All Forum Posts by: Kevin Harrison

I see this question every day at least once on the forums so I thought I would answer it for the majority of people. I was going to make this a blog post but couldn't figure out how to do it. What I am going to outline in this post to the best of my ability is the question YOU and only you can answer to find the answer to this question. Feel free to chime in if you think I missed anything or got it wrong.

The first questions you need to answer are...

1) What is your home worth as a rental, and what is your home worth at Fair Market Value?

This is going to entail doing some research, looking up what similar homes in your area have sold for recently (as in the last 6 months). Note that you cannot go off of what people are asking for their homes right now but what they have ACTUALLY sold for recently. As well as looking up what similar homes in your area are renting for. This is where you have to be truly honest with yourself as to what your home is in quality, size, layouts, amenities, etc. I know that 5 bedroom down the block is renting for $2200 a month but let’s be honest here. Your home only has 4 bedrooms that are up to code and is a half bath short of the one down the block, and its only going to rent for about $1800. See? Honesty... You can short cut some of this by paying to have your house appraised or talking to a local relator who knows the market and can give you a fair and unbiased estimate of these numbers.

You figured our your numbers yet? Alright, lets move on to the next step.

The next question is actually several that all somewhat overlap.

1) Can you rent your home out for a profit or at least break even? Not just on your PITI but on all your actual HONEST expenses (IE. CapEx, Vacancy, Maintenance, Property management, and any other expenses you know are going to come up). BP has quite a few useful calculators to figure this out that you can use a limited number of times a week, unless you are a pro member and then they are unlimited. Another way to think about this question is "Would you buy this home as a rental if you did not already own it?"

2) Can you afford to sell your house? Can you walk away with a profit or at least break even? This means you can afford to cover the mortgage payments while the home is on the market, or you have enough equity to drop the price some from the market price to get the home sold faster, and you have enough equity to cover closing costs without having to write a check at closing instead of receiving one.

3) Are you looking to buy another house when you move? Do not forget to consider that it will take 6 months – 2 years before many lenders will consider your rental income as part of your actual income, and even then they will typically only count 75% of the rental income. This will mess up your Debt To Income ratio and can prevent you from buying another house if it skews that percentage too high.

OK class, by now you should know if you CAN rent your home out or if you NEED to sell. This answers the bulk of the questions right? Next thought is that just because you CAN rent your home out when you move does not make it necessarily a good idea. Here are some other things to take into consideration before you make the leap as a rental.

1. How far are you moving? If it’s far, are you comfortable self-managing from a distance? Or do you need property management? Can you be ok with letting someone else run your property? If not then you should most likely still sell and use that money to get a new rental property closer to where you are moving.
2. Do you have some cash reserves to get you started? You don't necessarily need to have a full CapEx reserve stored up, but you need to have enough that if something major breaks (IE. Water heater, HVAC, etc.) right after you move you have enough to cover it.
3. Does your home make a good rental? A 1/1 is great in an urban area but not so much in the suburbs, and likewise a 6 bedroom home in somewhere that's not a collage town is most likely going to give you some trouble getting rented out.
4. Is your home in rent ready shape? Just because you are use to having to bump the stove to get it to turn on and you know there is that nail sticking out of the wall at the top of the stairs doesn't mean this is tenant ready. Having nice properly working appliances and taking care of these small nusience items are not even upgrades, this is what people will expect when they rent your home.

While I’m sure there are some things that I have forgotten in this list this should give you a good idea of whether or not you should rent your house out or sell it. If you think of anything I got wrong or have forgotten feel free to chime in and let me know. Let’s talk about it.

If this is a single family home then you would just wait until the lease ends, clean it up and sell it at market value. If you want to sell it now I would talk to some RE people in the buy and hold world, especially the ones trying to get started. Other wise if you just want to be rid of it and cannot wait until the tenant moves, I would shop it around to some of the local RE brokers and see if they know anyone who would like to pick up a tenanted buy and hold property.

Honestly its pretty harmless from the standpoint of the home (IE. it wont make the place stink forever), but if its causing issues with the roomates then go ahead and ban it. Also until you get a new lease in place I would at least talk with the tenant and ask them to keep it confined to their room.

I wouldn't think so. I would let them all know ahead of time that there will be others there. You should walk them through the home and give them each a copy of the scope of work, then just ask them to have their bids turned in by X date and you will make a decision and let everyone know by Y date. this way everyone knows what's up, up front. This will keep you from getting a feel for each contractors personality since I'm guessing they will be mostly quite during the walk through unless its a pertinit question.

you mean like air conditioning? so really there asking if you pay the electricity, unless the unit comes with no a/c. then the answer would be no. lol

yes...

jointly and severally!! I remembered it this morning.

You should name the price of renting the entire house and hold each student "each and severally?" (I think is the term) accountable, this means that each person is responsible for the entire rent amount and you can go after them in court. It also means if one of them moves out they as a group are still on the hook for the entire amount. This keeps you out of their drama. Let them sort out the small stuff.

What I was saying is that you add your PITI, vacancy, capex, and maintenance, plus any other known fixed expenses for the building such as lawn care, and water/electric/etc. But don't add the 30% in, the 30-50% is just a quick way to represent all the expenses I just mentioned minus the PITI.

You need to evaluate this as if you were not going to be living in the fourth unit first of all. you need to add that income back in. this will help your numbers significantly. Then I would go with all know/fixed expenses and then see where your numbers are and go from there. I wouldn't trust the 30-50% operating expense, that's just a rule of thumb for quick evaluations on the fly.