Anyone have any advice on the situation of living in your home for two years, then moving and renting it out. Is this an easy transfer to an LLC, while keeping the existing mortgage in place?
A little more info…mortgage (PITI) is and would be $1500, and rental income would be about $2000 for this 3-br house. This would be about a $500 per month gross cash flow, before expenses not covered in PITI.
I know there are some factors I may be missing, as I’m thinking about putting something like this into action in the future.
Thanks!
I done it few times myself, but I bought 3 families, lived in one unit, sometimes two, fixed the place up, moved out after a few years, and renting out all the units, then do it again…
And because conventional owner mortgages only require you to move in and occupy for a short time, you’re OK keeping the mortgage and renting it out, unless you got those first time homebuyer mortgages, or VA loans, that’s got more stipulations…
For SFH’s I generally have the tenants do repairs under $200.00, so I think you’ll do OK, unless you got big ticket repairs coming up.
I get myself good landlords’s insurance, have the tenant get renters insurance, and so far, i skipped doing an LLC. So far so good for me.
This is a loser as a rental, however could be a very good deal as a sale. I’m guessing that we’re talking about a house worth close to $200,000 (based on your mortgage payment). If the rents are only $2,000 per month, you are GUARANTEED to lose money every month. Properties rented at 1% of the value will not cash flow. Additionally, nice houses that you would live in are normally not good rentals. Tenants are experts at tearing things up and then you’ll have a property that will need rehab before it can be sold and that will be bleeding you through negative cash flow each month.
However, on the other hand, if you live in the property for 2 years and then sell it, you won’t owe taxes on the gain due to the exemption. So, as long as you bought it right, selling it could be profitable.
Good Luck,
Mike
Read the post on this topic entitled “DEAD BEAT RENTER AFTER ONE MONTH!!! PLEASE ADVISE”
There are a lot of ways to do this business but be aware that it is a business. You need to buy the house with the intent of using it as a rental not with the intent of living in it. Look at it like you would if you bought a factory and lived on premises or living in an apartment over the family store. You are living there only for the business not for the lifestyle. That also means that when you are about to rent to the person after you move has to get checked out credit and criminal background BEFORE you let them in and don’t be swayed by cash in hand. Wait until they check out before you lease to them.
Sounds like the simple answer is that for a house worth about $250k, I can expect the expenses (after principle, interest, taxes and insurance) to be more than $500 a month.
Does a lease option sound better to you on this one?
Based on your original post, you said the SFH should rent for $2,000, and PITI currently is $1,500/month, leaving you $500/month for taxes, insurance, and vacancies.
While it’s not a big cash flow if any, you won’t negative cash flow that much either, unless you have a prolonged vacancy. and some large repair bills. Whether renting it out in the long term makes sense or not depends on other many factors.
It’s quite instructive that there’s two “posts” right above and below this where in one case, a 45K house is sitting there, could get $1,500 section 8, but the house was trashed by the prior tenant. This is a pefect house for a cash flow investor, if they can stomach the neighborhood, and the type of tenants that one has to deal with.
Whereas your house is probably in a more stable area, where homeowners feel comfortable paying 250K for a house, but the returns are low.
I have a SFH in a middle class area here in LI, good schools, since 1983. For the first five years, it was breakeven cash flow, and I run a little negative if there are vacancies. Currently I can collect $2,200 marrket rent, with $573/month in PITI, and another $600/month for taxes and insurance. But the biggest return was the appreciation. I paid 70K for the place originally in 1983, and did 10K in a rehab. I since paid another 15K with new windows, siding, and roof.
The current FMV is between 375K to 400K. So, over the long run, the biggest return for this area is appreciation. I could try being a cash flow investor in areas where houses go for $45K, and rent $1,500.monht “section 8” for 10 times the work, and might get killed on the process.
This place rents easy, with proper screening, had no major tenant headaches.
As I said, success here has to do with tenant screening, and even here, I did my one and only eviction, with the tenant owing me around $3,500 when he left, and filed bankruptcy.
