Turning my home into a rental?

Question

Hello BP! I found out about this organization about a year ago and have been reading and listening to podcasts ever since.  I am wondering about turning my SFH that I've lived in for the past three years into a rental when I leave and was hoping to get some feedback from a more experienced community.

Property Details- 3Bed/2Bath/2 Car Garage/ 1648 sq. feet / built in 2003 (picture attached)

I am active duty Air Force and bought the home using a VA loan with 0% down.  The purchase price was 145,500 and the VA funding fee took the total loan amount to approx. 148,000.  The current balance is approx. 139,000 with a mortgage payment of $900.  I've done some research on market rents and conservatively I could get between 1300-1350.  I've also used the BP calculator to determine that this property would cashflow with a 10% management fee, but when I start factoring in capex, maintenance, etc. (which I'm sort of confused about how to pick percentages) I think I'll be cutting it close.

This property is in Charleston, SC which has been a rather hot market lately.  I feel like I should rent the property even if doesn't cashflow 100% with my reasoning being that I didn't have to put any money into the deal and the expected appreciation, but this will be my first deal.  Any and all feedback or suggestions would be greatly appreciated!

-Tyler

Justin Taber · Answer

This might work, I am sure that if you were looking for a true investment property you could find some numbers that work much better.

Good Luck!

Ashley Schroeder · Answer

We ended up renting out our first home out of necessity (the buyers loan fell through a week before closing and we needed into our new home for school district purposes), and it turned out to be great!  But I would also remember that there will be maintenance along the way.  So although you have not had to put any cash down on the property when it was purchased, there will still be needs that will require cash in the future.  Is this something you can fund?  Even if you purchase a new home for yourself (or rent an apartment)?  Can you carry the cost of it sitting empty while you are looking for tenants, even if you have somewhere else you have to pay for to live in.  If you feel that you can comfortably carry both, then I would say go for it.  If you feel uncomfortable with having the house sit empty (and you carrying the costs) while you are living somewhere else, then I would say you may not be ready.  Best of luck!

John Carr · Answer

Hi Tyler -

A few thoughts I had when reading your post, as I own a home that is very similar to yours in Mount Pleasant - 3BR/2BA, 2-car garage, 1708 sqft, built in 1996. (And just for the sake of clarification, I am NOT a member of the military - so if any BP members more well-versed wish to jump in and add or correct anything that follows, please do so!)

I assume that when you say you'd like to turn the home into a rental "when you leave," that you are referencing a change of station or temporary duty assignment. If that is the case, you will still be able to claim the 4% owner/occupant assessment ratio that is offered to active duty military (regardless of whether you're in Charleston, Berkeley or Dorchester county) - which is absolutely critical: when my wife & I moved from the SFH that I referenced above and turned it into a rental, our property taxes jumped from just under $1200 annually to almost $4000!

There is some fine-print regarding that assessment: having to apply for it each year you are stationed elsewhere, providing paperwork proving your assignment, etc., and there are also rules about getting that owner/occupant assessment ratio if you own another home in South Carolina (specifically, you are only able to receive the 4% assessment for two tax years after you purchase a second property in the state). If for any reason you are ever ineligible for that special assessment, you are going to get absolutely CRUSHED by property taxes and lose any and all cashflow from this property.

That being said, I just ran some estimated numbers based on what I know from my experiences with my Mount Pleasant rental - I don't think these should be too far off...

It's best to be conservative with your rental $ estimate when running these numbers, but for the sake of illustration, let's take the $1350 figure & break it down monthly:

Mortgage = $900

10% Mgmt fee = $135

Property Tax = $63 (I used a tax bill of $750 annually - you'd know this figure better than me)

Insurance = $67 (This is pure guesstimation. I use USAA, and have rental property insurance - as opposed to Homeowner's Insurance - and my bill is closer to $100 a month. But based on the price you paid for the home three years ago and what the fair market rent would be, I just cut my bill by 2/3 in the hopes of getting close. Definitely best to check with your insurer on what this figure would be.)

So these four expenses equal $1165 monthly which would leave you with $185 per month... BUT!!! BUT!!! BUUUUUTTTT!!!!! That is assuming that the home is rented out from the day you leave with no vacancies ever AND that nothing will ever break or need to be repaired or maintained, etc.  I don't pretend to know your personal financial situation, but that is a crazy thin margin (if there is even any margin at all) when accounting for these unforeseen circumstances. The Charleston market as a whole is really hot, so if you could stomach the potential for short-term loss for a long-term appreciation play, then that is up to you. And depending on the location, rents could rise and make the numbers on the spreadsheet look a little better.  Finally, you should also consider whether you ever plan to return to the Charleston area, and if having this home for your own personal occupancy in the future is a goal of yours (as home prices will continue to rise for the foreseeable future in this market).

Whether you decide to hold or sell, I have a killer property manager/RE agent that I can recommend whose business specifically caters to members of the military. Feel free to reach out to me if/when you'd like her information, or if you have any more questions!

Steve Jones · Answer

I think the best thing you can do in this situation is GET GOOD TENANTS. Screen them, get credit reports and interview them. Home looks nice, best of luck!

Tyler Wehrung · Answer

@John Carr Thank you so much for your detailed response! I would like to touch base with you off line as I have a few more questions

Tyler Wehrung · Answer

Thank you all so much for the quick feedback! @Brandon Battle That price does include taxes and insurance and VA loans don't require PMI, but refinancing once I hit 80% loan to value is a good idea that I hadn't thought of before!

Turning my home into a rental?

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