Author Topic: CASE STUDY: Can we rent out our house to escape the suburbs?  (Read 3099 times)

fallstoclimb

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CASE STUDY: Can we rent out our house to escape the suburbs?
« on: January 30, 2017, 07:38:13 AM »
We aren't approaching real estate as an investment per se, but instead want to try living in the city because we think but aren't sure that we made a mistake buying a house in the suburbs.  I'm hoping to be able to rent out our house for a few hundred more than the mortgage, and find a rental in the city for a hundred or two less, but I'm not sure how doable either of those things are.  There's a lot of unknowns right now.

Roughly how much more should you charge than the actual mortgage price to cover maintenance and other costs?  And how do you assess what you can rent a place out for?  There's very few SFH on the rental market in my area, although I think there's some demand - we're in a good school district, and not too far from a military base. 

Also, how much cash do you feel like you need to have on hand in order to be a landlord?  We have 17K in our emergency fund now, and have recently upped our cash savings to 1K/month.  We also have some money in a couple of Roth IRAs. 

Below are some of the financial details, as you can see we don't have a lot of equity in our house.  We were more focused on keeping mortgage payments low to allow for financial flexibility.  We save a lot in our retirement accounts, rather than put money into the house. 

Market Value: 315K?
Original Purchase price:  300K
Original Mortgage Amount: 280K
Interest Rate: 3.75%
Mortgage Term: 30 years
Term remaining: 26 years
Amount remaining on mortgage: 267K
Gross Rents: ??
Principal and Interest (the P&I of your PITI - should match with the above info):  1334
Taxes and Insurance (the T&I of your PITI): 353
HOA costs: 0
Deferred maintenance notes: nothing major that we know about, but it is an older home (1955)


Last question:  I think we'd allow dogs and cats, we have both and they've never damaged anything irreparably.  Is this really a risk?

Cromacster

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Re: CASE STUDY: Can we rent out our house to escape the suburbs?
« Reply #1 on: January 30, 2017, 07:50:04 AM »
Following.

I can't give to much specific advice to the real estate side of things, but I am interested to hear some of the answers. 

Why do you want to keep the house and not just sell?

My wife and I have had the lets move back to the city discussion several times over the past year.  So far we've landed on staying put due to the dog and the convenience having a yard brings.  We also came to the conclusion that one of our reasons stem from having to much space that we have filled with unnecessary stuff.  So we are working on getting rid of some stuff and reducing the clutter.

gregg687

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Re: CASE STUDY: Can we rent out our house to escape the suburbs?
« Reply #2 on: January 30, 2017, 07:56:01 AM »
Someone else will have to run the numbers for you, but I did something similar.  I did not like living in the suburbs after buying a house there.  My house was cheaper at 235k and worth somewhere around 250k.  I've been able to rent it out for 500-600 more than my total payments each month but have had to deal with some tenant issues.  Had I sold it then I would have lost somewhere between 5-10k after fees and such.  Selling it now I would probably make 10-15k but I plan to hold onto it a few more years. 

It was the best decision I ever made though as I am so much happier downtown.  I rented a room from a friend in the city, saved up more money, and recently bought a house in my favorite part of the city.  There are a lot of unknowns with anything, but it worked out well for me.

Good luck.

fallstoclimb

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Re: CASE STUDY: Can we rent out our house to escape the suburbs?
« Reply #3 on: January 30, 2017, 08:54:07 AM »
Glad to hear we're not the only ones struggling with the suburbs!  It won't save us much money (if any) to move downtown, as we're looking at renting a rowhome with a small yard, because of the dog.  We'll probably also want to spend on a security system or something, because we have a lot of bikes, and it would break our heart if they were stolen.  Plus, it will actually make our commutes a little bit worse.  But with the exception of the state park, these suburbs are not really working out for us.  All of our friends are in the city and it takes too long to get to them.  I miss having transit options.

We want to keep the house in case we hate the city, which is possible.  We've never lived in a city proper, and this one is infamously unsafe - we'll be in one of the safer areas, but it's just a tough town.  Plus we may miss the park too much.  We figure we can rent out our house, rent a place downtown, and if we hate it after a year we can just move back.  I also do like the idea of keeping one property so we're building equity somewhere.  And, I like that mortgage interest deduction on our taxes, although if we are not living in the residence do we lose that?  That would be a major bummer.  We donate ~6K a year to charity and its really nice to write that off. 