He actually owed me six months rent at $1,000/month (back in the late 80’s), but worked off $2,500 of it rehabbing the house, which I needed to do. He asked me about filing a “proof of claim” for the rent, after filing bankruptcy, but I told him to forget about it, and handle things with me when he’s on his feet. I don’t think I’m that much ahead settling for pennies on the dollar in a bankruptcy.
What happened??
Two years later, he paid me $50/week, till the debt was paid, something I didn’t expect him to do.
But then, it didn’t surprise me since as part of the screening process, I try to ascertain someones personality. and behavoir, and he didn’t strike me as someone who tries, and is not a scoundrel. Then again, in the iniital screening, he did hit a rough patch in the past, some five years before, when there were “writeoffs”. Not big amounts. I made an exception because he had a very steady job, '“president” of the company that hs dad founded.
Let’s say I went into this with my eyes open, and in speaking to my tenant’s dad, found out his dad fired him, and took over running of the company.
Looking at the broader picture, if the marker in your area dropped quite a bit, it might pay for you to hold it for a while. But if you’re an inexperienced landlord, and someone trashed your place, and you got a six month vacancy, then you’ll have a problem.
Bottomline, there’s no “one easy answer”. But for an inexperienced landlord, I wouldn’t start with an area where houses go for 45K.
Frank Chin
Thanks Frank and Mike.
This house could rent for $2000, and the $1500 includes mortgage, taxes and insurance. Just not maintenance and vacancy. This area will appreciate, but I see that as gravy. I’ll need a cash flow for it to work.
Frank - How do you get tenants to do repairs up to $200??..I love the idea but never heard of a tenant willing to sign into a contract like that…I’ve had a lot of tenants at my higher end homes do some minor repairs (2 of them know plumbing, and I’ve loved that over the years!), but nothing that costs a couple of hundred…how does that work?
Back in 1983, when I started doing rentals, it was for repairs up to $100.00. It’s been raised to $200.00 a few years ago.
I normally do my rentals at 10% below market to begin with, and with that, I’ve been able to rent them out quickly, and because of the large demand, and the good price, people are more than willing. I also make sure I rent to handy, older, blue collar people, rather than young professionals, who just left home, and mom’s cooked meals.
With SFH’s renting for $2,200 a month, and only charge $2,000, you’re already $200 ahead every month!!
Let me tell you a story. When i just finished the rehab of this SFH, and started to show it. I advertised it myself in the paper, and I had rental agents on it.
Had this lady, in her late 50’s checking the place out. Everything was newly sheetrocked at the time, new kitchen, and bathroom. Some negatives of the place was no rangehood over the stove (didn;t get to it), and the landsacping was OK, but not great, as I concentrated on the interior rehab, and haven’t gotten to it either.
I mentioned to her that I wanted tenants to handle repairs up to $100.00. She said she like the place, but wanted me to some work on the landscaping, put in a range hood, and she’s not sure about handling $100.00 repairs since the husband is not handy.
I never said no, so I replied “I’ll think about it”.
Later that same afternoon, another applicant came by, who’s a mechanic for a local bus line. He looked the place over, and asked if “it is OK with me if he can install a range-hood”. I said “fine”. Then he said he noticed the place needed some landscaping work, and if I would rent the place to him, he’ll really get the outside looking nice. He went on to say he’ll till the lawn, do the edging, do weed control, and plant some bushes. I was impressed to say the least…
Then I went my spiel about handling repairs up to $100.00. He said he’s got no problems with that at all, and if I rented the place to him that I wouldn’t have to worry about repairs, even over $100.00. I said to myself “wow”.
I told the fella I got more people coming, and I’ll get back to him.
Then a few days later, I got a call from a rental agent. She said that she just showed the place to an older lady who really loved it. I said “great, I like to meet her” The agent said “you already met her, and you said you’ll think about it, and wanted me to find out why you haven’t gotten back to her. She’ willing to pay my fees if I can work something out with you”.
So I explained to the rental agent what the lady told me, that she wanted a range hood put in, landscaping done, and I do ALL the repairs. As the agent was there in her office with her client, put me on hold for a moment, got back on the phone and said “and you have a problem with that”??
