I just agreed to buy a spec home from a builder but now I need to turn my existing house into a rental. I'm meeting with my financial advisor, realtor, and lawyer today to review everything, but I'd like to hear from some experience REIs on what you would do!
I'll be closing on the new house in mid-late February, so best case scenario I'd be able to rent my current house March starting 1st. (Maybe April 1st is better since it'll be a better rental season?) I've already determined the targeted rent and have included all expenses from maintenance, cap ex, and vacancies, etc. I'm debating whether or not to use a PM company since this is my first foray into land lording, but I'm fairly handy and have a father-in-law who is a general contractor. My property is only 7 years old and I'd be less than 1 mile away also.
I know I still need to contact my insurance company about land lording rates. But what else would you guys do to start getting the property ready to be rented? Any insights would be great!
I did the same thing you are doing almost 2 yrs ago. I have my house ready in 2 weeks. 2br/1b. Your timing seems right. You can always prorate the month.. I didnt use a pm. Cut into my profit too much. Any major issues you will need a laywer for anyway I feel. You are on the right track!
Thanks for the feedback @Jim Adrian !
Be sure to check out how to screen tenants. Make sure you do a background check as well. The lawyer can write a lease for you. I would Google to find some and see what items they inclued or exclude to see what fits your needs.
Did the same thing in 2009. Unfortunately, the property didn't cash flow. Some $70,000 in disallowed passive losses later, I can't wait to sell it. If not, it'll cash flow soon. The bleeding was greatly reduced by refinancing when rates fell. It'll be stemmed completely when the home equity loan is paid off.
Your plan sounds solid, assuming the property cash flows. It's a great way to get into it. Fortunately, our other *planned* rentals have turned out much better.
Definitely self manage unless you are super consumed with other things.
What is your financial adviser going to help you with out of curiosity?
I did the same thing the end of the year AUG2015. Lease To Purchase is the WAY TO GO. I know I'm going to hear flack from people who don't understand it the way I DO.
Your are renting it, Lease, but you give them the option to buy at a later date.
You promote this property as a RENT-TO-OWN. They pay a large upfront Payment to you. For easy numbers we will use $5k. This could be more or less depending upon what you feel. This Is NON REFUNDABLE, and is taken off the purchase price if they ever get financing and buy the property.
A Very minimal amount monthly from the rent (paid on time) is also removed from the purchase price if they every decide to buy. lets say $75-$125 a month. I'm not sure of your situation or how much equity you gain every month from mortgage payments.
They have the option to renew every year, and just continue renting.
Since they are Renting To Own, Tenant is responsible for all Maintenance and Repairs. That should save you some money.
No need to fix anything.
You place a floor on the purchase price. Basically what is it worth now? Then put in the contract that, the purchase price will be determined by an appraisal when they get financing, down the road. This means if they get financed from a bank in 5-10years, you gain ALL of the appreciation, but if the market goes down, your secure in knowing it won't sell for less than you want per your contract.
MOST PEOPLE never get financing... They usually move on after a few years. I usually save $1,000 they can have if they give back the keys and i can do an inspection to make sure everything works.
Don't fix it back up... just find a new tenant. Rent To Own. Have them put in new carpet and paint and have them save the receipts and report them to you during the first 30 days. They can make it look like they want to. You can take the amount they paid off the purchase price, and take an upfront payment like before.
These people would be new tenants at a higher rent rate due to the years that have gone by. More cashflow. Also you can get an estimate of your property and use it for the new floor purchase price.
Tenants get pride in OWNERSHIP and take better care of the property than an average tenant. If you ever do sell, you would have made all that cashflow, and gained all that EQUITY in the property from payments EVERY MONTH, as well as APPRECIATION, and you get it at appraisal price.
Single Family homes are priced by similar homes sold, not because you spent and extra $5k on the bathroom. They go by house size and bedrooms and baths, and year built, ect... see COMPS.
Anyway this solves all the problems with being a landlord. Hope this helps.
If rent will cover your PITI and expenses and has a positive cashflow then congratulations, or sorry your going to be a land lord :)
Now read this How To Rent Your House The Definitive Step By Step Guide by Mr. Brandon Turner
We did the same thing 7 years ago and continue to rent the house out. The home we moved to is one mile away like your situation. It is super convenient for doing turnovers (we are in the process of doing one now) and have found no need to use a management company. The biggest mistake we made was allowing someone with two dogs to move into the property when we moved out of it 7 years ago. Pet owners are not all equal in how they care for their pets and these dogs were never bathed and it was very hard to get the smell out (even after all the carpet on both floors of the house). We now no longer allow pets and are more picky about who we chose to rent the house.
Why not start marketing the property for rent now or at least by Feb. You can start feeling out what kind of tenants are interested and see if your pricing is in line. The beauty of owner occupied is that u can show when u want.
Regarding management: see what it will cost to manage, inc all that's included. Now see if this is worth your time to do. Say u make $40/hr at work, now add up the time you would need to manage each month and divide the cost of management. This should give you a good sense. Other formulas are out there. Gotta go. Wife needs me.
Interesting points about lease to own @Robert Herrera , I'll look into it some more.
Thanks for the other insights everyone. I think I'm leaning more towards managing the property myself and I'll see if the wife will let me show it sooner than later! Can't wait to jump into the world of REI and land lording!
@Jordan Hamm , search the site for "Hardening" rental properties. There are many things you may be able to do to reduce future costs of maintenance (especially since it was YOUR HOME)
I did not do it early enough but then realized my mistake and have done so a ssoon as I can in my rentals.
Haven't really heard of that yet @Robert M. ... Looking into it now. Thanks for the tip!