I'll be honest, my minimalist heart is so excited at the thought of having an actual reason for my husband to downsize his crap.  Its hard to make the argument when we have a whole house at our disposal, although I still try. 

Ensign1999

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Re: CASE STUDY: Can we rent out our house to escape the suburbs?
« Reply #4 on: January 30, 2017, 09:38:18 AM »
I'm sure there are much more experienced folks on here that can chime in, but here is a start to your answer:
-Following the 1% rule, you would need to rent it out for around $3,000 a month based on your purchase price of $300,000.  You can see that this is well above your PITI, but that amount takes into account many of the operating costs associated with having a rental (maintenance, vacancy, evictions, management, ect).
-The other rule is the 50% rule, in that you can only count 50% of rents as profit and the rest should be thought of as operating costs.
-While neither of these rules are hard written in stone, they are a good baseline and following them gives you about a 6% return on investment (think a $100,000 property would rent for $1,000 a month following the 1% rule.  After 12 months you would have $12,000, but with the 50% rule you only count $6,000 of it as profit.  A $6,000 return on a $100,000 investment is a 6% return).
-If you can manage the property yourself and all the major systems (roof, ac, heat, ect) are newer, then you might be able to count a larger percentage as profit.
-Once you move you and turn the house into a rental, it becomes a business asset and you will not longer be able to use the mortgage interest as a deduction on your taxes.  Instead it becomes an offset to your rental income.

You are in a bit of a different situation as you are looking into only keeping the property as a backup plan if you don't like living in the city vs keeping it as an investment property, so if the numbers do not work out as a great rental, then keeping it for a little while could make more sense in your case.  The other option would be to sell, walk away with some cash that you invest and hopefully get a better return on, and if the city doesn't work out, then you find an area that you feel will better suit your lifestyle than the burbs that you are in now.  If you are not happy now, will you be happy moving back a year from now if the city doesn't work out?

gregg687

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Re: CASE STUDY: Can we rent out our house to escape the suburbs?
« Reply #5 on: January 30, 2017, 09:48:14 AM »
Rowhome?  Infamously unsafe?  99% sure were in the same city.  My bike was stolen the first week I moved back from my patio but I have not had any other problems.  The city has been on a huge upswing for years and is becoming even more desirable with a certain business growing like crazy.  My commute got longer and I would not have saved money unless I rented a cheaper room from a friend. There are some major drawbacks if you haven't lived here before- parking can be a pain, the public transit options are not great (if this indeed is the same city), and late at night you will still want to uber home for safety.  I'm still much happier in the city. 

I wanted to keep my home for similar reasons as well.   After you pay the high closing costs that our state has it only made sense for me to hold on to it and deal with renting it out.  You still get deductions but they are not as significant as before. 

fallstoclimb

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Re: CASE STUDY: Can we rent out our house to escape the suburbs?
« Reply #6 on: January 30, 2017, 11:23:50 AM »
@gregg - 'a certain business growing like crazy' seals it, definitely the same city.  I'll PM you for details if you don't mind sharing!

@Ensign, thanks for the start on the finances.  You are right that we aren't thinking of this like 'investment income', so I don't think the usual numbers apply here.  Which I hope is OK, as we certainly won't get anything close to 3K for rent, I think 2K is a stretch.  We will manage it ourselves for at least the first year, I don't think it will be too much trouble.  We have a friend who does property management  in the area who might be willing to help us out as well. 

We really aren't ready to sell, if the city doesn't work out there's no other suburb I'd prefer more than this one.  We get by with one car and can access the state park extremely easily.  I think there's a decent chance that after a year or two in the city we'll feel like we scratched that itch and will be happy to settle down in the suburbs again.  (Or, we will leave this area entirely, in which case we will sell the house then unless renting it makes financial sense.)

Overflow

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Re: CASE STUDY: Can we rent out our house to escape the suburbs?
« Reply #7 on: January 30, 2017, 02:04:19 PM »
@gregg - 'a certain business growing like crazy' seals it, definitely the same city.  I'll PM you for details if you don't mind sharing!

@Ensign, thanks for the start on the finances.  You are right that we aren't thinking of this like 'investment income', so I don't think the usual numbers apply here.  Which I hope is OK, as we certainly won't get anything close to 3K for rent, I think 2K is a stretch.  We will manage it ourselves for at least the first year, I don't think it will be too much trouble.  We have a friend who does property management  in the area who might be willing to help us out as well. 

