You have a new job and you’re moving to a new city.What happens to the home you’re leaving behind?If you decide to sell and you’re lucky enough to get the price you want, great.But what if you can’t sell or just don’t want to.You may want to hold onto your home-- say, wait until the local market gets better,keep it in case your new job doesn’t work out,or maybe you’ve done the math and decided that having a rental property makes good financial sense.
At Moveline, we’ve overseen a lot of moves, and we’ve watched folks learn a lot of lessons.So today, we’re sharing some of that hard-earned knowledge with you.Anyone considering long-distance renting needs to understand what’s involved-- the pros, the cons, and the issuesyou need to consider to make long-distance renting as smooth and stress-free as possible.
It’s a great investment“Your home is now your investment,”says Grace Keister of firstteam.com.“Find a tenant and charge them rent (that’s) more than your mortgage payment so not only do you not have to worry about paying it every month, but you’re making money in the process, too.” Keister likes the tax benefits, too: commissions paid to a property management company and the cost of repairs may be tax deductible. Also, trips to see the property are generally tax-deductible.
Bruce Alion of locationlocationlocation.com is bullish on the idea of renting outthe home you leave behind: “In my opinion, everyone should own rental real estateinvestment property. Unless the equity is absolutely needed to buy a new home,renting your existing home is a great strategy.”
Josh Kattenberg of Real Property Management Express compares renting the homeyou leave behind with buying stocks: “It’s similar to holding on to a stockwhose price has fallen, then selling it at a profit,all the while collecting a dividend each month the stock is held.People who held onto their stocks during the downturn are smiling today.”
It saves the costs of selling
Selling a home is expensive. Alion says that you need to figure on a “5, 6 or 7 percentcommission to the agent and then your closing costs of 1, 2 or 5 percent of the transaction.In some markets, transfer taxes can be 1, 2 or 5 percent of the sales price as well.Make no mistake: selling can substantially diminish equity, even when there is a profit in the sale.”
It helps pay for housing in your new city
Marianne Cusato, architect and author of Get Your House Right(with a foreword from Prince Charles!) says, “You might know that the move is right andbe able to sell your existing home, but can’t afford to purchase in your new city,so you rent out your old house at a rate higher than your mortgage and expenses to build equity and create a little income. That’s what my friends Mark and Cristi did.They will never return to their house in Philly but can’t afford to buy in Manhattan.While they rent in New York City, their renters are paying their mortgage off in Philly.”Pretty clever, no?
It gives you the chance to change your mind
Renting your house while you give your new job/city a tryout makes the move less stressful for some. Moneycrashers.com’s David Bakke’s job is to give people financial advice.When Bakke relocated for a new job, he decided to rent his condo out and not sell it.“I didn’t think I had the time to sell it and I wasn’t 100 percent sure that the new positionwould work out for me. This is a great strategy for someone in a similar situation,as it reduces the stress of having to find housing all over again should they move back.”
You have to be a landlord
Without a doubt, this is the biggest headache. Put mildly,the landlord/tenant relationship is always a delicate one.
“I think most tenants don’t see the landlord as human and think he or she is alwaystaking advantage of them,” says Casey Dudding, who really doesn’t like being a landlord.“I wish I could have picked my house up and moved it with me,”she continues. Dudding moved to a small town in North Carolina for a new joband bought a house there just before the economic downturn of 2007.
When her company started laying people off, she began looking for a new job and found one in Raleigh.She tried spending the work week in Raleigh and weekends at her home,which was 3 hours away. “That got old pretty quickly,” she says, so she decided to rent her house.The first renters seemed ideal, but before long being a landlord became a real problem.“They seemed like a nice family; the dad was going to be the headmaster of a school in town.Sounds ideal, right? Wrong. Every single month was a hassle with collecting the rent.That arrangement lasted less than a year -- the initial term of the lease-- and they never paid the last month’s rent.”
The tenants won’t care for your home the way you would
Real estate broker Deb Tomaro says that when you rent, no matter how good you think your tenants are, they aren’t going to be as kind to your house as you would be. “It gets expensive to replace carpet, repaint, have professional cleaners, especially if you want to get the house ready to sell again. Those costs can wipe out any rent collected…. I had an owner who lived in Tennessee and swore up and down that the tenants in his Indiana condo kept it in perfect condition. Before we officially listed the condo, I took some prospective buyers over and the place was in awful condition... once the tenants moved out, he had to spend about $10,000 to get a $130,000 condo ready to sell. Ouch.”
