might find.  Damn, it's a tough call.  I think if Doc comes up with $2400 for two years, you lean toward renting it.  When you start talking about 2K, maybe less, for rent, the risk/reward tilts the other way.  It seems like a numbers game at this point. 

The house needs to kicked to the curb, but in a way that mitigates some of harm it's done to your balance sheet.  On the upside, I think housing is improving, I think quiet markets are beginning to perk up, I think 30 year rates consistently under 4% will lead many to consider bigger and badder mortgages (you know, the kind of thinking that lead many of us to buy more home than we needed).  There are many reasons to be optimistic about the trend in house prices, etc.  The only question is, does that additional 10-30K in home appreciation offset the time/money/emotion that will still need to go into the house in order to sell 2 years from now?  Also, what's you plan when you move, housing wise?  How does selling this home affect your next home purchase -- or are you renting when you move?  Damn, why are you moving at all -- that sounds exciting too!   

On the other hand, 4000 square feet on the lake?   Sounds absolutely beautiful.   Are you sure you can't make it work a little longer? lol.

Very good point about moving twice.  On the one hand I really agree about the hassle, on the other hand it would be very nice to get most of the hassle out of the way.  Getting things sold and thinning down our "stuff" is a big part of the hassle, and moving into a small house would get that done.  Then when we moved next year we wouldn't have the hassle of the house and tons of stuff, just the little bit that remains.  So I think it would be a wash in the end between moving twice or saving it all for next year.

I agree about once it gets down to or under $2k, I'm hoping to keep it at $2200 or above.  If they really like it and don't want that kind of rent then they can buy it...  :)

Based on my income I could move away, buy a new house, and just sit on this one until it sells.  I COULD, but it would hurt like hell...  :)  You are right that it's a numbers game, we just don't know the rules of the game (like where the market is going) until the game is over.

[Fuzz]

I think it's a really neat idea. If you can get a rent above $2200 or wherever the numbers work, I say go for it.

It seems like a low risk way to try out something you really want to do. Maybe you'll find out that you really need ~1600 square feet, that you don't like walking in the snow to work, that you miss the larger lot size or the lake view or something entirely different. It sounds like you would be excited for the transition and it's only a year.

Best of luck,

[Dicey]

Hi James,
I've been biting my tongue since your out-of-debt post. I was happy to hear about you kicking so much debt to the curb, but saddened to hear that you still needed to consider a short sale. I have a lot of respect for what you've achieved so far. I also appreciate your thoughtful answers here on the forum. I didn't want to seem critical, and kept my lip zipped. Now, it seems there's a win-win solution in sight. This could be an awesome arrangement. There are tax advantages to consider, which could tilt the equation a little further in your favor. As I've mentioned on another thread, a good CPA is your friend.

You may not be a landlord at heart, but you seem to have a good head and steady hand. If you have a great tenant, I wouldn't be afraid to be an absentee landlord in the future. All the details can be worked out without the aid of a property manager. I've been a long-distance landlord for eight years. With the right tenant, it just ain't that hard. The key is to secure a capable tenant and lay contingency plans for when the "what-ifs?" become "oh, shit!", which they are guaranteed to do at some point. This prospect you have may be a doctor, so the affordability seems to be there, but make sure to check him out as thoroughly as if he was a used car salesman (sorry to any UC Salespeople who might be reading, but your income does tend to fluctuate wildly, which occasionally leads to other flaky behavior). I treat each candidate as if they were applying for a job, which they kind of are. I check references, comb through the applications for anything that doesn't pass the smell test and trust my gut. I also treat my tenants with respect and maintain the house as I would if I were still living in it.

I think you hit the nail on the head as far as purging. Once you go through it, you will be much more aware of what you bring into the house and the potential second move will be easier. The housing market may or may not have improved in two years' time. Either way, you will have the satisfaction of knowing that you went far and away beyond the efforts of many other short sellers. That satisfaction should bring peace of mind to you and who knows? You might avoid a short sale entirely, which would be awesome. Please let us know what you decide. I'm rooting for your continued success. I know you'll make a good decision.
 

[James]

Thanks for all the feedback, I greatly appreciate the encouragement. 
 
We offered the house to the couple for $2400 with a minimum 2 year lease.  We know the 2 year lease may very well be the sticking point, they asked for a 1 year lease with a probable extention to 2 years, but I'm just not willing to take the risk it would only be for 1 year.  If only renting for 1 year then I would rather keep the house on the market and hope for a sale next year.
 
Right now my biggest concern is that they will say no and I'll feel guilty for holding firm on the price and 2 year lease, but we can afford to stay in the house and selling is our real goal anyway.  If they turn us down I'll probably let them know I'd be willing to go down to $2200, but I'm not sure that money is really what would hold them back, and I'm not going to do a 1 year lease.
 
But at the end of the day I'm really hoping they take the house, it would definitely be huge for us to move, downsize, and learn to live with less space.  My calculations for savings over the two years is $30-40,000, depending on how much I had to spend on upkeep for the house, etc.

[James]

Well, to close off the the thread, we were unable to settle on a deal for a two year lease.  It wasn't about the money, they just wouldn't do two years at any price, and I just can't see having to deal with this again next year.  This way I can save up as much as possible over the next year and drop the price as low as possible to try and get it sold.

I'm sad it didn't work out, I figure it was worth $35,000 over the two years as opposed to paying the mortgage over that two years, even figuring in some expenses for maintenance.  But if we can sell the house over the next year or so that will be even better than the lease.  Of course if I can't sell the house over the next 14 months I'm really going to be hurting trying to move across the country with the house sitting here and $2400 a month going into it, but not much I can change about that.  Maybe I can find a renter then...  :)

Thanks for all the input, it was helpful to be able to write things down and have feedback.  Hopefully my wife and I can still continue working to get rid of stuff and be even more ready to downsize when the time comes.  And being mustachian with our spending remains the key component we can control at this point.

[smedleyb]

Sorry it didn't work out James.

Since this is a numbers game, any chance of renting the house over the summer one week at a time?  I pictured you and the fam roughing it at a campground while some family pays you $1200 a week to sleep in your beds.

Just a thought.

(edit:  I forgot to add don't hesitate to try to sell the property yourself.  If you can link up with a prospective buyer who's willing to pay you  360K for the house, then do it.  Frankly I feel no obligation to real estate agents, and cutting out their commissions to get yourself out of an emotional and financial drag of a house is an acceptable tactic, IMO.)

[James]

It's not a bad idea to rent by the week, but probably not something we would do.  Since we aren't hurting financially, it wouldn't be worth it to us.  If it came to that I could pick up per-diem work and make money that way easier than renting the house out by the week.  We are also in an area of many lakes, so there are quite a few houses on lakes people can rent by the week.  And our lake isn't a prime one for that purpose.  But it's a good idea if we end up moving, any extra would help and if we weren't in the house it wouldn't be hard to get something for it during the summer.