We really aren't ready to sell, if the city doesn't work out there's no other suburb I'd prefer more than this one.  We get by with one car and can access the state park extremely easily.  I think there's a decent chance that after a year or two in the city we'll feel like we scratched that itch and will be happy to settle down in the suburbs again.  (Or, we will leave this area entirely, in which case we will sell the house then unless renting it makes financial sense.)

Hi fallstoclimb,

In regards to rent, hopefully your friend in property management could give you a good estimate for what it would go for. If not, you could use a tool like rentometer.com to get another estimate. Go to craigslist and look for anything comparable that might give you a hint at your rental market value. Look for major things like #bedrooms and #baths, and then try to adjust your figures based on differences in the property (duplex vs. single family home, basic finishes vs. high level finishes, yard size, schools, etc). Rent prices are an inexact science.

Unfortunately, we don't get to set the rent based on what our mortgage payment is (that would be great!). Instead we have to rent at what the market will handle. If you were buying a rental, than you would have to think through those items, but your situation is a little different.

Say you can get $2,000/month for your house. Your PITI is 1687, which leaves ~$300 a month left. We still need to take into account repairs and maintenance, capital expenses (big ticket items like roof, appliances, HVAC), and vacancy. On the conservative end you should budget 15-20% of your income to those items. Depending on your location, age and condition of the house, it could be less or more. If you have zero vacancy and very minor repairs over the next 3-5 years, great! That might happen for a few months, but over enough months and years, you will see your average expenses rise to a higher percentage of your income. You need to build in some of those numbers into your budget.

If we take the low end of 15% for expenses then you are looking at $300 a month. Bringing your total profit to zero. If your R/M, vacancy, and other expenses crawl up to 20-25% (very common numbers) than the property will be costing you a couple hundred bucks a month to keep. (BTW, if you did decide to go with property management, thats usually another 8-10% of your monthly income).

So here is a question in front of you (one of many): Are you willing to pay up to $200-300 a month to rent your house while you go on your few year experiment/adventure living in the city?

If you say yes, thats totally great. Living in the city might very well be worth paying a few hundred bucks a month on your old house. Just go into this adventure with a full understanding that it will likely cost you some money. The way the numbers look on the back of a napkin, renting will cover the majority of your house expenses, but not all.




Jon Bon

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Re: CASE STUDY: Can we rent out our house to escape the suburbs?
« Reply #8 on: January 31, 2017, 05:17:43 AM »
I guess I can answer your question with a question. How are your finances currently? What is your savings rate? What other debts do you have?

This is an experiment you will do to see if living in the city makes you noticeably happier, NOT to make money on a rental. The numbers for your house are not very good. In my experience SFH are never a good long term (rental) investment. Most folks who rent out SFH are usually accidental landlords kind of like you plan to be.

If you want to try it for a year (and have a sound financial situation) go for it, but it will not make you rich. The numbers are not that good and a few months vacancy or the need for a new roof would kill your margins.

I would play this very safe. Have a lease signed on your house BEFORE you sign a lease in the city. Screen the crap out of your tenants, and get a full months security deposit. Misjudging the rental market in the suburbs could be very costly. You currently have a Dog so you would probably be ok allowing them is my guess. But charge extra, a lot extra! I would do $200 or more for a non-refundable security deposit and pet rent of at least $50 a month depending on the animal. 

Have you spoken with a local realtor? They usually can eyeball a property and give you a range, that could affect your decision. All in all this is not all that risky if you make sure you are not paying rent and a mortgage, good luck!




ChpBstrd

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Re: CASE STUDY: Can we rent out our house to escape the suburbs?
« Reply #9 on: January 31, 2017, 01:12:30 PM »
There's another rule: "If you wouldn't buy it, sell it."
It sounds like you wouldn't buy your suburban house again. By that rule, you should sell it.

That raises the question of how much the option to return to the suburbs after a year or two in the city is worth to you. You already know if you move back to the burbs, you won't like it. So are you preserving an option with a negative value?

Sounds to me like you are avoiding the sunk cost of closing costs. To test this theory, ask yourself: If selling the suburban house was as easy as selling a stock in an online brokerage account, would you do it? If you'd click that sell button in a heartbeat, you're trying to avoid closing costs.