Renters often ignore small problems that lead to huge repairs
This is a particularly worrisome issue if your home is an older one. Realtor Peggy Gachet has handled several rentals of historical homes in St. Augustine. Florida, and she reports that “old homes require more maintenance, and most renters are far from interested in insuring that your investment remains solid. A small plumbing leak that is nothing more than an annoyance to a tenant can turn into a huge problem… the same would apply to a roof leak that does nothing more than create a moisture mark in the inside ceiling but over time will require a costly roof repair.” She advises anyone who is considering renting their home to ask themselves whether they have the cash reserves to make major repairs or to replace appliances or flooring, to repaint or re-landscape.
You may want to move back before the tenant’s lease is up. Your timing and your renter’s may not be in sync. If you’re renting because you don’t want to burn your bridges, be aware that you probably won’t be able to come back to your home for at least a year -- the minimum for most leases.
Before you decide: 4 things to consider
If you decide to hire a professional property manager and are willing and able to pay a management fee (typically one month’s rent to fill the vacancy and then 10 percent of the monthly rent), the four issues below will become your manager’s problem, not yours.
A property manager himself, Robert Pifke, says that a good property manager “will completely manage the property, advertise the vacancies, screen tenants, maintain the property, collect payments from tenants and secure damage deposits.” Choose a manager or management company with experience and good references -- one that is located near your property and is a member of the National Association of Residential Property Managers.
If you decide not to hire a manager and to take a more DIY approach, you’ll want to consider these four issues before you begin the process of renting out your property.
1. Marketing your property
How are you going to get the word out that your home is for rent? How are you going to reach the best audience, the most reliable renters? Try word of mouth and social media first. Do all you can to make sure that your new tenant is someone you know or someone who comes with a recommendation from a friend. Use the local college or university as a source.
And when you publicize your rental, consider carefully the question of whether or not you will rent to people with pets. The downside of allowing pets is obvious enough, but if you have a strict no pet policy, you’re narrowing your market considerably.
Make sure that you’ve set the right rent, too. Calculate your costs at each end of the equation. For the house you’re renting out, consider your mortgage, insurance, HOA fees, taxes, recurring maintenance costs and any other related expenses. If you’re going to use a property manager, factor in that fee as well. Then, think about what your housing expenses are going to be in the new city.
2. Vetting applicants
“Some people use the ‘feeling’ approach to tenant qualification,” notes Kattenberg. “While emotion is always part of our decision making, our best decisions are made when we base them on data. We look at Consumer Reports when buying appliances, reviews when buying a product on line, or information on gas mileage when we buy a car. Why wouldn’t we do the same for a decision as important as choosing someone to live in your house?”
The data you need includes the results of a criminal records check, a credit check (you need permission from the tenant for this, and you need to know the laws on how to handle the results once you get them) and a sex offender check. You need to verify the prospective tenant’s employment and make sure he or she makes enough money to cover the rent. A general rule is that rent can range from 30-40 percent of gross income. And make absolutely certain you’re not violating any federal or local Fair Housing rules when you make your choice.
No matter how carefully you’ve vetted your tenants or how much you like them, you need to have a detailed lease that covers all eventualities and is drafted by an attorney who knows local and state regulations.
3. Collecting Rent
If you’re not going to rely on a property agent to handle the payments,Pifke says “you need to be disciplined about bookkeeping, sending out late notices and collecting late fees. If the tenant falls behind in rent, every day of delay in starting an eviction process can mean lost rental income. This might mean that you’ll fall behind on your own mortgage payments and expenses. And if eviction is necessary, who will file the court papers and manage the eviction process?”
4. Providing Maintenance and Repairs
Anticipate the 2 am phone call about the toilet that’s clogged or the air conditioner that conked out in the middle of a heat wave. The lease needs to spell out who is responsible for what.
Unlike most apartment dwellers, Pifke explains “people who lease single family residences are generally required to maintain landscaping, mow the grass, replace light bulbs and pay their own utilities.”
Schedule regular inspections of the inside and outside of your home to make sure that the tenant is abiding by all of the terms of the lease and keeping up with maintenance. Do the inspection yourself if geography makes that possible, or deputize a trusted friend or neighbor. You need to give the tenant ample notice of an inspection to be sure that you are not violating any trespass rules. If and when you ask a family member or friend to be your “inspector” or local contact person, be upfront about how challenging this can be since it involves so many unknowns.
If you’re going to try to manage your property long distance, know that scheduling appointments for repairs that are convenient for the tenant can be difficult: Susman says that when the dishwasher broke in the home he was renting out in Texas while he was living in New York, “coordinating repairs with my tenant’s schedule was a pain and when a power outage happened in the area, I had to be the one constantly checking in and feeling his pain…”
No matter what you decide about your old home, let Moveline help you out of it and into your new one. We’ll take the headache out of your move by helping you with your inventory process and gathering fair quotes from reputable movers. The best part: our services are free. We’re happy to help you get where you’re going, no matter what you’re leaving behind. So, let us help you #movebetter.