Turning Primary Residence to Rental

[Michael Mainini]

Hello, I’m considering turning my primary residence into a rental and moving out of state. It’s a 3000 sf 5 bed 3.5 bath new build (2022) with really nice finishes. We bought at the peak of the market in 22, and can’t stomach the loss in equity + paying an agent to sell. Our plan is to hold the house 5 years + until the market comes back, or possibly just holding it long term. 

I'm considering either the STR or LTR strategy, but haven't quite decided which would be better / less of a headache.

Mortgage is roughly 3250 and I think we could rent for 3450 to 3600. Not sure on how much I could airbnb it. We're located in Buda which is a bit outside of Austin, but still only about 20 mins from downtown, so I think there's still good STR possibilities.

Im curious if anyone has any advice or things to keep in mind when doing something like this as it will be our first rental. Curious if anyone here has gone through something similar and could share their thoughts / advice. 

[Ryan Kelly]

@Michael Mainini you have options and renting could be a good choice if your interest rate is low. I’m happy to help you analyze it as a rental. We have many clients who have kept their homes as rentals and I encourage it if you have the right plan. We have good property management recommendations as well.

[Jonathan Greene]

If you are 20 mins from Austin center, short-term would be ideal and really most of your stays will likely be a week. Your only issue is that STR management is costly in Austin, up to 25 percent. So, if you can learn to manage or get a co-host, you will do better. But remember that you have to furnish the whole place to the tee to crush it on STR in the Austin area, there is a lot of competition.

[Nathan Gesner]

Quote from @Michael Mainini:

I'm a big fan of holding property forever, but you need to know the numbers. Have you ever learned how to evaluate a property to calculate whether it's a good investment or not?

Your mortgage is $3250 and it could rent for $3600. That's only $350 a month. If the home sits vacant for one month, you lose an entire year of profit.

Here's a very common scenario. The tenant fails to pay their last month of rent, moves out, and leaves some cleaning and repairs. You lose the last month of rent ($3600), cleaning and repairs ($2000), and it takes a month to turn it around and place the next renter ($3600). That's $9,200 lost, which equals over two years of profit lost!

Here's a guide to learn how to calculate whether a property is worth investing in (or keeping).

[Jason Grote]

@Michael Mainini

I'm very familiar with Buda, and we currently have an STR in Buda.

I feel your pain with buying at the top of the market. If you have the resources to hold the property until the market comes back, which it likely will, it makes sense to do so. 

I will say that the STR market around Austin is not that great. Mine is in year three and it's best year was year one. Interview a couple of management companies and get their income projections, but definitely be conservative.

On the long-term rental side, I'm not exactly sure where your house is, but getting over $3,000 a month right now is for homes that are on the high end and in really nice neighborhoods. Yours may be, so if you can make your PITI in rent, then putting a tenant in the house and having the lease end at the beginning or middle of selling season could make a lot of sense. Good luck!

[Michael Mainini]

Quote from @Ryan Kelly:

@Michael Mainini you have options and renting could be a good choice if your interest rate is low. I’m happy to help you analyze it as a rental. We have many clients who have kept their homes as rentals and I encourage it if you have the right plan. We have good property management recommendations as well.

 Hey Ryan,

Thanks for the response! I will be reaching out for guidance.

[Michael Mainini]

Quote from @Jonathan Greene:

If you are 20 mins from Austin center, short-term would be ideal and really most of your stays will likely be a week. Your only issue is that STR management is costly in Austin, up to 25 percent. So, if you can learn to manage or get a co-host, you will do better. But remember that you have to furnish the whole place to the tee to crush it on STR in the Austin area, there is a lot of competition.

Thanks Jonathan! Good point, would definitely be some added cost in furnishing a larger home, considering we are going to take our furniture with us. Appreciate it!

[Michael Mainini]

Quote from @Nathan Gesner:

Quote from @Michael Mainini:

I'm a big fan of holding property forever, but you need to know the numbers. Have you ever learned how to evaluate a property to calculate whether it's a good investment or not?