I've been there - done that. I absolutely had to buy a house, then realized I hated it. Sold and bought another house closer to work, but it was too expensive and big, and now I feel shackled. There is value renting 5 or 6 different places before locking into a purchase you might discover you don't like. Consider selling out and moving around Chicago, St. Louis, or New Orleans or wherever you are every couple years. At the end of this journey, you'll know precisely what you want and you'll only pay closing costs once ever again.

J_Stache

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Re: CASE STUDY: Can we rent out our house to escape the suburbs?
« Reply #10 on: January 31, 2017, 02:03:54 PM »
I'd try to avoid renting to dog or cat owners, especially since you have animals of your own living there.  Some animals (cats especially) are very territorial and may decide to mark their territory all over the house when they smell your cat that lived there before them. 

Start off looking for non-animal owners and only accept pets if you can't rent to anyone with them.

fallstoclimb

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Re: CASE STUDY: Can we rent out our house to escape the suburbs?
« Reply #11 on: January 31, 2017, 04:41:47 PM »
Thanks to everyone for the feedback!

@J_Stache, good point about animals being territorial, I hadn't thought of that

@ChpBstrd and others -- I'm not really giving our current housing situation credit, there are things we absolutely love about it.  I think its entirely possible that we'll move to the city, be overwhelmed by traffic and lack of greenspace and safety concerns, and come running back to the suburbs.  I honestly put it at about 50-50.  And we live in the best suburb in our state (in my mind), so this is where we'd come back to.  Yeah I'd probably opt for being right next to the state park, all else being equal, but those house are usually 100K more so....all else is not equal!  But this is more about not being emotionally ready to give up our house, rather than any concern over closing costs, that literally had not crossed my mind.  And surely its good to be building equity somewhere, right?  (But, again, this is more emotional/logistical than financial)

@Overflow, yeah, I think we are willing to do this even if it means we are basically paying a couple hundred a month to do it.  Obviously we wouldn't continue that indefinitely, but for a year or two, sure. 

For all those who asked about our finances, we're doing great overall by my standards.  45% savings rate, no debts beside the mortgage a bit cash light but should have 20K in the emergency fund in a couple months, with some more cash available in our Roth IRAs if totally necessary.  Both have secure jobs, although I'm a fed so I don't know what my future really is, but that would be a intentional choice, not a layoff, etc. 

Also, general question I'm not really getting --- why do maintenance costs play into this?  We'll be paying for those whether we are living in the house or not (and since we are renting in the city, we won't be paying those on the city house), so financially I see that as a wash?  Am I not thinking about this correctly?  I get that a property manager would be an extra cost (probably won't go that route), as would a vacancy as we'd be paying both rent and mortgage that month.  But maintenance just goes along with owning a home.

Last thing, I am more concerned about losing the mortgage write-off, as I feel like that has helped us lots in the past....any thoughts there?  I mean, sounds like I'll just have to deal with that, probably.

former player

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Re: CASE STUDY: Can we rent out our house to escape the suburbs?
« Reply #12 on: January 31, 2017, 05:30:18 PM »
My rentals are both in a rural area where allowing pets makes them much easier to rent and renters less likely to quibble about the rent charged, so it is worth it to me to allow pets, but

1.  I specify the particular pets on the lease, so that I do at least know that they are housebroken and healthy to start with and that no other pets that I haven't checked (such as a new puppy) should be coming in without permission, and

2.  I have a higher deposit for damage, plus cover for complete professional cleaning at the end of the tenancy.


ChpBstrd

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Re: CASE STUDY: Can we rent out our house to escape the suburbs?
« Reply #13 on: January 31, 2017, 07:10:13 PM »
If you're 50/50, a move might be to drastic a move. Just AirBnb seven or eight nights in various places/neighborhoods in the city. Do it on days you work. Yea, it'll cost a few hundred, but compared to a purchase/rental mistake that's nothing.

Overflow

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Re: CASE STUDY: Can we rent out our house to escape the suburbs?
« Reply #14 on: February 01, 2017, 09:16:34 AM »

Also, general question I'm not really getting --- why do maintenance costs play into this?  We'll be paying for those whether we are living in the house or not (and since we are renting in the city, we won't be paying those on the city house), so financially I see that as a wash?  Am I not thinking about this correctly?  I get that a property manager would be an extra cost (probably won't go that route), as would a vacancy as we'd be paying both rent and mortgage that month.  But maintenance just goes along with owning a home.


The reason to factor in maintenance is because you are comparing renting your house vs. selling it.

If you sell it, then no on going maintenance expenses.

If you keep it, then you need to budget for them.

