Primary —> rental: overwhelmed in Virginia

[Barb F.]

Hi all! Back in here after meeting Mindy Jensen on a recent cruise ☺️

My situation: bought my first home in Fredericksburg, VA in December 2019. Cash-out refinanced in November 2021 at 3.75%. I've lived in it solo the whole time. Bought it because the location, price, and other qualities made it stand out as a great property to have a long-term rental when I leave the area.

That day is coming soon. In April I am moving to Charleston for a new job (incidentally: know anybody looking for a great tenant in Charleston who wants to stay in one place for a 3 year term appointment?). After a lot of thorough conversations, I have decided that I will be renting the house to my tattoo artist. We’re on the same page about wanting everything well-documented and on paper to protect both of us and maintain a business relationship. Regardless of if I were renting to him or not, I have SO many questions. Important: I am much more on the leftist / progressive / social justice side of the spectrum and not super interested in screwing others over - mutual benefit while doing good is my preference.

1. Virginia doesn’t have many requirements around a security deposit: doesn’t require an interest bearing account or for me to return interest if it earns any. Does it need to go in a BUSINESS savings account or can it go into a PERSONAL savings account? If I do an online HYSA, are those generally personal accounts? I’m also interested in banking with a community oriented bank or credit union, black owned bank/CU, or similar, but interest rates there are often lower than online HYSAs. Most importantly: I want to not have to pay fees on the security deposit account because that would be ridiculous.

2. HOW do I approach my homeowners insurance about changing my policy, and  WHEN? I’m spooked because a house hacking friend called to ask his HOI company this same question before he started renting out rooms, and they just flat out dropped him. I have my auto and homeowners bundled with Geico / Liberty Mutual. Do I just call LM? How should I expect the premium to change? It’s about $900 or $1200/year right now.

3. I have a conventional loan held by Mr. Cooper. Will I need to refinance? Terrified that if I do I’ll get railed with interest rates that have more than doubled.

4. How do I run a background and credit check? I’m comfortable with my tenant selection but want to do this both for due diligence and for practice.

5. Do I need a *business* checking account to accept rent payments and pay for maintenance/repair costs as they arise? Even though I believe this will be pass-through income, it seems like it’s a better choice for accounting and keeping income/expenses more easily separated.

6. Should I create an LLC to accept rent and pay maintenance/repair expenses? It only costs $100 to do this in Virginia and I've done it before… but would I need to do this in my soon-to-be home state of SC? How could I even do it in SC before I move there??

7. The house is old and I’ve done a ton of reno in the last 4 years. I want to use the rent to help me build up a larger emergency fund, to the tune of $20k more than I have right now. I don’t want to draw a salary right away and instead build the EF… but is that smart? I’ve heard I should “always pay myself first” but I’d REALLY feel better with a larger EF.

8. Should I create a retirement account that I can contribute to with income from this property? What type? I don’t anticipate buying in SC so this will be my only property for at least 3 years (the length of my new position there).

9. How the hell does depreciation work? Do I need to worry about that NOW or is that a “next year at tax time” thing I can take off my plate and revisit in a few months.

10. I’m taking a big (but temporary) pay cut in my move to SC (please withhold your judgment - it was a very carefully made decision). Roughly $115k to $60k. So 2023 will be my highest AGI year for a couple years to come. 2024 will be lower, and 2025 will probably be lower still, before coming back up in 2026. (And yes, I know the phrase “man plans and god laughs” but this is just some rough approximation for a place to start thinking about this.) Having this bird’s eye view of my income for the next few years, how can/should I be optimizing this situation?

I do have MORE questions… but they’ll come after I get started with tackling these first 10. Sending good karma and warm, fuzzy vibes for anybody interested in sharing recommendations on my questions!

[Lynn McGeein]

For my Virginia one, 1) for security deposit, I just opened a separate personal savings account with the same bank I already have accounts with, so no monthly fees, and that's the only thing in it. It doesn't earn much interest, but plan to credit tenant back whatever it earns. 2)I'd call for an insurance estimate "if you decide to rent" to make sure they would cover you and that costs wouldn't rise significantly before you determine rent amount. 3) if you've already lived there over a year, most mortgages are fine with it becoming a rental. 4) For screening, I just use Transunion smartmove so tenant can pay them directly for the credit/background check, although I do have a separate application they fill out so I have their pertinent information and emergency contact in case I ever need to evict. 5) if you have only the one rental, I wouldn't open business checking and pay those fees. Just plan to keep expenses on a spreadsheet. 6) We got an umbrella insurance policy vs LLC - lots of forum threads on here about the differences and which one is best depending on situation. 7) An emergency fund is paying yourself, I don't sleep well whenever mine gets low. 8) For me, it would depend on your financial level, time to retirement, and/or if you have income you need to offset or not. 9) you need to figure out if selling with the up-to- $250,000 capital gains tax free for primary residence is better financially for you than renting as you'd be converting to a rental and potentially losing that tax advantage (takes a lot of monthly rents to equal that benefit), and talk to your accountant about the depreciation as I think they still value it as depreciated when you sell even if you forget to depreciate at tax time.

You said it was an older home, so remember Virginia has required disclosures like lead paint, and there's a new required tenant rights and responsibilities form that has to be done, some localities require annual smoke alarm tests or rental inspections.  If you're not comfortable with leases and disclosures and dont' have a network in place like electricians, plumbers, handyman, etc., that will help without you being there, then might be best to hire management vs long-distance landlord, at least until you're comfortable with it.