What strategies can I use to rent my current home?

Question

My wife and I have been discussing options for how we can rent our current property, and we are having a tough time making the numbers work...

Our home is 1200 sq/ft, 2/2  SFR in the Talmadge neighborhood of San Diego, CA.  Our house mortgage is about $2500, and based on other homes in the neighborhood it appears we could rent the home for around $2300.

Obviously cash flow with the current situation isn't going to happen, but we believe the neighborhood is up and coming, and the property will continue to appreciate over the next 10 years.

Any ideas of ways we could leverage our situation to hold the property as a rental would be much appreciated!

Mitch Messer · Answer

Hi @Michael Conway! If your neighborhood is one in which folks want to eventually own, you might test whether offering your home as a lease-option is viable.

Here's how it might work:

• Find a family that wants to own but is unable to do so right now. You want folks with solid household income, but with credit defects that can be addressed within three years (BK, short-sale, deed-in lieu, etc.).
• Give them a lease, ideally at a higher than market rate (maybe $2400, $2500, or even $2600), for one year.
• Decide on a purchase price.
• Sell them an option, which gives them the right, but not the obligation, to purchase the house at the purchase price anytime during the year.
• Make the cost of the option (the non-refundable option consideration or NROC) about 1.5% - 2% of purchase price. The NROC gets applied as earnest money once they are ready for a mortgage.

If, after the first year, they are making steady progress toward qualifying for a mortgage, you can do another lease and another option for year 2. First, though, you'd adjust/raise the rent and adjust/increase the purchase price.

Our experience is that families who are serious about owning can get there act together and purchase within 3 years. If so, you reap the windfall.

If you don't see any progress being made toward a mortgage, just don't renew their lease or option. Let them move on, leaving behind the NROC of course. Then find yourself another, hopefully more serious, family.

Garrick Oconnell · Answer

Tough Question

Not only are you under cashflow at market rent you also have to take in account the cost of maintenance/ repairs, time managing the property, and vacancies.

You might look at airbnb or vacation rental

but the simplest solution is to live there a few more years as the market rent raises and can cover your mortgage

This is why it can be difficult to invest in San Diego