Renting out my first home

General Landlording & Rental Properties
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Renting out my first home

Billy Rowe
Louisville, KY · Member since 2013 · 32 posts · 3 votes

Quick question, (Still learning still have a far way to go)

Ok If I were to rent the house I'm living in now, do I have to change anything with my current mortgage. In other words I pay approx 850 per month on my house (that includes a escrow for tax's and insurance). When we go to buy our new home, do I just carry on with my current mortgage, or do i have to make some sort of adjustments to it because im now renting it out? What the plan is, is for me to rent it out for 1300 per month (houses are renting for that much in my neighborhood), and continuing to pay my 850 mortgage that includes the tax/insurance cost. I would factor in 100 per month for maintenance and 10% for a property manager 130 per month. What other factors am I missing? by my math Ill have 220 per month in my pocket which doesn't seem like alot but it is paying my mortgage so that I can keep the property. I know there are probably more holes in my plan than Swiss cheese, but do I have the gist of it down?

Thanks!! and thanks for all the info!!!

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Ali Boone
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
12y

Yep, you're good to go! No changes to the mortgage, but definitely let your insurance company know so they can make any changes they need to, if any. I'd also ask about an umbrella policy to cover major liabilities. Super cheap policies, and well worth it.

And $220 in today's market is great cash flow!

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  • Alex Anderson
    Real Estate Agent · Milwaukee, WI · Member since 2010 · 129 posts · 24 votes
    12y

    Hi @Billy Rowe, you won't really have to do anything regarding the mortgage (well nothing comes to mind), but what you will have to do is adjust your insurance on it to a Landlord's Policy, since you are no longer occupying the property. Oh and make sure that you stay current on the payments ;)

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  • Joe H.
    Gahanna, OH · Member since 2009 · 3 posts · 0 votes
    12y

    Hey Billy,

    Your plan is sound, that is a good way to start in the real estate business without as much risk as some other avenues. Two things to consider: you will want to change your homeowner's policy to cover your house as a rental (will likely be a little bit more than you are currently paying, but not outrageous) and before you go putting your house up for rent or putting an offer on another house, make sure you talk to your financier about the numbers, they will likely want you to have a couple month’s worth of mortgage payments in reserve for your current house too in case it doesn't rent as easily as you think. All in all though, it is a good plan and should be manageable. Best of luck.

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  • Garrett Grove
    Richland, WA · Member since 2013 · 26 posts · 0 votes
    12y

    Things I also account for in my model is water, trash, sewage, and vacancy. Just a few more things to account for before you are so quick to claim 220/mo profits!

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  • Billy Rowe
    OP
    Louisville, KY · Member since 2013 · 32 posts · 3 votes
    12y

    Awesome thanks everyone!! Can I roll the renters insurance policy into my escrow as well or will I have to pay it separate?? And @Garrett Grove is it typical for the landlord to pay for those utilities? or are you just saying take into consideration on paying those items if the property remains vacant? i always assumed that whoever rents the house out would be responsible for those things i may be wrong though??

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  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    12y

    Solid plan, with one exception. Many RE investors get their start this way. I did. The exception is, don't spend the $220. You will need it for the house. You didn't consider vacancies. One month sitting empty per year and it takes 4 months to catch up. 10% is low for maintenance over the long haul. Think new furnace or hot water heater, repaint at turn-over, new roof, and etc.

    There are some tax benefits you haven't mentioned but consider that gravy.

    Each month tenant's rent adds to your equity, in the long run you will have a paid off house.

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  • Sharon Tzib
    Real Estate Broker · Cypress, TX · Member since 2013 · 822 posts · 468 votes
    12y

    "make sure you talk to your financier about the numbers, they will likely want you to have a couple month's worth of mortgage payments in reserve for your current house too in case it doesn't rent as easily as you think."

    I don't think there is any reason to let your mortgage company know of your plans. Smart for you to keep reserves on your own, however, but I'd never want them sitting in the mortgage companies bank account.

    In addition to letting your insurance agent know you need Non-Owner Occupied coverage now, you may want to entertain getting an umbrella policy as well for liability reasons, especially if you will not be putting this house in an LLC or trust.

    Also, talk to your CPA and make sure you understand fully how this will benefit you from a tax strategy perspective, as well as the documentation you'll need to keep and provide each year.

    Lastly, I would allot 8% to vacancy, 5% to repairs, 5% to reserves/cap ex, and 10% to property management, or 28% total ($364). $1300 - 850 - 364 = $86/month positive cash flow. Still a good deal, especially if you combine it with all the other perks of REI (tax advantages, principal pay down, potential appreciation, etc).

    This is exactly how I started my REI career (converting a primary residence), so congrats on getting started!!