Generally, you are evaluating renting your house as an investment. Thats why you need to consider the income and expenses to determine if its will be a profitable effort (if not profitable, than how much will it cost you).


fallstoclimb

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Re: CASE STUDY: Can we rent out our house to escape the suburbs?
« Reply #15 on: February 01, 2017, 04:05:01 PM »

Also, general question I'm not really getting --- why do maintenance costs play into this?  We'll be paying for those whether we are living in the house or not (and since we are renting in the city, we won't be paying those on the city house), so financially I see that as a wash?  Am I not thinking about this correctly?  I get that a property manager would be an extra cost (probably won't go that route), as would a vacancy as we'd be paying both rent and mortgage that month.  But maintenance just goes along with owning a home.


The reason to factor in maintenance is because you are comparing renting your house vs. selling it.

If you sell it, then no on going maintenance expenses.

If you keep it, then you need to budget for them.

Generally, you are evaluating renting your house as an investment. Thats why you need to consider the income and expenses to determine if its will be a profitable effort (if not profitable, than how much will it cost you).

Oh, right, this makes sense.  Because the alternative is we could just sell. 

Thanks to everyone for all the input, we are quickly getting very excited and very serious about this.  It sounds like basically it will more or less work financially, at least in the short term.  If we decide to stay in the city, we will reevaluate the finances of the rental. 

norabird

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Re: CASE STUDY: Can we rent out our house to escape the suburbs?
« Reply #16 on: February 02, 2017, 08:42:36 AM »
I would say just do it and reevaluate after a year. I don't think you need to make it pass muster as an investment situation, it's just a trial balloon.

marion10

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Re: CASE STUDY: Can we rent out our house to escape the suburbs?
« Reply #17 on: February 02, 2017, 12:06:44 PM »
We did the same thing a year and half ago. Kids were grown and the commute was killing us. We had a big estate sale, donated a lot of stuff, rented out the house and rented a condo in the city. We got a good deal on a property manager who charged us only $50 a month plus one month rent. We probably should have priced a little higher- we had 7 applications in 3 days. The property manager took care of showings and screenings, etc. He collects the rent and handles any maintenance issues which have been minor.  We have good tenants who renewed a second year.
Reason for renting was to have a fall back in case we did not like city life.  Also, renting out the house was easy compared to staging and showing an occupied house, particularly with a dog.  We have thought about keeping it as investment property, since the mortgage is almost paid off, but I think we are going to list it soon.

Since we have owned to house almost 30 years, we have significant capital gains, if we continue to rent it, we would lose the capital gains exemption- although there are ways to get around it- we plan to live in the city . probably renting a few more years and then buy a condo in our old community. We need the funds from the house to do that.  So we will sell the house and then park the money somewhere for a few years until we are ready to buy.

Ensign1999

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Re: CASE STUDY: Can we rent out our house to escape the suburbs?
« Reply #18 on: February 02, 2017, 12:50:06 PM »
I'm not great at taxes and some of the tax implications of turning a house into a rental and then maybe turning it back into a primary residence or selling it after a certain amount of time...but I want to say that there are potentially some significant tax implications if you decide to stay in the city and then sell the "rental" if you wait to long.  Again, I'm guessing based on what I think I've heard, so I would consult a CPA or other tax professional on the tax impacts the potential outcomes have.

That being all said I think if you move to the city, rent your property out for more than a couple of years, and then decide to sell you would end up having to pay capital gains tax on any profit that you gain from selling your now business asset (assuming you make a gain).  I believe the cost basis for the asset is what you paid for the house when you originally purchased it.  The basis would be adjusted lower if you depreciate the value of the property to help offset the rental income.  The profit/gain would be the difference between what you sell the property for and what the adjusted basis is.  This gain is taxable.

I think if you move to city, rent your property out, and then move back at anytime and live in it for more than two years, then you will have converted your property from a business asset back into your primary property and not be subject to the capital gains tax.

Again, take all this with a huge grain of salt.  Talk to someone in your area that knows the tax laws with respect to turning houses into rental business assets and back.  The difference in taxes you pay if you decide to sell could be significant and because I believe there are timelines associated with them will play into how you decide to go about your experiment living in the city.

adamcollin

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Re: CASE STUDY: Can we rent out our house to escape the suburbs?
« Reply #19 on: February 06, 2017, 04:45:52 AM »
1) Renting your home can be a good option.
2) You must find a pet-friendly home if you have pets.