Author Topic: should I turn my home into a rental?  (Read 4863 times)

solon

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should I turn my home into a rental?
« on: February 02, 2015, 02:09:02 PM »
I want to sell my home, but I'm worried I may not be able to get what I owe out of it.

A friend of mine approached me lately and asked if I'd be willing to rent it to them. I initially tossed the idea of renting it out, because I didn't think I'd be able to find a renter. I don't want to become a real estate investor, but I might be willing to rent it for a while until the value increases enough to make it worth selling.

So the question is, how do I determine what to charge? Obviously, I need to clear my mortgage, taxes, and insurance. What else should I add on top of that?

thedayisbrave

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Re: should I turn my home into a rental?
« Reply #1 on: February 02, 2015, 02:12:15 PM »
You need to look at what similar properties in your market/area are renting for and go from there.  If your property has certain features that others don't have, such as hardwood floors or upgraded appliances or granite countertops, you can charge a little bit more.  Ideally you'd get enough in rent to not only cover mortgage, taxes, insurance, BUT ALSO maintenance/repairs and vacancy.  Some landlords purposely charge less than market rent so that they have a flood of applications and can be pickier with the tenant they want.  YMMV.

Edit to add: I use Rentometer (www.rentometer.com) to ballpark my rental figures.
« Last Edit: February 02, 2015, 02:14:18 PM by thedayisbrave »

neo von retorch

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Re: should I turn my home into a rental?
« Reply #2 on: February 02, 2015, 02:13:04 PM »
There's a Real Estate and Landlord forum here which may give you more experienced, laser-focused answers (and questions) but I'll give it a shot.

First - there's a rule of thumb... charge at least 1% of your purchase price for rent, because between all of your costs/overhead, this is about where you hit a sufficiently positive cash-flow rental to make it worth it. Below that and you risk spending more on maintenance/repairs, vacancy and tenant search costs than you make.

Here's a simple experiment you can run... if you "clear mortgage, taxes and insurance" but barely... 11 months out of 12, how much money do you make each month on average?

Dicey

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Re: should I turn my home into a rental?
« Reply #3 on: February 02, 2015, 02:53:53 PM »
IMHO, the 1% rule is not all that helpful. Sorry if that sounds harsh, but there are too many other variables for that rule to be very reliable. I'd look at Zillow (very general, but a decent starting place), check CL (warmer) and talk to realtors in your area (better still). Look at the grocery store for any local renter's guides. Go look at a couple of nice apartment complexes to see what they're getting for the same number of beds/baths. Of course, a SF home should fetch more, but apartments are competing for the same renter, so it's useful information.

Besides all that, you'll sleep better at night if you have a stash of cash to cover vacancies and repairs. How much depends on the amount of your mortgage and your other savings. I'd say three to four mortgage payments (including taxes and insurance) as a minimum.

neo von retorch

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Re: should I turn my home into a rental?
« Reply #4 on: February 02, 2015, 03:29:11 PM »
You've hurt my feelings and destroyed my pride! No, but seriously, it's a "rule of thumb," not at all a rule. The amount people spend on interest and taxes varies wildly, as does maintenance and repairs depending on the initial condition and age of the property. If you have no idea, it's a guideline that might work for you. In other words, if you have a $200k house but rent for a house like yours is $1000, good luck covering all of your expenses.

I think I personally break the 1% rule because I rent out individual rooms and pay utilities. So while my "gross rents" are just above the 1% rule, it's "bad" because the 1% rule doesn't factor in you paying utilities. But I pay almost nothing in interest, have low taxes and all of my expensive maintenance items are behind me... knock on wood. (It was my primary residence for 7 years, so the repairs had to happen whether or not it was an investment property.)

Dicey

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Re: should I turn my home into a rental?
« Reply #5 on: February 03, 2015, 10:16:35 AM »
I actually edited this post because I thought it was too long. I originally said that the 1% rule of thumb doesn't work in high COLA areas, but I realized that my perspective is probably permanently warped from living in CA all my life, so I took it out. Sometimes I am so green-eyed at what money can buy in other parts of the country... I figured since it was a "rule of thumb" you wouldn't take it as a personal criticism. I know for a fact that ice cream is an excellent tool for curing hurt feelings and damaged pride, except for those who are lactose intolerant, of course. In that case, I recommend Rice Dream :-).

arebelspy

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Re: should I turn my home into a rental?
« Reply #6 on: February 03, 2015, 03:56:54 PM »
There's a Real Estate and Landlord forum here which may give you more experienced, laser-focused answers (and questions) but I'll give it a shot.

First - there's a rule of thumb... charge at least 1% of your purchase price for rent, because between all of your costs/overhead, this is about where you hit a sufficiently positive cash-flow rental to make it worth it. Below that and you risk spending more on maintenance/repairs, vacancy and tenant search costs than you make.

The 1% rule is for deciding about making a purchase (and it's really rough, you still want to run the real numbers), and you base it on actual rent and actual purchase price and rehab and closing costs.

You don't just arbitrarily set your rent to 1% of your purchase price, because the market doesn't care what you paid or what it's worth - it cares what other similar places go for.

If your house is worth 200k, but similar ones rent for 1k/mo, you trying to rent it for 2k (1%) will get you nowhere, just a lot of vacancy.

The 1% rule, in other words, has nothing to do with setting your rent, but whether or not you should buy given what the rents actually are.
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solon

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Re: should I turn my home into a rental?
« Reply #7 on: February 03, 2015, 08:37:20 PM »
Thanks rebs. I'm aware of the 1% rule, but as you pointed out, it doesn't really apply here. Also, I'm not really looking to maximize rental income. I just want to keep my head above water long enough for the value of my house to rebound enough so I can sell without losing money.