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  • Sharon Tzib
    Real Estate Broker · Cypress, TX · Member since 2013 · 822 posts · 468 votes
    12y

    Billy, you'll need to check in your area what is common place in terms of utilities. Most single family home rentals the tenants pay all utilities. In multis where there aren't separate meters, you'll see landlords having to pay water/sewer/garbage. Again, check what the norm is in your area because if all your competitors are paying for it, you'll need to also in order to rent the house quickly.

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  • Blake Morris
    Property Manager · Louisville, KY · Member since 2013 · 26 posts · 0 votes
    12y

    If you're looking for an experienced property manager, (I have my own lease and manage 235 units in southern Indiana) let me know. I manage privately for family members as well. Let me know if you want to talk further!

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  • Blake Morris
    Property Manager · Louisville, KY · Member since 2013 · 26 posts · 0 votes
    12y

    Also, the 50% and 75% rule of thumb certainly applies in your scenario. 50% of gross can be counted on for income if owned free and clean and 75% if you have to pay debt service. These are definately rules of thumb, though, which means you would net approximately 325 per month on average.

    If you want to look at it from a mortgage perspective. A lender will count income from a rental property after you have had it for a period of time, generally 2 years. They count 75% of the income above your mortgage payment. that takes into account vacancy and maintenance. If you use that calculation, then a lender would count $337.50. So, if you are excited about your conservative number of $220, then the average rules of real estate investing are on your side!

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  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    12y

    Yep, you're good to go! No changes to the mortgage, but definitely let your insurance company know so they can make any changes they need to, if any. I'd also ask about an umbrella policy to cover major liabilities. Super cheap policies, and well worth it.

    And $220 in today's market is great cash flow!

    1Reply
  • Billy Rowe
    OP
    Louisville, KY · Member since 2013 · 32 posts · 3 votes
    12y

    another noob question but what exactly is an umbralla policy? We are taking 2 to 3 years to fix the house up as well we had it built new in 2003 so we may look into replacing the furnace and major stuff before we move out just layers new carpet yesterday and we're getting quotes for paint. Sorry I'm rambling but I'm kind of stoked about starting and for all the nice folks on here! Thanks again!

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  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    12y

    Replace the furnace and major stuff when it breaks. Put your money aside for that day. Most major items give you a warning before they go.

    Something to consider for the future. Paint first then flooring. You work top down for renovation.

    If you own rentals long you will ditch the carpet for something hard (hardwood or allure) depending on your market.

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  • Billy Rowe
    OP
    Louisville, KY · Member since 2013 · 32 posts · 3 votes
    12y

    @Bill S.

    Thanks! Would you have the ducts cleaned? My house is 10 years old and I have never had them cleaned. Also does anyone know of a checklist of the best renovations to do before renting out a property?

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  • Blake Morris
    Property Manager · Louisville, KY · Member since 2013 · 26 posts · 0 votes
    12y

    I wouldn't have the ducts cleaned but that's just me. I tend to agree with Bill. Only do what you HAVE to do when you HAVE to do it. Other then that you would need to place yourself in the shoes of who will rent your home. Your perspective is to have your home be rentable for what you want to rent it for. Tour your home like you would as a potential renter.

    For example: Do you have bi-fold doors that creak and are hard to open? If so, think about bible and cross slider closet doors or mirror slider doors.

    Typically a tenant will inspect for cleanliness, and a fresh look. To achieve that you would normally just have the place cleaned really well, clean the carpets and have your place painted. The property manager who conducts the tours would say something like "the owners have lived here for 10 years and took very good care of this place, so you would be living here after the owner, not be the 4th or 5th person to lease this place in 5 or 6 years." If someone gives you feedback like "I am extremely allergic to blah blah blah and I really want to be totally sure that my kids aren't exposed to blah blah blah." Then your property manager, with your approval, would recommend that the owner would be willing to have the air ducts professionally cleaned if it would put them at ease.

    The general moral of the story is to make money. There needs to be a balance for everything, but doing absolutely everything imaginable to your home before you rent it....at some point becomes wasted money.

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  • Blake Morris
    Property Manager · Louisville, KY · Member since 2013 · 26 posts · 0 votes
    12y

    Probably someone on here has a checklist, but I really think there are too many variables to consider. If you are renting in a low income area you wouldn't change all the doorknobs just to do so. But, if you are in a high income area and you need to make small changes to spruce up the place, then something along those lines would be appropriate.

    I tend to hate brown trim and brown doors. It reminds me of a very old 80s home. But, if your home is in a more historical part of Louisville, then I would love it. It just depends on your homes current condition, price range, area of town, and what appeals to the biggest majority of the type of people you are probably going to be renting to.

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