Renting out your home?

[Gone4Good]

I found this other thread, but wanted to ask a question not covered there.

Living in a high-cost, urban, area is an impediment to retiring. I've considered moving but think the risks likely outweigh the benefits. Something I've thought about recently is renting out our apartment while we live in other areas on a "trial basis". I'm concerned, however, that if we decide to return home we may not be able to reclaim our apartment from the tenant. I've heard that evictions can be a nightmare. What risk do I run that the tenant will not want to leave once their lease is up?

 

[Arif]

I see you live in NYC so I am assuming that is where you're home is located. If I were you I would ask other landlords in your area this question. Their might be a RE investment club nearby that you could visit to get a feel for the issues of being a landlord in NYC. From what I have heard, NYC is a strange and difficult (not impossible) place to be a landlord so thread carefully.

 

[Mr._johngalt]

I found this other thread, but wanted to ask a question not covered there.

Living in a high-cost, urban, area is an impediment to retiring. I've considered moving but think the risks likely outweigh the benefits. Something I've thought about recently is renting out our apartment while we live in other areas on a "trial basis". I'm concerned, however, that if we decide to return home we may not be able to reclaim our apartment from the tenant. I've heard that evictions can be a nightmare. What risk do I run that the tenant will not want to leave once their lease is up?

Significant.

JG

 

[vic]

My biggest concern renting out my own home would not be to get my home back. The biggest issue to me is in what shape I would get it back.

As a homeowner you live in your own house and treat it as such. A renter is only staying there temporarily until they move on. You will have considerably more wear and tear than if you were to live there. I have some great renters but I would not want any of them to stay in my own home.

Most states have some apartment owners or landlord organizations or whatever. You can check out what leases they have and what to expect. Do not use a generic lease that my be in violation of state law. I am in TX which is very landlord-friendly. You can always rent something out month-to-month (or maybe do a 3 month lease first). On a month-to-month lease, either you or the renter can give 30 notice to terminate the lease without any reason (btw, that is not the same as eviction). If you get someone with a good rental history and good credit, they will probably not give you too many problems. Getting a good tenant by careful screening solves 99% of the potential headaches.

Vicky

 

[MooreBonds]

I'm currently in the market looking to buy my first home, and am toying with the idea of renting out some of my spare bedrooms.

Do you have enough rooms where you could still live there when you're done 'exploring', or are you looking to rent out your entire house?

 

[Gone4Good]

I'm currently in the market looking to buy my first home, and am toying with the idea of renting out some of my spare bedrooms.

Do you have enough rooms where you could still live there when you're done 'exploring', or are you looking to rent out your entire house?

Yikes. It'd be cozy. We have a 1,000 sqf, two bedroom apartment, which is fine for the two of us.

Then again, after I told the missus that we'd be sharing our place with a stranger I suspect it would be just me moving back . . . so a roommate might work out after all.

 

[flipstress]

Can you rent to friends? They might take better care of your place.

 

[simple girl]

I've heard that evictions can be a nightmare. What risk do I run that the tenant will not want to leave once their lease is up?

We are in a similar situation (renting out our place while on the road for work) and had to face the same questions. We researched a lot on mr.landord.com. I would suggest you check it out, perhaps post your question there, too.

I think there is always a risk that you'll have a problem tenant, but the risk goes down the more selective you are. I would expect more wear and tear on the property than if you lived in it.

If you did have trouble with an eviction, how hard would it be for you to live in your new area a little longer while the eviction is resolved?

Risk vs. reward. How much do you want to try out other areas? How much will investigating this help you discover if you can retire earlier in a more low-cost area that you like?...

simple girl

 

[Caroline]

Is there a college anywhere near you? If so, maybe a carefully screened grad student would work?

(S)he might be easier on the house (studying instead of partying -- at least in theory), and would depart upon graduation, leaving you to move back or rent again, as the spirit moves you.

I've been thinking along these same lines, living as I do on the equally expensive west coast. Thanks for the question.

 

[vic]

When it comes to eviction, most states have a very fast streamlined process. Within a few weeks, most delinquent tenants will have had their court decision and if you like the constable can supervise you while you physically throw their stuff out. I am in TX and within 10-12 days I will have them out (vs 6 months for small claims) - excellent landlord friendly state anyway.

When you are renting: avoid friends at all costs unless you want trouble or lose your friends. Being a landlord is business. Always put EVERYTHING in writing, and definitely the lease. Important stuff goes by certified mail etc.. I did not like one of my tenants (high maintenane whiner) - all it took was 30 days notice to get her out - just by giving a notice of non-renewal. She was a professional property manager and knew that that was it - nothing to contest about that. Otherwise I would have had the court have taken care of her.

