Switching a primary home to a rental property

[Jonathan Horton]

Hi BiggerPockets,

I am a 24 year old currently living in Charlotte, NC but will likely be making the move to Knoxville, TN for work.  I bought my Charlotte, NC home almost a year ago with the intentions of renting it out in the future.  The future has come a little sooner than expected, but I believe that I can rent out my current home with about $200-400 monthly cash flow after paying a property manager but before saving for capex.  I also believe that with my salary and savings, I can afford to purchase a nice 2 bedroom townhouse in the college town of Knoville, TN for $100-120k, which I also plan to rent out at a later time.  Some questions and concerns that I have:

• What are some of the questions I should be asking property managers?
• Does anyone have any concerns or more profitable alternatives to this plan?
• Does anyone have preferred property managers in the Charlotte area?

Thank you for any input!

[Erik Hanson]

I don't know about the Charlotte market but holding a property as a rental, can be a really good idea.  I have done this with all of my primary residences over the last few years.   A quick question, have you lived in the property for more than 2 years continually?  If so then you can try out renting the property for the next 3 years and see if it works for you.  If not sell it tax free as it was your primary residence for 2 of the previous 5 years.  (ok not really tax free but the first $250K of equity is exempt from Capital Gains) 

As far as your property manager goes,

• Be prepared to have about $800-$1500 in expenses during the first month to get set up with the new PM. (tax deduction)
• Ask them what percentage of rent they charge. (tax deduction)
• Do they require you to keep a cash reserve with them in case of emergencies?
• What is the limit on repairs they can authorize before getting approval from you?
• How do they advertise your property?
• What is their average time between tenants?
• Do they handle cleaning between tenants?

Last piece of advice,  Get a second bank account for ONLY real estate related transactions.

Try and build up between $5,000 and $10,000 per property as a reserve.  This way you are not having to scrape together money to replace appliances or HVAC or repair a roof out of your own pocket.  If you don't need the cash flow right now dump the entire amount of the rent onto that account.  Pay the mortgage out of it, any utilities, any repairs or upgrades, it all goes through that account.  Makes tax preparation at the end of the year soooo much easier.

Erik