First time landlording. What do I need to know?

[APowers]

We own our home outright (no mortgage). We are planning on moving out of state and renting out our house. We're planning on hiring a property manager, since we won't be in the area to manage it ourselves.

I think it can rent for close to $1,000/mo, but it may only rent for $900-950. I'm not sure.

I'm assuming the PM will charge 10% of gross rent-- that seems to be the going rate (around here at least).

And I'm assuming we'll set aside another 10% (of gross) for ongoing maintenance.

My taxes are ~$100/mo, and our current homeowners insurance is $40. I asked my insurance company for a quote to switch over to a landlord policy; I don't know if that will push my rates up or down.

After management, maintenance, taxes, and insurance, I figure it'll cash-flow ~$600/mo. Does that sound reasonable? Are there any other things we should be aware of or ask about?

[SwordGuy]

You need to go read a bunch of articles on the topic and then come back and ask directed questions.   


Here's a good book on running the numbers:  http://www.amazon.com/Estate-Investor-Financial-Measures-Updated/dp/1259586189/ref=sr_1_1?s=books&ie=UTF8&qid=1461630739&sr=1-1&keywords=gallinelli+in+books

[fishnfool]

Make sure your PM does periodic inspections of the rental. A lot can happen over time and a good PM will at least do a annual or sometimes bi-annual inspections to put your mind at ease about your property. Most PM's are charging around 8% these days so you might be able to negotiate the rate?

[APowers]

I got the quote back from the insurance agent, and rates will be a little higher, but not significantly so. With a high deductible, they quoted me ~$45/mo, and with a lower deductible, ~$60/mo.

I haven't actually asked the PM what her rate is, but we're meeting with her tomorrow.

SwordGuy-- I'm not sure what directed questions I should be asking exactly. I'm mainly curious as to what to expect in general as a landlord, since I've never done this before. Thanks for the book recommendation, I'll see if our library has it.

[Drifterrider]

Are there any other things we should be aware of or ask about?

Yes.  Find a reputable property management firm (or several) and interview them for the position of being your employee (which they will be).  They are better able to tell you what you can expect to collect in rents and what turnover rate, if any, you can expect to have.  They can tell you what are your responsibilities, theirs and the tenants.  Based on this information, you can run the numbers to determine if you want to keep or sell.

I use a PM firm that only does PM.  They have been in business 30 years.

[Fishindude]

My biggest concern as an out of state landlord would be that tenants aren't trashing the place out and causing it to go down in value.
Pets ruining things, lawn not kept up, general upkeep and cleaning, trash or junk in the yard or driveway, etc., etc.   I'd have a real clear list of what the tenants responsibilities are, what is or isn't allowed, and have property manager check on it periodically and give you a report with photos.

[rachael talcott]

Be very careful about who you rent to.  The main risks are 1) tenant trashes your place 2) tenant does not pay rent, leading to expensive eviction and possibly several months in which you have to pay mortgage without rent coming in.  Difficulty of eviction varies by state. 

I require credit scores 700+ and income 3x rent.  I would prefer not to allow pets, but so many people here have dogs that I allow them on a case-by-case basis.  I do not allow aggressive breeds or puppies and require that the owners have some plan for what to do with the dog when they are at work.  The main damage I see from pets when I rehab houses is that someone locks the dog in a room and the dog scratches up the woodwork of the door and doorframe trying to get out. 

For a long-term rental, I calculate deferred maintenance by listing the lifespan of various things that will need to be replaced on a regular basis.  So a roof here is about $6K and lasts about 15 years, so that's $400/yr.  HVAC $5K/15yrs = $333/yr.  Flooring $3K/7yrs=$430/yr.  That's already ~10% of gross and we haven't even gotten to appliances.  But the numbers may be different in your situation, so don't just use a rule of thumb.  Do the actual math.  It's easy to underestimate cost of maintenance. 

Why not sell?  If you're going to move back or have reason to think that property values will go up a lot in the next few years, it might make sense to rent it out.  But most properties that are converted from homes to rentals do not make good rentals. 

RT

[APowers]

I talked to the PM before I decided on her. I also called some of her tenants-- one of whom it turned out I actually know, so I trust her review, and all the tenants gave me the same story of the PM being prompt and resolving issues a.s.a.p., so I'm pretty confident that she'll be good. I'm meeting her today, so we'll see if we still like her and what her expectations are compared to mine. I also don't know of any other PM companies in the area that I would want to do business with. I have heard horror stories from multiple tenants about one, another is run by a real estate company who had trouble getting back to me in a timely fashion when I wanted to work for them (even though the owner had been apparently effusive about wanting to work with me), one is run by my former hometown mayor (town gov't is super dysfunctional), and the others I was not impressed by when I was trying to work for them as an intern or something (UNPAID, no less). It was kind of process of elimination.

The tenant requirements summarized on her website are very similar to the ones I've seen from successful landlords-- like yours, Rachael: high credit score, income 3x rent, and good rental history. We're definitely planning on "no pets"

We're open to selling, but renting will work better for us in a few respects. There are a couple outbuildings on the property, one of which could be developed into an ADU, which would give us a place to stay if we come back to visit family (both our immediate families are in the area), and I value having an alternate income stream over a chunk of cash*. We also don't have a mortgage, so there shouldn't be cashflow issues on that front.

*Interesting to note that the expected value of the current sales price according to the 4% rule is $433/mo (assuming a sales price of $130k, which may be high), is about the same as my expected cash flow from rent (assuming $900 rent which is low, 10% management, 1/12 vacancy, and 25% of gross for maintenance).

