Thinking of renting my house out?

Question

I am actually looking to move, since I live about 45-50 miles away from work. The question is I have had to spend about $5000 dollars in the last month fixing the A/C and plumbing. I believe you can write off repairs for a rental home, and I am wondering if it would be worth it to the rent the house out for at least 1 year, so I could use the 5000 as a tax deduction. I also had to get the foundation fixed, so that would be another 7,000 if I could write that off as well. The payment is 1050, and it should rent for about 1300. Thanks for the help.

Clint

James H. · Answer

Check the IRS criteria to see what of the things you have done qualifies as a repair and a capital improvement. If capital improvement, it must be amortized over several years - reduceing immediate tax savings. Ultimately, it probably won't matter becausee expenses pertaining to a rental are only valid if the unit is on the market for rent or being rented. to claim expenses paid while you live there as rental expenses would be a lie. ANY "repairs" made before the unit is placed on market is amortized as an improvement, regardless of what it would be categorized as after the house is converted to a rental.

There are a lot of things that affect how significant the tax savings will be. Personally, my standardized dedcution is higher than all my expenses and mortgage interest writeoffs combined.

Secondly, I would never do a transaction only for the tax benefit. Make sure its profitable. I bet your principal and interest are around 600 - 700 a month. So your "rental" would probably only break even at best after expenses. Also, do you want to manage a house 45 minutes away? I like to stay within a 20 minute radius. Some people invest out of state. At least you should have lower maintenance costs since you have done some major improvements recently.

Look up the 50 percent rule and see if your property fits or is close that criteria. How much cash reserves will you have for major emergency repairs? How much will it cost to install all the new apurtenances of a new home? Appliances, window fixtures, shower curtains, furnature....? Be brutally honest about what it will rent for - based on the market, not what you think just because you dumped a bunch of money into it recently.

I'm not saying you shouldn't do it, just saying that there are more things to consider than PITI -rent.

Lynn McGeein · Answer

I like that you are thinking smart, looking for ways to limit your personal expenses and investing more while you are young.  My son rented for a few years, sick of all the tenant rules, no grills, crazy lady screaming next door, etc., so he is now buying a home, but planning to rent out a room to his current roommate.  He has never had trouble finding roommates among his friends home from college or through work, and I thought it was a very intelligent solution to invest in something solid, stop paying $$$ towards someone else's equity, but still keep his payments low.  If you don't do roommates then it won't work, but he's always preferred it.

James H. · Answer

That's why you buy houses that will rent for a profit. 15 percent rent profit plus an asset that keeps up with inflation. Plus you need to buy with equity in the deal up front. And right now, you are buying an undervalued asset which means if you buy now it will increase in value faster than inflation, whereas if you bought in 2006 it will increase in value slower than inflation - at least looking at each comparison over a 10 to 15 year respective time frame.

When done correctly, as with any business (not investment) real estate is a profitable veture. Otherwise, why would anybody hold an apartment or house with wich to rent to yourself? Think the owners are suckers barely keeping up with inflation? Depends on how good they work their deals.

Again, I agree its not right for everyone - just like opening a business is not. Buying a house to live in yourself may nor may not be a good investment. But I at least like to know I can build a deck and not have some snotty property manager tell me I can't BBQ on my patio. My parking spot is always open and nobody can tell me who can live in my house or what animals I can keep. Yeah I pay for maintenance, but I garauntee you if you can't find a mortage for less than paying rent right now - you are doing something wrong - especially in Stinkadena.

Clint Nelson · Answer

I think if your going to buy a house, then right now is a good time to buy. I also do believe if you know you will be in the same place for 10 years, it could be a good investment, or if you have a family. That being said historically housing prices on avg have risen just slightly above inflation, and if I tried to sell a stock that had that kind of return, had to spend on maintenance, and charged a 6 percent commision to sell it people would be running scared. I don't think real estate is a bad investment, I just believe it's not the best investment for everybody like a lot of people including me are made to believe. A house mortgage in my area would propably average 1200 a month with thousands of dollars down. I believe maintenance cost on a house and HOA fees would average at least another 300. If you saved the thousands, got a 1 bedroom apartment for 700 a month, and put the other 800 in to other investments I believe you would come out aheand in the long run. I might be wrong, but just what I believe from my experience.

James H. · Answer

I think if you can buy a house now, you can buy at a historic low in prices. Yeah, for the next 5 years, maybe the payback is marginal - but after that you see the win. Investing while young is the best time. Just like saving for retirement when young. But just because you don't buy now, doesn't mean you are doomed to  a life of destitude either. Just depends on what exactly your goals are. If you have a high paying job that compells you to move a alot, buying real property might NOT be a good investment for you. If you plan on living in the same area for 10 years, I can't think of a better place to park your money.

Clint Nelson · Answer

Well, I think I am definitely looking at renting for the next couple of years. I know this is propably blasphemy to say in real estate forum, but I thinking buying a house is extremely overrated investment, especially if you are single.

Lynn McGeein · Answer

Clint, You didn't say if you would be buying closer to work or just renting.  FYI, we ran into the new "buy and bail" rules, where if you convert your primary residence to a rental and want to buy a new residence, they will not count any rental income from the former residence towards income, and they count the full mortgage payment against you when calculating the amount you will qualify for to purchase your new home.   So keep that in mind if you were looking to buy closer to work, not just rent.

Michael Lauther · Answer

There are tax advantages if your rent over and above the deductions you may qualify for regarding your maintenance issues.

You need to determine first however if your property makes sense as a rental, and how long you plan to keep it as a rental .

There are also tax advantages in selling a primary residence which could be beneficial if you have a large profit on the sale .

Based on your rental estimate be sure you have enough income from the property to cover Mortgage, taxes , insurance, vacancy and maintenance to name just some of the on going expenses.

Thinking of renting my house out?

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