One of my tenants will be losing his job in a few weeks. Most likely he will default on the rent. He will be evicted in that case. It will probably even not go to court. I will definetly not lose any sleep over it.

The biggest problem with evictions is that these people may be angry, they will lose their damage deposit anyway and they may want to teach you a lesson by remodeling your place.

However, if you got a place in a good neighborhood and you screen your tenants carefully, you should be ok in most cases. I avoid roommate situations and most students. Ideal for me is a couple where at least one works and FICO >700.

Another thing you have to remember is that people will expect that you take care of stuff when it breaks (and you should, do not let tenants 'fix' stuff). You never know when you get a call that there is one foot of sewage in the tub and you end up having the entire sewer line replaced. Difficult to do when you are somewhere else. Of course you can always hire a property manager

Vicky

 

[mathjak107]

new york city is very landlord unfriendly . i would never be a landlord again. it can take 3-6 months to get a tenant out and you must have maintained impeccable records.

the courts wont even open a case for you unless you can prove that you didnt get the rent. the judge can't just go okay mr tenant show us you payed the missing months rent, nope you need enough proof to get the court to ask the tenant that question first.

the only way is to exchange recepts especially if cash is involved. you give the tenant a receipt for the cash and they give you one .

now as stupid as it sounds you go to court and layout the recepts showing your missing receipts for the months you are owed rent. you could have thrown them away but the fact is it opens the case up for the judge to ask the tenant for his proof he payed.

make sure you have a lease. i thought i would have an advantage with no lease to do more things frreely. nope , without a lease how do you prove the rent amount?

my tenant owed a few months rent and threatened bankruptcy if i attempted to collect any of it. try going to court to evict someone after bankruptcy here in nyc, its a joke.

 

[mathjak107]

heres a few other things we learned about being a landlord in nyc....

if you want a delinquent tenant out with out risking the fact that the tenant will bring a hundred bucks to court to put towards the rent and the judge will let them stay then you can allow a family member to live there and use those grounds .

heres the rub there too. you cant just tell the tenant or mail a certified letter... it must be done by a process server and it must have special wording to the effect that you own no other real estate to let your family member have.


it must be filled by a certain time of the month or else you give them another month.. if you blow any of the above the court will not accept the documents and the tenant gets another few months to stay without paying.

nothing is a problem in real estate until its a problem and nyc is the worst place on earth for a problem, you better have deep pockets and lots of time

i was a landlord for 20 years and for 18 years it was good, the problems i hit with a bad tenant have made me never want to be a landlord again.

 

[Mr._johngalt]

When it comes to eviction, most states have a very fast streamlined process. Within a few weeks, most delinquent tenants will have had their court decision and if you like the constable can supervise you while you physically throw their stuff out. I am in TX and within 10-12 days I will have them out (vs 6 months for small claims) - excellent landlord friendly state anyway.


Vicky

I have owned rental property in four (4) states. It seems to me that Texas
is the most "landlord friendly" which should not be a surprise I guess.

Disclaimer: For all you would-be RE investors and Trump wannabees,
there are still the fire ants, rattlers, gun-nuts, scorpians, heat, dust
etc etc

JG

 

[kcowan]

We have friends who are currently on holidays in Manhatten. They rented a 2 BR/2 bath apartment west of the park for 2 weeks. Putting your place in such a pool might get you comparable returns while leaving the management of the place to someone else.

 

[MooreBonds]

A quick question for Martha and the other non-professional experts

If you form an LLC that owns real estate and rents it out to people to live there, is there a risk of a red flag if you take your mortgage interest expenses, real estate taxes, insurance, and depreciation, and it results in a constant annual loss for many years? Or does the IRS realize that when you add all of these together, it may result in consistent tax losses from year to year?

 

[Martha]

Now I am feeling shy. Maybe my good buddy retire@40 can give you some guidance.

I and a lot of people I know have rental property investments that threw off losses for a number of years. And now I am paying for in by taxes at 25% on recapture of depreciation.

How many years are you talking? As debt gets paid down and property depreciates, the chance of losses go down as well.

Or, are you saying there is no profit motive or there is some sham aspect to the generation of a loss?

 

[MooreBonds]

Now I am feeling shy. Maybe my good buddy retire@40 can give you some guidance.

I and a lot of people I know have rental property investments that threw off losses for a number of years. And now I am paying for in by taxes at 25% on recapture of depreciation.

How many years are you talking? As debt gets paid down and property depreciates, the chance of losses go down as well.

Or, are you saying there is no profit motive or there is some sham aspect to the generation of a loss?

No, no sham...I stay clean when it comes to the IRS.

My idea: find a house that is in moderately good shape, but in an area where they are tearing down 250k-350k homes to put up 800k-1MM homes. Rent it out for a while (5-10 years). Based on my back-of-the-envelop calcs, the rent would barely cover (or perhaps barely is short) the mortgage. Yes, I know the hazards of having cash on hand for a bad water heater/A/C/leaky roof, etc..