[3okirb]

Are your taxes $100/month now, or is that what it'll be when it's not owner occupied.  My taxes are $600/year here, but would be $2400 if I rented and didn't live in the house.

[APowers]

Are your taxes $100/month now, or is that what it'll be when it's not owner occupied.  My taxes are $600/year here, but would be $2400 if I rented and didn't live in the house.

I'm pretty sure our taxes (WA) are the same regardless. I'll put it on my list to double-check, though. Thanks!

[Ox05]

Another thing you may want to consider is if there are any Home Owner's Association restrictions on renting. Some (especially condo buildings) may have limits.

On the other hand, as an out-of-town land owner, the HOA kind of acts as an insurance policy preventing the neighborhood / building from going to hell while you're not around to keep an eye on things.

[APowers]

The property manager offered us something called eviction insurance for $10/mo. It would cover the (legal, etc) costs of any "simple eviction", should the need arise. Is that worth it? How much does a simple eviction generally cost in WA?

[zephyr911]

It sounds like you've already made up your mind to do this, but I have to ask, are you sure this is the best choice?

If you sold this house and parked the cash in what most of us here would call a "good" rental investment, you'd be looking at way more than 4% return on equity. For the additional risks and low liquidity that come with real estate, most of us expect (and receive) a much higher return.

Another side note - keep in mind that if you DO rent it out, and you've lived there for at least 2 years, you can cash out within 3 years without paying capital gains. Beyond that, the sale turns into a potential major tax hit.

[APowers]

It sounds like you've already made up your mind to do this, but I have to ask, are you sure this is the best choice?

If you sold this house and parked the cash in what most of us here would call a "good" rental investment, you'd be looking at way more than 4% return on equity. For the additional risks and low liquidity that come with real estate, most of us expect (and receive) a much higher return.

Another side note - keep in mind that if you DO rent it out, and you've lived there for at least 2 years, you can cash out within 3 years without paying capital gains. Beyond that, the sale turns into a potential major tax hit.

I'm not 1000% positive that this is the best choice. I do believe it's a good choice among other good choices.

What is a "good" rental investment? Genuinely curious here. Our house, surprisingly enough, fits almost all the rules of thumb-- the 1% rule: we bought it for 69k and remodeled for a total "price" of 95k, and we'll rent it for $900 (I expect we'll be able to raise the rates once we get a better idea of what we're doing)-- we expect to net according to the 50% rule: $900 minus expenses puts us right about $450. Should we expect to be doing better than that?

Regarding taxes-- So for up to three years after we move out, we can sell the house and have no tax hit because "primary residence blahblahblah"? And then after that, it's considered an investment property and is taxed under capital gains?

[zephyr911]

For a long-term hold, it makes more sense to use market value than your actual cost. You created that equity, and now you should account for it, or you'll make your ROI look higher than it really is.

The 4% SWR is for a zero-effort, totally passive portfolio with no liquidity issues. It stands to reason that tying your cash up in real estate - illiquid and requiring more work from you, even with a PM - should give you at least a couple points more.

I have one property earning a similar cap rate to yours, and if I didn't have a stable, long-term dream tenant occupying it right now, I'd probably have it on the market. I learned later on in my investing career that for the same price I could get 2x the rent in another part of town.

[DeanW5]

How did you set the price? Rents differ widely around the United States. Only Craigslist and local real estate agents can give you an idea for what price you can rent out a property.

Also you should know that approximately 5% of gross rental income should be devoted to regular maintenance and 5% you need to pay for the downtime and repairs that come with vacancies.

[powskier]

Re: eviction insurance/costs.
Legal fees are generally minor, it is the loss of income during the time eviction can take that is brutal, it once took me 5 months, following the law. Does this eviction insurance cover loss of income?

All rental issues come down to getting a great tenant, and a bomb proof lease . It can be worth charging less to get a stellar tenant.

[NoNonsenseLandlord]

There is a lot to learn...  Refer to my blog.

Learn how to screen tenants first. 

[waltworks]

For 1% rule or sell/rent considerations you should really use the amount you would end up with if you sold the house. In this case that's something like $120k, right ($130k minus some commissions/fees/etc). As others have pointed out, a passive index fund is both liquid and work-free (and IMO less stressful, but YMMV on that one) and those are HUGE advantages. It is arguably less risky, too (real estate is full of "big company left town and I can't sell or rent the house anymore" horror stories).

Having a place to stay when you visit family is great, but A) hotels are cheap, and B) it sounds like you'd need to invest a decent amount of money to actually build that AD unit you're talking about.

I'd sell the place.

-W

[JasonCouponKing]

I'm sort of in the same situation.  I'm planning to move into a bigger home within a year.  And I've been kicking around the idea of either selling my current house, or renting it out.  My mortgage is $800 a month (which includes taxes), and I think I could get $1200 per month in rent.  So I think I could make about $400. 

But then I think about situations where the tenant doesn't pay, and I'd still be stuck with a mortgage and trying to evict the person.  Or if I couldn't get someone to live in there at the price I'm asking.  Or if the tenant trashes the place, and decreases the house value.

And then I think, "maybe the equity that I make from selling my current house, could be used as a fatter down payment, which would reduce my new mortgage, displacing the money I would have made by renting." 

So I think I'm leaning towards selling.

[KarefulKactus15]

There is a lot to learn...  Refer to my blog.

Learn how to screen tenants first.

I was going to steer you to this blog!  Fantastic resource for real estate.