Does the 50% rule apply for short term renting?

Question

I am thinking of renting my current primary residence. I dont plan to hold it longer than 2 years so I am wondering if the 50% rule would apply?

Jean Bolger · Answer

Since you say you have already closed on your new home you obviously have enough income to cover both mortgages. So that makes me believe that you have enough income/reserves to deal with this even if things go a bit sideways. If things were at all tight for you w/ the finances then I would be cautioning you more strongly against it. As it is, you may well come out somewhat ahead and you probably won't get hurt. If it were me, I'd sell and do something else with the proceeds though. Betting on 2.3-3% appreciation just doesn't excite me that much.

Bill Gulley · Answer

Not really, you all ready own it! The 50 and 2% "rules" are targets in the consideration of buying a property, after you own it, you're rather stuck with what the market will bear. As Jon mentioned, why not sell now and not put the property at risk for a short holding period? If there is some reason you can't sell now, like some title snafu, then what the market will produce will at least limit expenses to carry it, barring that you don't lease to a wrecking crew. Research your market and qualify your tenant with a fine tooth comb. :)

Gerald K. · Answer

So basically, you're hoping for appreciation and learning property managment. What would you do if the market declines in the next two years? You need to think about alternate exit strategies, such as renting for a significantly longer period. Does it still make sense?

Jon Holdman · Answer

Also keep in mind that some renovation will be required in order to sell after leasing it for two years. Possibly significant renovation if you get messy tenants. At the very least you should factor in replacing all carpets and painting the interior.

Joshua M. · Answer

Great points Jean. The projected 2 years allows for a considerable buffer that I am comfortable with. The market here is also less volitile and not a huge concern. Now the tennats and staging do always pose some risk, I absolutly agree there.

Jean Bolger · Answer

Imagine you get eighteen months out, put it on the market- but the market is not as hot as you had hoped. That 2 year deadline is ticking closer and closer..... Maybe you get a lowball offer, maybe you get no offer at all. Maybe because you have a renter in there the place doesn't show as well as if you had it nicely staged. I see the potential for some sleepless nights. The potential profit in the best case scenario is not exactly huge- it may not make it worth the risk.

Joshua M. · Answer

You are absolutly correct, I am throwing that % out there as an average over the last 3 years with what is being projected for the next few. We have been pretty lucky buying at the low and having great gains in the last 4 years. As for the appraisal, it was a true appraisal. I used the wrong term when describing the $250, sorry and thank you for catching that.

Jon Holdman · Answer

Cash flow is nowhere near $200 a month. Your best case cash flow is $250 a month for the months where you have a tenant in place an no expenses besides the PITI+HOA. Any other hits - vacancy, maintenance (guaranteed you will have some over two years), make ready costs, legal fees, CPA fees, HOA assessments, etc, come out of that $250. Not sure how much of the $1450 is P&I, but the 50% rule says you take half the rent ($850) and subtract the P&I part of your payment to estimate cash flow. This doesn't look like a big negative cash flow, but it also isn't $250 a month, either, unless you get very lucky. I've been lucky at a video poker machine or a craps table before, but I know what the reality of these games really is, too. Now, if you self manage, you can earn the PM's cut. That's significant. But it is a job and you have to be prepared to deal with it. Appreciation over the next two years is just a guess. Maybe that happens. Maybe it doesn't. You just don't know. Is the $270K from a true appraisal? Or is it a tax assessment?

Joshua M. · Answer

@jon Holdman Thanks for the follow up. That’s exactly why I posed that question. Here is my thinking. Its our current primary residence and we just closed on a single family and will be moving. My thought process was to rent the town house out for 2 years, getting experience as a Land lord and grow a little more equity and cash flow a little monthly. Here are the numbers. I would love your thoughts. 4 br 2.5 ba town home built in 2001 Currently owe $215K - recently appraised at $270K Total monthly payment (mort, tax, hoa, ins) $1450 Comp rentals in area show - $1700-1850 I don't need to spend much to get the home rent ready (>2000 at most). I don't plan to hold it longer than 2 years so that we can avoid capital gains. In my head its a no brainer to hold the property, continue to get strong appreciation (2.5-3%) while having the mortgage paid down by someone else. Also shows cash flow of ~200-300 a month. Whats are your thoughts?

Jon Holdman · Answer

The 50% rule applies to a portfolio of properties for a long period of time. For any particular property over any short period of time the actual results can deviate considerably from the 50% number. On the positive side you're limited by the taxes and insurance. So best case is "cash flow = rent - PITI". For a couple of years you might hit that. On the downside there is no limit. Some big repair, tenant damage or some other major expense could crop up and your actual expenses, vacancy and capital could be much larger than 50% of the rent. For that matter, they could be larger than 100% of the rent for a short period. I had one expense on one of my properties in 2013 (sewer line replacement) that was over 50% of the year's rent. What's your reasoning behind this short term hold? Why not just sell now and be done with it?