Rental Question for Experts

[F-One]

Would you turn your house into rental property if you were moving out of state? I had not planned on it as income for retirement but with market as it is, wasn't sure if it would be better than selling. What are issues?

Current Mortgage Tax, ins - 700/month
Property Age -27 years, has had updates but A/C unit is 7-8 years old
Management companies have said they will take 10-12% rental as fee then I'm responsible for any repair costs
Rental would be around 1050 - 1100 per month (house is 1500sq ft)

My concern is being out of state, bad tenants, repair cost issues versus selling house in current market (and not being around, so house sits empty)

 

[Ed_The_Gypsy]

We had to do exactly that years ago when Houston's economy tanked, and a few years before that when we had a remote assignment. We had no choice, just like you.

I would recommend finding a management company by reference, not just our of the phone book. They are your lifeline. Talk to HR departments, banks, or someone in real estate who does not do property management themselves. When you find someone who is known to be a good performer, pay what they ask. You are trying to preserve the value of your investment.

Our tenants in Houston liked the place so much they offered to buy it later. We sold it for what we owed and were happy to be able to move on. Point: At some times in some markets you will take a loss. Breath in, breath out, move on. Better to lose a little than a lot.

 

[panhead]

relevant question

Along these same lines, there is a question to be answered. We know that if we live in a house for 2 out of the last 5 years we can sell the house and not pay capital gains, and likewise, cannot use a loss on the sale as a deduction. Now, if we turn our primary residence into a rental, does the inverse apply? In other words, if I rent it out for two years and sell it for a loss, am I able to write off the loss against my income? Does the two year limit apply here? I know if your income is too high you cannot write off the loss against your income, but it will carry over year after year until your income drops enough so you can.

Just something you might want to consider, and answers I'd be interested in having as well.....

-Pan

 

[arebelspy]

We know that if we live in a house for 2 out of the last 5 years we can sell the house and not pay capital gains

I believe this was changed a few years back and is no longer the case.

As for turning it into a rental or not versus selling it, what is the fair market value and what do you owe on it?

 

[rothlev]

The house will be prorated based on years of personal use/ years of business use.

When you turn your house into a rental the FMV as of the date it becomes a rental , is your starting point for depreciation and taking a loss later when you sell it. . You will also take depreciation and other expenses on your tax return which may be a sch. E loss depending on your income whether or not you can take the passive loss. when you sell you will recaputure any depreciation you took while it was a rental.

You will lose the right to not pay taxes on the personal gain if there is a gain when you no longer meet the 2/5 year rule.

 

[ducky911]

Yes i would keep it...Your lender might not allow it some mortgages state owner occupy.

Real estate is at such a low there is good upside coming if you look at a ten year period.

 

[pb4uski]

....Real estate is at such a low there is good upside coming if you look at a ten year period.

But the real question is whether the current income from the house and any upside will exceed the upside of your investment of the proceeds from the sale.

In other words if you rent it for x years and then sell it or sell it today and invest the proceeds for x years, which will give you a bigger pot of gold at the end? (Putting aside any hassle of having another property).

My sense is that investment returns will exceed increases in real estate prices in the near term. We sold in late 2011 for a discounted price and are glad we did and could just move on.

 

[clifp]

Well there is at least one well know stock investor who disagrees.

Appearing live on CNBC's Squawk Box, Buffett tells Becky Quick he'd buy up "a couple hundred thousand" single family homes if it were practical to do so.If held for a long period of time and purchased at low rates, Buffett says houses are even better than stocks. He advises buyers to take out a 30-year mortgage and refinance if rates go down.

I think Buffett is right.

 

[jimnjana]

We are currently using our old primary home as a vacation rental. We manage it ourselves with the help of a neighbor who does maintenance and cleaning for us. Warren Buffet recently said that if he could, he'd buy a hundred thousand homes and rent them. I'd say go for it, if you have the stomach for it.

 

[Buckeye]

Would you turn your house into rental property if you were moving out of state? I had not planned on it as income for retirement but with market as it is, wasn't sure if it would be better than selling. What are issues?

Current Mortgage Tax, ins - 700/month
Property Age -27 years, has had updates but A/C unit is 7-8 years old
Management companies have said they will take 10-12% rental as fee then I'm responsible for any repair costs
Rental would be around 1050 - 1100 per month (house is 1500sq ft)

My concern is being out of state, bad tenants, repair cost issues versus selling house in current market (and not being around, so house sits empty)

Did it once. Will never do it again. Sold the last house at a loss (OH) because we were moving to FL. Buy one, sell one, buy one, sell one.

 

[Nords]

Would you turn your house into rental property if you were moving out of state? I had not planned on it as income for retirement but with market as it is, wasn't sure if it would be better than selling. What are issues?

The answer depends on whether you're one of those people who rips a band-aid off your skin to endure a brief burst of large pain, or whether you're one of those people who peels a band-aid slowly away to agonize over a long period of smaller pain.

Figure out how much it'd cost to sell now, and figure out how much you'd be losing by renting it out. Assume that the value of the home is going to rise at about the rate of inflation over the next decade.

 

[FIREd]

We are moving out of state in June, and will turn our house into a rental property. We have already found a property manager that came highly recommended by both landlords and tenants. We plan on moving back in and making this house our retirement home in a few years. The house is paid off, carrying costs are fairly low, the rental market is favorable, the house is located in a desirable area of town with good schools, so I think we'll do Ok.

 

[WM]

The answer depends on whether you're one of those people who rips a band-aid off your skin to endure a brief burst of large pain, or whether you're one of those people who peels a band-aid slowly away to agonize over a long period of smaller pain.

Figure out how much it'd cost to sell now, and figure out how much you'd be losing by renting it out. Assume that the value of the home is going to rise at about the rate of inflation over the next decade.

I agree with this. A few years ago we owned a house in a state we knew we didn't want to come back to. Selling it was going to cost us $10K at closing. Renting it out was going to cost us at least 10K in the first few years. We sold it and haven't regretted the decision.

 

[Gone4Good]

I like having a rental property to diversify my financial holdings. And rental yields are often far better than what you can get elsewhere. However, if you're sitting on a capital gain, it's worth considering that your window for renting out the property and maintaining the tax-free status on that gain is pretty short. In two year's time, when you decide to put the place on the market, you may be trying to sell it with a tenant living in it or with the property empty. It won't show as well as if you staged your own home, which could be worth a pretty penny - although it is impossible to figure.