Should I rent out my house?

Question

This is probably a very commonly asked question, "Show I rent out my house?".  In 4 years I am planning on upgrading to a bigger house.  I have a solid 3/2 house in a town with 2 colleges.

I am thinking about using a property management company to manage the house.

If I do so, how much time is required on my end per month or year?

I'm trying to decide if I should keep the house and rent it our...or spend all the time I would have spent on the house and do IT consulting on the side instead, making $75 - $100+ / hour.

Thanks!

Scott Hubbard · Answer

The problem with investing in rentals is the avergage person does not: a) have the time to manage and care for the property, b) have the skill or experience necessary to manage or care for the property, or c) does not have the incentive to overcome a and b.

As others have suggested, when utilizing a management company the time required from you will ultimately be very low.

I would carefully consider the following  before you go forward.

1.  The condition of the property.  If it is a well constructed house recently built, chances are your property will require less in repair expense.  However, if your sitting on a older home which need constant upkeep, then the amount of repairs will double or even triple because the tenants will discover news ways of breaking things never before thought possible.

Also, you should be aware of potential safety issues.  Pools, cracks in side-walks or slabs, exposed electrical wires, non-GFCI protected outlets, and hazardous materials / organics like mold and lead are just a few of the hazards to look for. I recommend tenant proofing your house in preparation for renting.  The upfront costs will work themselves in time.

2.  Spend time picking a high-quality managment company that has experience with college properties.  It can be a huge drain of resources to hop managment companies.  Also, a terrible management company can cost you money in the long run.

3. Safety in numbers.  With only one property, the headaches are generally not much less than if you have ten properties.  This is because there is safety in numbers and when one property is vacant, you have others drawing cash flow to help tied you over.  With having only one property, you will be exposed with every problem that arises.  Being a part-time landlord is much worse than being a full-time one in my opinion.  So, my advice to you is make sure this is really want this.  Selling a home now as owner-occupied will likely net you more than selling it is a former rental one or two years down the road. So, if your not in this for the long run, then I highly recommend you sell.

4. Capitalization.  I see too many people who were really forced into being landlords becuase they though they could not afford to sell.  If your clearly not cashflowing, then you will likely not be able to support your vacany rates without coming out of pocket.  If you cannot afford to carry the mortgage on your rental for at least 6 months, then you could be undercapitalized and would then be in a very risky situation.  I have seen to many people with very good intentions get into this business only to discover they could not afford a single month of vacancy.

In my opinion, you need to carefully take into account all the pitfalls associated with landlording.  It can be rewarding, but it also can be devastating.

Jon Holdman · Answer

I don't use a PM, and only have two properties at the moment.

When things are going well, I spend maybe 10-15 minutes once a month dealing with getting the rent and sending out receipts.  If I have to go pick up rent, that's an hour or so.  When there's a maintenance issue, that's usually a minimum of an hour or 90 minutes to be sure its not something simple and easily fixable (it usually is) and then to get someone out there on the rare occasions when its not.  Roughly one incident every few months.

When I do turnover there's some time to do the walkthrough and send out any deposit money.

I do showings once a week.   I usually get 10-15 phone calls, about five minutes each, a week, then spend an hour or two doing the showings.  Screening is probably 30 minutes per group of applicants.

Once a year all the data has to be gathered up to send to the CPA.  Couple of hours.

If you're using a PM, I'd guess you'll spend 15 minutes or so once a month and then those same couple of hours once a year.  You'll probably spend quite a bit of time hiring someone and getting set up to start the contract.  If things go wrong, you'll spend time dealing with that.

Mark N.A · Answer

College rentals can be great with the right tenants and the right management.  Without that it can be an expensive nightmare.

How 'desirable' is your location?  Very easy walking distance is key.  Without that you start competing with the luxury complexes catering to students sprouting up along the bus routes.

The good news is that if you choose to sell you have three distinct target markets:  rich parents buying for their kids, college rental investors, and regular homeowners including the college faculty/staff.

Micky Fokken · Answer

Thank you all for your detailed responses.  You have helped me see the big picture.  I will follow your advice in detail.  This means I may or may not follow this route.  If, after extensive review, this is a risky venture for only a few more dollars per hour, then I'm better off spending my time getting more clients in my existing consulting side business.

I will continue to read many posts on this forum over the next few years, in preparation for the big decision.

Again, thank you for everything.  I will follow the advice provided so I can avoid common pitfalls.

Steve L. · Answer

The amount of effort required if you hire a good property manager should be low.  The times where you will need to spend effort are:

1. You are looking to switch property managers.
2. The tenant moves.
3. When preparing your taxes (not much effort for 1).

If time is something you don't have a lot of, I'd suggest you rent it under market and be extremely picky and hope to keep a tenant super long-term 5+ yrs.

Most of us here cannot relate or help with your question as we are in the business full-time and self manage our properties.  Volume, cash-flow, etc are more important to us.

If you are a "high-income" earner you have some tax benefits beyond the cash-flow that come into the equation (depreciation, etc).

Most of the regulars here buy purely on cash-flow as we get killed if we have negatives or small earners.

Micky Fokken · Answer

Jon, thanks for your advice.  I wll continue reading these forums.  This is a great site.

How much time (per week/month/whatever) on my end is required to check on the management company, do my bookwork, and complete other required tasks when a good property management company is utilized?

My goal over the next 10 years is to get my hourly ROI to exceed $100 (pretax), regardless of the business I'm in.  :-)

Jon Holdman · Answer

I'd recommend you do some reading in the Rental Property forum to get an understanding of the rental business.

Rental properties do not net much on a month-to-month basis.  If you're clearing $100 a month, you're doing well.  There are some things you can do to make more, but you're already said you don't want to deal with management.

What do you think your house would bring if you sold it?

How much rent would it bring in?

If its worth $200K and would bring in $800 in rent, no brainer - sell.

If its worth $75K and brings in $1500 in rent, no brainer - rent.

A good estimate of cash flow is (rent / 2) - P&I payment.  If you have a bunch of equity (remember, it will cost 10-12% of the price to sell), and little cash flow, you're money may be better off elsewhere.

Rentals are a good way to build long term wealth.  As long as they're cash flow positive, your tenants are paying down the mortgage.  Eventually, you have a free and clear house, or at least significant equity.

Should I rent out my house?

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