Rental property questions

[Danno]

I know there have been somewhat similar threads in the past, but not sure I have seen one exactly on point (if so my apologies), and I know there are a lot of slumlords here.

What are the implications of turning a primary residence into a rental property (not an airbnb rental, long term rental)? Some things I know need to be considered, such as

1. Tax implications. This could include how a rental property is taxed and whether there are any other tax implications (with the recent increase of the standard deduction, we did not itemize and deduct mortgage interest this past year, but no idea if turning the property into a rental might change that)
2. What is a reasonable amount to allocate to "expenses" after PITI, in order to determine a more realistic cash flow
3. Related to the above, what's a realistic cash flow number that would make it worthwhile (worthwhile is a squishy term, but what are the factors and considerations to make such a determination)
4. Is there likely a change to my homeowners insurance (I assume I'm supposed to notify them)?
5. If the property needs to be sold in the future, how much is having it as a rental property likely to impact that sale price
6. Any non-financial considerations
7. Anything else not considered above

[DBdude]

Yes there are tax implications because of depreciation recapture. You don’t have to depreciate the home but if you sell you have to pay the depreciation recapture if you sell the property and it is not your residence

You have to tell your insurer that you are renting the home.


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[AdironRider]

1) Tax implications are often pretty specific to each owner individually, but the big one is if you want to sell you should try and live in it as a primary for at least 2 of the previous 5 years prior to sale.

2) 3% is a good rule of thumb. If you rent to college kids I'd probably double that.

3) If you can hit a 10% cap rate you are doing well.

4) You are going to want a landlord policy. I've found these to be cheaper as you aren't insuring the belongings within the residence.

5) It can go either way depending on condition, but if it is a multi family all people are going to care about is the cap rate. A single family property that is rented out as an airbnb can often fetch a little more if it has a proven rental history, reviews, etc.

6) How do you feel about popping toilets at 2am and all the literal shit that entails? Get yourself an awesome handyman on speed dial.

7) Families are better for keeping the place occupied long term and cash flowing. You will probably average .5-1 month a year vacancy unless you get some rockstar long termers in there. It is often worth renting just below market to achieve this.

[RootSkier]

8) One person smokes meth in your house you may as well just burn it to the fucking ground.


I think small-time residential landlording of single-family homes is a good way to get yourself super-fucked and add immeasurable levels of stress to your life.

I would advise you to read the entire Colorado landlord tenant code, including the part about security deposits, which is a separate section in some states.

[Buster Highmen]

Depreciation is your friend.
Assume at least 2 months of rent goes to taxes, maintenance, insurance.

DB gots the insurance and tax issues encapsuled.

Be very aware of how tenant friendly your state and local laws are. At least 20% of your tenants will be nightmares and cost you money and it's worse in states that make evictions difficult.

[RootSkier]

the big one is if you want to sell you should try and live in it as a primary for at least 2 of the previous 5 years prior to sale.

This x1000.

[liv2ski]

I think AR hit the important parts. Remember, that when you sell a property that you have owner occupied for 2 of the last 5 years that allows for $250k for a single person and $500k for a couple in tax free gain. If you have more than that, then renting the property out for 2 years (to qualify) for a tax deferred exchange can be a good tax avoidance strategy if you want to down size in the future.
Exchange the main home into 2-3 rentals of which you eventually move into one of them and have income from the others. Trying to show my wife the merits of this idea isn't going over so well.

[Danno]

Thanks for all the responses, still processing. I don't think this house would be a long term rental, it's just a stopgap solution to some other issues. So I am not even sure depreciating it is worth it, in part because of that headache but also because my understanding is that when you sell, you have to pay that back in some form? (sorry if my understanding is misguided) And I suspect the 2 out of the last 5 years won't be a problem.

Here's what little I understand. Let's put real numbers to it.

Say, we get rent of $35,000 for the year.
Mortgage Interest is $12,000
Homeowners Insurance of $1,800 (may change when converted to rental)
Real estate taxes of $3,500

I don't know what to account for in terms of expenses beyond that (suggestions? Adironrider, is your 3% on the rental amount?). So, if my understanding is correct, I have about $17k-18k in "income" that then gets taxed? So, maybe about $6k in income taxes to pay?

Or do I have that completely wrong?

[fatnslow]

Many argue one missed opportunity when calculating returns is the home value appreciation. The appreciating value(historically 5% over long term) against your initial down payment can be a very good investment as long as the rental income is able to cover PITI and ALL expenses. If you can deal with being a slumb lord it's not such a bad deal, however if you pay a management company to handle everything it usually doesn't pencil out. Picking the right renter will be a huge factor.

[Elkhound Odin]

Don't you listen to the radio? These guys say it's easy peasy to rent and make $$$$$. Nothing to worry about. They take care of everything. Nothing can go wrong.

https://renterswarehouse.com/

[Cruiser]

$35k a year in rent for a single wide with a stick built front porch? Crazy times up in Boulder county.

[RootSkier]

Or use a 1031 exchange to roll it into another investment.

Still just deferring instead of getting it tax free.

[Timberridge]

Boulder's near Denver? Did anyone mention the chance that these renters could turn it into a grow house and pack the garage full of stolen bicycles?

[Kenny Satch]

Make sure you have the right insurance to fit whatever you decide to do and read the damn thing.