I said “that’s not the problem. But I got another applicant who like the place as much as your cleint, BUT he volunteered to put in the range hood, told me all the work he’ll do on the landscaping which I admit needs some work, and he wouldn’t bother me at all with repairs”.
I went on to say “I don’t have to think too hard deciding between her and the other guy”. She put me on hold again to consult with her client.
Got back on the phone, told me that her client wouldn’t bother me on the rangehood, and do the landscaping, she’ll take care of it, and help out as much as possible on the repairs.
I said to the agent "between you and me, she said her husband is not very handy, and judging from her personality, would call me on every little thing, which is why I wanted tenants to handle repairs up to $100 to begin with. The agent said “that’s too bad, but I understand”.
In fact, I didn’t rent to the bus mechanic either, as I had an ad for an open house that weekend, and rented the place to someone else altogether.
Fast forwrd to my current tenant. They are usual in the sense the wife has a job paying $120K a year, with a husband running a home based business, never owned a home, and renting for the last 20 years. Hey, that’s their choice, so why am I complaining.
They’re wonderful tenants, and would send a letter with the rent check each month with a story. A few months back, they wrote a letter about a problem with the faucet, going out and checking out different models at different stores till they chose one, and what they had to do to install it, taking over two hours, but making sure the job was done right.
It was under $200.00. they enjoyed telling the story, and I was glad someone took such great care on my house. We called back to thank them.
Then two weeks ago, the temperature here was in the 90’s, and the two year old “Frigidaire” refigerator broke down, with a limited warranty in place. As background, they asked to replace ALL my appliances with new one two years ago, stove, dishwasher, washer dryer, and refigerator. But before my wife dropped the phone, they said they’ll PAY for all of them, leave it there when they leave, IF we pay for the refigerator. SInce hte refigerator was 20 years old, we said “FINE”. The appliance were old, and it’s a good deal for us
Ok, what about the broken refigerator.
Turns out it’ll take 8 to 10 days to get the 'authorized" repair place to get to it, and it sounded like the compressor is busted, but his son needed refigerated medication. After some dicsussion between the wife and myself and the tenants,. we told him “under the circumstances, if you need to buy a new refigerator, we’ll pay half”. We want to make sure his son has his medication.
A while later, he called back and said “since we’ve been so nice, he’ll pay for the whole fridge himself”.
Well, he had a problem with a neighbor, and someone came by to vandalize his car. So we piad $500.00 towards a TV surveillance system, and we knew he really appreciated our concern.
On the other hand, I once had a rental agent, bought over a wonderful couple, with a child, who loved the place, it was exactly the school district he wanted, and the school was a block away. he’s an Indian national, and a college professor.
I rented the apartment WITH the driveway. The deal is that he gets the driveway for free (market price $75.00) if he’ll shovel the snow from the driveway and the sidewalk in front when it snows.
Agent got back to me. Said the man has no plan to shovel the snow, but loves the apartment. Said I can keep the driveway, he’ll park his car on the street instead. So I told the agent I probably won’t rent to him. the agent wanted to know what thei big deal was.
My answer??
It’s no big deal, except I see it’s a type of tenant that requires much babysitting, and I understand culturally, Indians from a higer caste believes LABOR to be beneath them, and I don’t think he’ll lift a finger to help, on ANYTHING.
The guy I finally picked shovels snow, as well as a dozen other that wanted the place. So why GO OUT OF MY WAY to pick someone who can’t??
Bottomline, here’s my take on repairs:
- Key is tenant selection.
- As long as people know what the deal is, they have no problems, $100, $200, or whatever.
- Work with the tenants., and one hand washes the other.
- Reasonable rents, PLUS a place “looking just right” maks people WANT to do things my way.
- Pick tenants carefully, Someone with an MBA, got a job as an investment banker, just left home from mom, is not going to do repairs.
BTW, having tenants handling repairs up to a certain amount is a common practive here for SFH
Mike/Propertymanager, what’s your perspective on letting tenants pay for the first X dollar amount in repairs?