Newb. Buying new primary residence turn current home into rental

7 Replies | Little Rock, Arkansas

I have a home paid for in NLR, AR. My neighborhood has been seeing lots of development but I am still on the outskirts. I think in the next 10 years my block has a lot of potential to see considerable development. I don't think if I sold my house I would get what it is worth considering the future development. Because it is paid for and easily exceeds the rule of thumb of charging more than 1% of home value per month ( I should be able to get 600-700 for a house I paid 45k for) I want to try being a landlord. Because I am new to this I have a few questions and I hope this forum is the right place to ask.

House is ~1150 sf, 2 bed 1 bath, new windows, insulation and heat pump.  Very energy efficient and near the Rockwater Village development.

Because I am new at this and we bought another home because my wife and I are expecting our first baby :) I am strongly considering using a property manager (worried about time and attention with the newborn). How does one go about selecting and vetting property managers?

Also I think my house could use some TLC before renting it but don't know what all is necessary for our market. I am sure property managers would make recommendations after we have a contract. But if I wanted to try renting it out on my own is there a consultant type service where I could a knowledge expert walk through my house with me letting me know what upgrades are likely necessary and what would not lead to actual ROI. For instance some of my trim has flaking paint, do I need clean this up all through the house or would a person renting a 1150 sf home for $650 even care? Do I need to do any serious work to the kitchen? How much should I initially ask for rent.

And any other tips for a guy who works 40-45 hours a week and about to have his first baby looking to try being a landlord?

@Andy Nanneman Rely on referrals for property management company vetting. Also talk to the company to see how they run their business and screen tenants. Companies that have on staff maintenance is a nice bonus to owners. If you haven't properly educated yourself on tenant screening and managing a rental property then I would opt for management unless you want to prepare yourself and eventually take that on when you have the knowledge/time to be able to do it. If you scope current places for rent and use rentometer.com that should give you an idea of current rent prices and the condition of the other rentals available. I always make my units nicer than average for the areas to attract the best tenants and decrease likelihood of issues during tenancy. I think it is a good idea though to hold onto the property if you see the area is on an upswing. You could even utilize the equity in the property by refinancing or getting a HELOC to buy more investment properties if it is something you want to scale up.

before you turn it into a rental do you have any significant equity from when you purchase it

did you live in it 2 of the last 5 years

if so the entire gain would be tax free..  which is by far the best tax treatment in the US today.. 

talked to your accountant about options.. it maybe better to sell.. if you have a nice gain that your going to take tax free then use that money as down stroke on a rental.

I'm not a fan of PMs.  IMO their incentives are in direct conflict with yours.  Plus, it's not needed for one property.  Get a reasonable tenant in and you will spend less than 4 hours a month...far less.  1 property is no big deal.  Your time and effort will spike during turnover but that's about it.  Find a local general maintenance guy you can call when repairs are needed.  Then your time will be, occasionally, texting and emailing the tenants and maintenance guys.

I have 38 units, full time job, 3 kids and a wife.  I still don't use a PM.  I have a handful of contractors I use to help run my business.  Full disclosure - I may be an absentee father and husband and just not recognize it. 

And...congrats on the baby!  That's exciting.

Originally posted by @Jay Hinrichs :

before you turn it into a rental do you have any significant equity from when you purchase it

did you live in it 2 of the last 5 years

if so the entire gain would be tax free..  which is by far the best tax treatment in the US today.. 

talked to your accountant about options.. it maybe better to sell.. if you have a nice gain that your going to take tax free then use that money as down stroke on a rental.

 I have some but don't think it would be substantial.  But that is a good point if I understand you correctly.  If I rent it for the next several years I lose the ability to sell it without paying long term capital gains, correct?  

Originally posted by @Jacob Sampson :

I'm not a fan of PMs.  IMO their incentives are in direct conflict with yours.  Plus, it's not needed for one property.  Get a reasonable tenant in and you will spend less than 4 hours a month...far less.  1 property is no big deal.  Your time and effort will spike during turnover but that's about it.  Find a local general maintenance guy you can call when repairs are needed.  Then your time will be, occasionally, texting and emailing the tenants and maintenance guys.

I have 38 units, full time job, 3 kids and a wife.  I still don't use a PM.  I have a handful of contractors I use to help run my business.  Full disclosure - I may be an absentee father and husband and just not recognize it. 

And...congrats on the baby!  That's exciting.

Wait a minute the guru's all say the reason they are doing real estate is to spend more time with the kids  :)    

What are your goals? Is it to buy and hold real estate? If so, I agree with the person who recommended to refi or get a HELOC to unlock the equity and continue to invest. Selling the property ( even with tax-free capital gains) would not be aligned with your goals.

Also, I do not think you necessarily need a PM. I own 7 properties and I generally spend less than 3 hours managing them most months. When something has gone wrong it may take me all of 10 hours. Also, being your first property it will help you understand what to expect quite some bit before you get a PM in the future