Your mortgage is $3250 and it could rent for $3600. That's only $350 a month. If the home sits vacant for one month, you lose an entire year of profit.

Here's a very common scenario. The tenant fails to pay their last month of rent, moves out, and leaves some cleaning and repairs. You lose the last month of rent ($3600), cleaning and repairs ($2000), and it takes a month to turn it around and place the next renter ($3600). That's $9,200 lost, which equals over two years of profit lost!

Here's a guide to learn how to calculate whether a property is worth investing in (or keeping).

 Hey Nathan, thanks for the response. Yes, that is my biggest concern is the very poor cash flow - but with the area I'm in, I see appreciation being a large piece of the puzzle. There are still a bunch of new builds in my neighborhood and lots available, so it's hard to compete with builders right now - but I see that changing once the neighborhood is complete in a couple of years. In selling it I estimate I would lose somewhere around $30k of my initial investment, which I'm also factoring in.

Appreciate the guide!

[Michael Mainini]

Quote from @Jason Grote:

@Michael Mainini

I'm very familiar with Buda, and we currently have an STR in Buda.

I feel your pain with buying at the top of the market. If you have the resources to hold the property until the market comes back, which it likely will, it makes sense to do so. 

I will say that the STR market around Austin is not that great. Mine is in year three and it's best year was year one. Interview a couple of management companies and get their income projections, but definitely be conservative.

On the long-term rental side, I'm not exactly sure where your house is, but getting over $3,000 a month right now is for homes that are on the high end and in really nice neighborhoods. Yours may be, so if you can make your PITI in rent, then putting a tenant in the house and having the lease end at the beginning or middle of selling season could make a lot of sense. Good luck!

Jason, thanks for the reply and advice! When you say not that great are you at least breaking even on the STR? My wife and I have high paying jobs, so if I can at least break even (or even take a very small hit) I still think it would be worth rolling the dice on equity increasing a decent amount, as well as rent increasing over time.

[Jason Grote]

@Michael Mainini Our house is smaller (1600 sq ft), so it's hard for me to say what your revenue would be. I will say this, I would rather negative cash flow $100-300/month on a long term rental than positive cash flow $500 with an STR. Even with a management company, an STR is much more work plus the wear and tear with an STR is greater (typically). It's all about your comfort zone and how much attention you can give it. It wouldn't hurt to chat with a couple of management companies. I'll DM you my contact.

[Ab John]

Hey Michael,

I am familiar with Buda and I have stayed in a STR in Buda.

I currently have an STR in the DFW area. Unless it is completely managed by a property manager, it will involve work from your part. So if you are moving out of state it might not be ideal. But one good thing about keeping it as an STR it qualifies you as RE professional and would be able to deduct from your W2 income.

LTR is much more hands off especially if it is a new build. Have a handyman on call and you should be good. I would hold even if it just break even for at least a few more years. 

[Matthew Kwan]

HI Michael, you can do STR/MTR/LTR but it depends the location and time that you are willing to commit in terms of managing. If the house is located in prime area, perhaps STR would makes sense with some tax loopholes that you can achieve and save. As for LTR, you can save time and focus on other tasks, while the income is stable but the opportunity cost could be lower when you're charging a flat monthly rent.

@Carlos Valencia @Albert Bui 

[Tanner Lewis]

I'm in Austin and I see a lot of deals here that do not pencil as an LTR, but do as an STR. Look at AirDNA to see what your projected income would be. STR will be more of a headache, but it does have a lot higher income.

[David Ivy]

@Michael Mainini

Does your home belong to an HOA? With it being 2022 construction in Buda, I'm assuming it does. If so, then you should check your HOA rules and/or speak with your HOA. Many HOAs for prohibit or otherwise restrict STR.

[Nathan Gesner]

Quote from @Michael Mainini:

 Hey Nathan, thanks for the response. Yes, that is my biggest concern is the very poor cash flow - but with the area I'm in, I see appreciation being a large piece of the puzzle. There are still a bunch of new builds in my neighborhood and lots available, so it's hard to compete with builders right now - but I see that changing once the neighborhood is complete in a couple of years. In selling it I estimate I would lose somewhere around $30k of my initial investment, which I'm also factoring in.