After the tenants run it down, tear the house down, build a nice new one (myself), and put the new house on the auction block.

Until I tear it down and build the new one (or perhaps I will live in the new house once it's built), the rent income will not exceed the house depreciation, mortgage interest, and real estate taxes. So I'd have 5-10 years of net real estate income losses (in all likelyhood).

 

[Patrick]

So I'd have 5-10 years of net real estate income losses (in all likelyhood).

But you'd have to recapture all that when you sold the property, right?

 

[Martha]

No, no sham...I stay clean when it comes to the IRS.

My idea: find a house that is in moderately good shape, but in an area where they are tearing down 250k-350k homes to put up 800k-1MM homes. Rent it out for a while (5-10 years). Based on my back-of-the-envelop calcs, the rent would barely cover (or perhaps barely is short) the mortgage. Yes, I know the hazards of having cash on hand for a bad water heater/A/C/leaky roof, etc..

After the tenants run it down, tear the house down, build a nice new one (myself), and put the new house on the auction block.

Until I tear it down and build the new one (or perhaps I will live in the new house once it's built), the rent income will not exceed the house depreciation, mortgage interest, and real estate taxes. So I'd have 5-10 years of net real estate income losses (in all likelyhood).

I don't see a problem. As Patrick mentioned above, you will have to recapture any depreciation for which you received a tax benefit when you sell the place. My question would be whether it makes business sense given that the property might not even cash flow.

 

[Gone4Good]

We are in a similar situation (renting out our place while on the road for work) and had to face the same questions. We researched a lot on mr.landord.com. I would suggest you check it out, perhaps post your question there, too.

I think there is always a risk that you'll have a problem tenant, but the risk goes down the more selective you are. I would expect more wear and tear on the property than if you lived in it.

If you did have trouble with an eviction, how hard would it be for you to live in your new area a little longer while the eviction is resolved?

Risk vs. reward. How much do you want to try out other areas? How much will investigating this help you discover if you can retire earlier in a more low-cost area that you like?...

simple girl

Well I won't quit my job until I can afford to live right where I am now. We like it here and we don't really want to take a flier on moving to what we hope will be a lower cost area just to speed up the retirement process. I fear that after we've picked up and moved, we might wish we hadn't.

But regardless of whether we can afford to live where we do, I can't help but think we'd have a higher standard of living and more financial security if we lived somewhere else. And besides, who's to say we wouldn't like someplace else better? We'd also like to try living overseas for a while. Maybe one of those places would stick and we wouldn't have to worry about coming back but we'd also like the option of returning to a place we know we like.

So the idea of renting out our place and exploring other environments has some real appeal.

 

[mathjak107]

the trick is to die, then your heirs inheirit the property and the depreciation is wiped out.

 

[Nords]

No, no sham...I stay clean when it comes to the IRS.
My idea: find a house that is in moderately good shape, but in an area where they are tearing down 250k-350k homes to put up 800k-1MM homes. Rent it out for a while (5-10 years). Based on my back-of-the-envelop calcs, the rent would barely cover (or perhaps barely is short) the mortgage. Yes, I know the hazards of having cash on hand for a bad water heater/A/C/leaky roof, etc..

No matter how much rent our tenants paid, we've never made any money on Schedule E. And from what professional property managers tell me, I don't think the IRS is surprised by landlords losing money.

You have to pay depreciation recapture taxes whether or not you remember to actually depreciate the building. So you might as well let depreciation and the mortgage help you avoid (not evade!) paying taxes on the rent.

Of course there's a guy I know who attempted to depreciate the land under his building, but the IRS caught onto that right away. Just to make sure he understood the concept they audited him for five years straight.

 

[vic]

Landlording in NY seems risky business. TX is landlord lala-land. What kind of stupid NY laws that you can barely get the renter out. If mr tenant does not pay the rent, I still got to pay my mortgage. TX has a non-judicial foreclosure process which is also lightning fast... So pay up or get out asap.

We got three rentals that we want to tear down in the next 5-10 years and then rebuild on the lots (depending how quickly the tenants can the houses out).

Anybody knows how does it work when you tear down the entire thing? Can the whole house be depreciated instantly since there is no house left?

Vicky

 

[mathjak107]

dont even get me started on new yorks stupid rent control and rent stabilization laws. what a bogus bill of goods this is for new yorkers

 

[Mr._johngalt]

dont even get me started on new yorks stupid rent control and rent stabilization laws. what a bogus bill of goods this is for new yorkers

And for the rest of the country at some point. You will see things in the
future that will make rent control look positively benign, instead of the malignancy that it is.

JG