So, I was trying to think of a nice simple formula for a rent value that would make sense. e.g. principle + interest + PMI + taxes + insurance +...

What else should I add? Maybe an amount for maintenance? How much? An amount for admin expenses? How much?

arebelspy

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Re: should I turn my home into a rental?
« Reply #8 on: February 03, 2015, 08:51:40 PM »
You're thinking of this wrong.

You can calculate that number to determine what your return is, but not what you should charge.

In other words, the question from the OP:
So the question is, how do I determine what to charge? Obviously, I need to clear my mortgage, taxes, and insurance. What else should I add on top of that?

Is the wrong question.

You don't determine what your rent is based on needing to clear your costs.  Your renters don't care about your costs.  You determine what your rent is based on what the market says it is (using MLS rental comps, craigslist, rentometer/zillow rent estimates, etc.). That's how you determine what to charge.  Then you look at those factors (expenses) you asked about and compare it to the rent and see how much you're making (or losing).
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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neo von retorch

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Re: should I turn my home into a rental?
« Reply #9 on: February 04, 2015, 07:54:57 AM »
You don't just arbitrarily set your rent to 1% of your purchase price, because the market doesn't care what you paid or what it's worth - it cares what other similar places go for.

Ha nope, not what I meant though I did type "charge" just meaning - in making THIS decision, can you charge at least 1%? As a starting point anyway.

To further illustrate with my anecdote, last time I updated my spreadsheet (9/2014) I had this:
Home Expense   ($88,881)
Utility Costs   ($23,002)
Months Passed   70

So an average expense of just under $1600/month. I currently get $1630/month in gross rent. That's a little rough, barely positive, but as I said, a lot of big past expenses (including closing costs, refinances) put that number where it is and I'm optimistic I won't be replacing ANOTHER HVAC and ANOTHER ROOF in the next few years since both are less than 5 years old. In addition, my interest cost per month is the lowest it's ever been and continues to slowly decrease. My actual recurring expenses (interest, taxes, insurance, utilities) total about $920 right now. So each month that I make $1630 and spend $920 helps to chip away at my past expenses.

frugalnacho

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Re: should I turn my home into a rental?
« Reply #10 on: February 04, 2015, 09:45:53 AM »
You don't just arbitrarily set your rent to 1% of your purchase price, because the market doesn't care what you paid or what it's worth - it cares what other similar places go for.

Ha nope, not what I meant though I did type "charge" just meaning - in making THIS decision, can you charge at least 1%? As a starting point anyway.

To further illustrate with my anecdote, last time I updated my spreadsheet (9/2014) I had this:
Home Expense   ($88,881)
Utility Costs   ($23,002)
Months Passed   70

So an average expense of just under $1600/month. I currently get $1630/month in gross rent. That's a little rough, barely positive, but as I said, a lot of big past expenses (including closing costs, refinances) put that number where it is and I'm optimistic I won't be replacing ANOTHER HVAC and ANOTHER ROOF in the next few years since both are less than 5 years old. In addition, my interest cost per month is the lowest it's ever been and continues to slowly decrease. My actual recurring expenses (interest, taxes, insurance, utilities) total about $920 right now. So each month that I make $1630 and spend $920 helps to chip away at my past expenses.

What if you sold the house and invested the equity in VTSAX?  Would you end up making more with that approach?

DoNorth

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Re: should I turn my home into a rental?
« Reply #11 on: February 04, 2015, 10:30:14 AM »
depends on how much money you're ok making or losing.

I bought my house for $400,000K in 2012 in Alexandria, VA loan,no money down, 3.375% interest.  As a primary home, it was tax exempt so I paid $1800 month ($1100 interest; $700 principal)  finding an $1100/month 4 bed 3 bath house on 1/3 of an acre a mile from the metro in the DC area (near most major military bases and the Pentagon) would be nearly impossible so it made great sense to buy at the time.

  I'm retiring this fall and will rent the house out.  It should rent for $2850 so once I add back in the property taxes, I'll gross about $500/month.  Subtract 10-20% of that for maintenance each year and it still should net $4K or more in profit.  obviously $2850 is nowhere near 1%, but it's still a reasonable proposition as one small part of an overall passive income strategy. 

neo von retorch

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Re: should I turn my home into a rental?
« Reply #12 on: February 04, 2015, 10:59:22 AM »
What if you sold the house and invested the equity in VTSAX?  Would you end up making more with that approach?

So if we're just talking about current monthly income and expenses, I'm netting about $700 / month. If I sold the house, in month one I would have maybe $60,000 (equity) to invest. Assuming 7% average annual return, that's $350 gained each month. Feel free to correct any basic (or advanced) math mistakes and assumptions.

mbl

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Re: should I turn my home into a rental?
« Reply #13 on: February 04, 2015, 11:59:25 AM »
Never rent to friends or family.
Nope....don't do it.

Landlording is a business.  If something goes wrong and they're not able to pay are you going to be willing to take the steps you need to?

Don't rent to friends.
Trust me it will save you from a world of aggravation.

davef

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Re: should I turn my home into a rental?
« Reply #14 on: February 04, 2015, 01:46:01 PM »
I rented to a friend for 5 years and it was a great experience.
However, first and foremost it was a friend I trust who was good with money.
Also, don't think renting to a friend means you don't need a contract, you do.

My reasons were similar to yours, work moved me in 2009 and the market was down, I had a friend that needed a place.
My Mortgage all inclusive was right at $1000 per month, I rented it with utilities for 1800. My costs, including about $100 per month set aside for maintenance was about 1300. All told I profited almost 500 per month, plus made another $350 per month in equity.