As long as you know the costs and are willing to take the risk, I recommend holding onto the property.

[Ali Radoncic]

Quote from @Nathan Gesner:

Quote from @Michael Mainini:

I'm a big fan of holding property forever, but you need to know the numbers. Have you ever learned how to evaluate a property to calculate whether it's a good investment or not?

Your mortgage is $3250 and it could rent for $3600. That's only $350 a month. If the home sits vacant for one month, you lose an entire year of profit.

Here's a very common scenario. The tenant fails to pay their last month of rent, moves out, and leaves some cleaning and repairs. You lose the last month of rent ($3600), cleaning and repairs ($2000), and it takes a month to turn it around and place the next renter ($3600). That's $9,200 lost, which equals over two years of profit lost!

Here's a guide to learn how to calculate whether a property is worth investing in (or keeping).

 This is certainly text book and absolutely the proper way to analyze a deal.

Im not sure what he owes on the home but based on the payment and the year it was bought and the fact that its 20 min from Austin im just going to throw out 500K for conversations sake.

500K compounding annually at 3% for 5 years comes out to approx $578,000, and you have the loan paydown aspect as well obviously.  If he has the reserves for minor repairs and vacancy, I think its a good equity play.  If its going to make or break him, might be better for mental health to sell.

Austin is a great market and Id be willing to bet the vacancy could be plugged quickly.  The fact that its a newer build helps from the cap ex side as well.

I wonder when the "shift" will occur that puts "cash flow" in the back seat when considering higher growth markets.  The fact that he can even cash flow at all on that house is great in the first place.

[Steve K.]

If the value has not gone up a lot since purchase, this might not apply to you, but one thing that is often a factor when converting a primary to a rental is losing your section 121 capital gains tax exclusion (up to $250k individual, $500k married couple if you've lived in the property for 2 of the last 5 years). You can always 1031 when you sell instead once it becomes and investment property, but any time you can get tax-free profits, it's nice to take advantage of that. 

[Joe Scaparra]

@Michael Mainini, I am sorry to give you this advice as so far no one has given you a complete picture of what you are up against. 

Before I give you this advice, let me qualify myself  so you can judge if my advice is even worth taking. 

I am neither a real estate agent or a lender OR  a property manager for money.  

However, I am an investor with 20 units I own and I manage another 6 for my kids!   I manage 26 units in total.  I have been doing this since 2003.  Yes that is 21 years doing this and I have seen it
all when it comes to property management.

Most of my units are 2 bedrooms (900-1000 sq ft)  and most of my rents hover between $1500-$1900 per unit.  Big difference from a 5 bedroom 3000 sq ft house.

Here are the cons to renting out your home.

1.  Out of state and no experience with rentals............SETUP for DISASTER.

2. Property is built for OWNERS not RENTERS.  Large home 5 bedrooms!!!! Lots to tear UP!  I have a few 3 bedroom duplexes and they give me the biggest headaches.  Most families are smaller these days, extra bedrooms are an invitation to get UNAUTHORIZED people living in your home. Life is tough, but it is tougher for renters and the people they associate with.  There will be a time that they will invite others to join them (help pay rent) or take in people hard on their luck to house them.  All that does not spell good news for the owner.

3.  Property Manager.......no disrespect to the PMs on this sight, but to put it kindly you won't find any PM that will do a better job than yourself and probably dislike after you hire one.  Yes there are a few out there but to find them is like a needle in a haystack.

4.  Fees that a property manager quotes you are not what you will experience.  8-10% fee is not all the total fees they charge.  Every new tenant they acquire you will pay a half month to full month of rent in addition to your management fee.  Many PMs charge that on a tenant renewal as well.  My vacancy when I used a property manager far exceeded the time it took me to find a client.  But with no experience and moving out of state you are locked in to using a PM.