[DJSapp]

On selecting renters: you cannot discriminate. You can, however setup a significant set of requirements on when and how you will take applications. Here are some examples that may or may not work in your locality

1. Hold a home viewing day and only accept applications that day. No exceptions, if they didn't show up prepared, they lose. Make people sign in to verify they were there
2. First + Last + Security deposit (maximum amount practical, up to another month's rent or more if the market will bear it) due at lease signing. No exceptions. Yes, this is a significant amount of cash up front, in your case nearly $10k.
3. Sealed credit report due with application provided at their expense. No significant delinquency beyond 30 days. Must be in good standing with local institutions. No application will be considered without a credit report. No exceptions.

The should weed out 95% of the bad renters that will ultimately trash the place. You will feel like an asshole doing this, but you are not discriminating, you are simply separating the folks that come prepared from those who are not. Typically the one's who are not come complete with a sob story, drama, and bad things seem to follow them. You don't want that.

To defend against the rest...

You cover water/sewer/garbage and landscaping and raise the cost of rent to cover it. Hire a landscaper that will report the house condition to you when they stop by weekly. Do not accept the renter maintaining landscaping or allow them to pay for water, there is no security deposit high enough to cover this if your entire yard dries up.

[KQ]

I think small-time residential landlording of single-family homes is a good way to get yourself super-fucked and add immeasurable levels of stress to your life.

Ain't that the truth! I've got houses sitting vacant because I'm sick and tired of dealing with renters who think they can stretch and bend the rules not giving a damn about other people's property. "It's just a rental, so who cares?"

[DBdude]

Or use a 1031 exchange to roll it into another investment.

fancy talker

[Danno]

On selecting renters: you cannot discriminate. You can, however setup a significant set of requirements on when and how you will take applications. Here are some examples that may or may not work in your locality

1. Hold a home viewing day and only accept applications that day. No exceptions, if they didn't show up prepared, they lose. Make people sign in to verify they were there
2. First + Last + Security deposit (maximum amount practical, up to another month's rent or more if the market will bear it) due at lease signing. No exceptions. Yes, this is a significant amount of cash up front, in your case nearly $10k.
3. Sealed credit report due with application provided at their expense. No significant delinquency beyond 30 days. Must be in good standing with local institutions. No application will be considered without a credit report. No exceptions.

The should weed out 95% of the bad renters that will ultimately trash the place. You will feel like an asshole doing this, but you are not discriminating, you are simply separating the folks that come prepared from those who are not. Typically the one's who are not come complete with a sob story, drama, and bad things seem to follow them. You don't want that.

To defend against the rest...

You cover water/sewer/garbage and landscaping and raise the cost of rent to cover it. Hire a landscaper that will report the house condition to you when they stop by weekly. Do not accept the renter maintaining landscaping or allow them to pay for water, there is no security deposit high enough to cover this if your entire yard dries up.

Thanks. Our yard is currently fucked, so it would be hard to ask them to make it unfucked, but I get what you're saying.

And, in fact, I lived it when I used to have roommates. I had one guy who had a sob story regarding why he didn't have the security right away and I bought it. He moved in and was seemingly a nice guy, but he was perpetually strapped. He did ultimately pay me the security, but then later stole from me in order to make rent. A friend told me later the exact same hard-assed advice you have here, that requiring all that up-front cash may seem harsh, but it at least demonstrates that your renter is likely financially solvent.

[liv2ski]

Look at your states rules as far as what you can ask for upfront, (money) as in CA I have always asked for the prorated 1st months rent and a security deposit equal to a months rent that can not be applied to the last months rent. I use this company to screen clients: https://www.rentspree.com If it is available in CO, use it and have the prospective tenant pay the $30 fee. I always tell tenants they also need to provide pay stubs that support their gross income is 3X the monthly rent and the person with the most savings and best credit score will win.
As previously said, my rents are normally about 10% below the high end to attract good tenants.

[RootSkier]

On selecting renters: you cannot discriminate.

If you own less than four properties and rent them yourself you are exempt from the Fair Housing Act, yo.

There may be state laws that apply, however.

[Tye 1on]

Great thread, i'm going to either rent or sell/invest in three years so starting to noodle around some of the same questions.

AR nailed lots of what i understand as well. The one piece I might add is the increase to property taxes, depending on the state. Idaho has a homestead exemption that can be huge, in my case it cut the tax bill in half when I corrected the error that was made when I bought [county had not been notified that it was my primary residence], so will double if I rent it out.

[digitaldeath]

I’d be worried about the tenants ruining the linoleum floors and how you would have to steal their security deposit to stay afloat

[liv2ski]

I’d be worried about the tenants ruining the linoleum floors and how you would have to steal their security deposit to stay afloat

Good point, if at all possible try and tile the entire place with that nice looking fake wood tile that the tenants can't fuck up. That was the route I when after the last idiot tenant that rebuilt his engine in the carpeted living room. And DD, I have never kept enough of the deposit to come close to square on tenant damage, so go suck a bag of dicks.

[DBdude]

DD is a bitter pawn and thinks capitalism sucks

DD likes thugisim - it makes him feel better after selling shitty mortgages and coming home and jerking off


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[pepperdawg]

1) T
4) You are going to want a landlord policy. I've found these to be cheaper as you aren't insuring the belongings within the residence.

Seconded.