5. Rental market.  Here is some good news......Since 2003 I have never lowered rents!  Amazing! But my rents have averaged from $725-850 early on; and now average $1500-1900.  However, I am renting to lower income people and when they lose their job there are plenty of renters to choose from.  However, here is the bad news.  When $3000 tenants lose their job due to layoffs it will be VERY hard to replace them, especially at the same rental rate since everyone will be looking for lower mortgage/rents.  It is far easier to find two $1500 renters than one $3000 renter.

6. Your vacancy rate, and your maintenance cost will be higher. Renters do not care about the yard. All of my duplex's yards go brown in the summer.......All of them. Renters will not pay for watering the lawn or Plants!!!! Your curb appeal on your house will decline and if you live in an HOA be ready to get some complaints.

7.  Pets.......yes pets.  70% of renters have pets.  Some disclosed and many non-disclosed pets.  Pets, both cats and dogs leave their marks, smell and scratches!!!!  If you can't be a hands on landlord you will have issues!!!!  Any carpet in your house will be destroyed within two tenants.  The nice thing about duplexes, they are only about 1000 sq ft.  Mine do not have any carpet. My go-to-flooring was tile, but now luxury vinyl.  

8.  Renters do not change out air filters!   Yes, the do not!  Your air ducts and ceiling fans will be full of lint.  Cat and dog hair is not your AC friend.  

I know it is easier to just rent out your house and Hope For the Best.  Don't take the easy way.  Take a loss if needed and move on.  If you were an investor ask yourself this one question:

Would I buy this house to rent out from the start.  If the answer is no then don't do it now.  Yes this is not what you wanted in home ownership, but don't let a tough situation become a disaster.

Take emotion out of the decision and point out the areas that my logic is off base.

I wish the best for you.

[Michael Smythe]

@Michael Mainini how much market research have you done?

In our area, 5 bedroom homes are NOT good LTR rentals. 
- Not many families need that many bedrooms, so you can either rent for the same amount as a 3-4 bedroom home or sit on it for several months to find an ACCEPTABLE family that needs that many bedrooms. Guarantee you will find more S8 tenants than cash tenants, but they may wreck your house.

So, that leaves either STR or MTR strategy.

If you can do that for the next 2-3 years, you can then either keep it as STR or MTR if all is going well or sell it to get the $250/$500k capital gain exception.

[Bonnie Low]

Quote from @Michael Mainini:

Hello, I’m considering turning my primary residence into a rental and moving out of state. It’s a 3000 sf 5 bed 3.5 bath new build (2022) with really nice finishes. We bought at the peak of the market in 22, and can’t stomach the loss in equity + paying an agent to sell. Our plan is to hold the house 5 years + until the market comes back, or possibly just holding it long term. 

I'm considering either the STR or LTR strategy, but haven't quite decided which would be better / less of a headache.

Mortgage is roughly 3250 and I think we could rent for 3450 to 3600. Not sure on how much I could airbnb it. We're located in Buda which is a bit outside of Austin, but still only about 20 mins from downtown, so I think there's still good STR possibilities.

Im curious if anyone has any advice or things to keep in mind when doing something like this as it will be our first rental. Curious if anyone here has gone through something similar and could share their thoughts / advice. 

You're not going to cash flow as a LTR if you use a property management company. There's not enough spread between your mortgage and the LTR rates to leave much of anything after they take their cut. Are you prepared to self manage? If so, it's definitely doable but, again, it won't be cash flowing much and maybe you're ok with that. You're in a great area that will always be popular. I think Austin is pretty restrictive on STR regulations but that might not apply in your area. Use a tool like STR Insights to analyze STR potential in your area. Your property may have potential as an MTR. There's potentially a use case as an insurance placement as this is the type of home that can bring high dollar insurance contracts if done right. 

[Basit Siddiqi]

A property with a mortgage of $3,250 and a tenant paying $3,450 - $3,600 will not cash-flow when you factor in vacancy, repair, capex.

It also doesn't seem like the property appreciated since you purchased the property.
Therefore, this property thus far has negative appreciation and negative cash-flow.

This is a bad investment, cut your losses, sell it and get into a better investment.

Waiting 4-5 for the property to appreciate just to cover the realtor costs is a losing proposition.