Renting You House to Go Abroad a Few Years?

[ESRBob]

Curious as to whether anybody has ever rented out their primary residence to have a few years to go 'walkabout' in another country or place. The rental income could subsidize or cover the expenses of the trip, and you could go experience Italy or Australia or the Far East for a few years without having to pemanently relocate,come back to home etc.. I am guessing anything less than two years would not be a reasonable rental for the tenant, but maybe that isn't right either.

Anybody try or consider this? What would be the upsides/downsides?

 

[dory36]

My horror stories are at http://early-retirement.org/forums/index.php?topic=2541.msg46149#msg46149 which is a thread on the same topic.

My summary: On three different occasions, we tried to keep a house while we were far away for an extended period. (Fool me once, shame on you. Fool me twice, shame on me. Fool me three times, I'm an idiot.)

 

[Nords]

A different approach

Curious as to whether anybody has ever rented out their primary residence to have a few years to go 'walkabout' in another country or place. 

Our neighbors across the street moved out the week we moved in. ("There goes the neighborhood!") He's a bank executive who was transferred to the Japan branch, where he's been for just 3 5 a bunch of years. I wonder if they're ever coming back.

The use of their (unfurnished) house has been handed over to their church. The assistant pastor lived there as a parsonage (rent-free) for nearly three years (just moved out). Now the pastor uses the house occasionally as his office, all the church's adult/youth groups use it for meetings, and they stash their garage-sale fundraisers there for a quarterly sale that attracts hundreds of the congregation's cars. (Our entire street has learned to piggyback off their schedule.) Several visiting missionaries or departing members have used the home as a residence hotel for a week or two.

I'm sure that the owners are writing off huge amounts of "rent" as a charitable donation. Volunteers maintain the landscaping and the interior is in far better shape than any tenant would ever leave it. And they've been perfect neighbors... talk about visiting the "wrath of God" on inconsiderate users.

If your home is paid off (or your mortgage is low) this approach might even result in positive cash flow.

 

[LEX]

I have given this much thought. My DW and I are often away in Eastern Europe for months. I have a security company watch the place, and we are satisfied with the result. However that can be a drain on a fixed income. Issues such as this make a strong case for townhouses and condos that you can lock and leave.

 

[ER@40]

DISASTER - no need to read any more!

Despite having a downtown condo, in a major city, and in a well managed building - it proved a major headache. Instead of a single letting agent and property management service as is common in Europe, had to pay for each service separately, (and repeatedly pay for the former) for each tenant - good or bad.

The onsite building management had no rental services on offer, and were indifferent bordering on unhelpful (85% owner occupied building). Local Friends who were interested were unfamiliar with the subtleties, and those familiar were too busy even for good $. Found a Prop Management lady with solid references, but she insisted on managing the rental money, argued it was a more professional landlord service-  one the tenants would respect more. Some of messier problems and complications were :-

1. Prop Mgt lady who 'actually' lived in burbs rarely showed up. She was to oversee touchups after window upgrades. She claimed she did, but only half was done, and it was shoddy.

2. Long delays getting paid and the amounts were wrong, this took many stressful long distance overseas calls to address. High costs incurred by 'her friend' the outside contractor who only ever painted a bit, and fixed a few minor things.

3. To rent furnished or not? The former created big problems and far more maintenance. But the latter would have meant even bigger upfront hassles and costs. There were ridiculous condo elevator fees ($350/hr after only two hours of use). Plus the elevator deposit wasn't refunded due to trivial damage.

4. Long delay in approval of tenants by the condo board (6+weeks, lost tenants)

5. The rental money for the 1BR generated little income after the condo assessments + prop tax + costs were factored in. Here's why: rental income 14k, assm $5.5k, Prop tax 3k, Mgt 1k, Agent 1.4k, Misc Costs 1k. Leaves 2k. Had paid up mortgage thankfully!

If you’ve read this far, here’s the punch line, I aborted the Letting before it really got started. It was just too much hassle, refunded monies to tenants - cut a deal with agent - and gave up. Long distance US ‘condo’ land-lording is impossible, unless you have a trusted, knowledgeable friend or colleague on call - IMHO.

 

[LEX]

Perhaps one can not easily have their home base and be a globe trotting gypsy at the same time. This suggests that a home base should be very simple studio that one uses as much as a mail drop and personal storage than as anything one would attempt to cash flow while out on long term travel. To quote the great Janis Joplin tune "When you aint't got nothin, you got nothin left to loose.." 8)

 

[Mr._johngalt]

Perhaps one can not easily have their home base and be a globe trotting gypsy at the same time.  This suggests that a home base should be very simple studio that one uses as much as a mail drop and personal storage than as anything one would attempt to cash flow while out on long term travel.  To quote the great Janis Joplin tune "When you aint't got nothin, you got nothin left to loose.." 8)

That's a great line and a great point for ERs and others.

JG

 

[Mr._johngalt]

DISASTER - no need to read any more!

Despite having a downtown condo, in a major city, and in a well managed building - it proved a major headache. Instead of a single letting agent and property management service as is common in Europe, had to pay for each service separately, (and repeatedly pay for the former) for each tenant - good or bad.

The onsite building management had no rental services on offer, and were indifferent bordering on unhelpful (85% owner occupied building). Local Friends who were interested were unfamiliar with the subtleties, and those familiar were too busy even for good $. Found a Prop Management lady with solid references, but she insisted on managing the rental money, argued it was a more professional landlord service-  one the tenants would respect more. Some of messier problems and complications were :-

1. Prop Mgt lady who 'actually' lived in burbs rarely showed up. She was to oversee touchups after window upgrades. She claimed she did, but only half was done, and it was shoddy.

2. Long delays getting paid and the amounts were wrong, this took many stressful long distance overseas calls to address. High costs incurred by 'her friend' the outside contractor who only ever painted a bit, and fixed a few minor things.

3. To rent furnished or not? The former created big problems and far more maintenance. But the latter would have meant even bigger upfront hassles and costs. There were ridiculous condo elevator fees ($350/hr after only two hours of use). Plus the elevator deposit wasn't refunded due to trivial damage.

4. Long delay in approval of tenants by the condo board (6+weeks, lost tenants)

5. The rental money for the 1BR generated little income after the condo assessments + prop tax + costs were factored in. Here's why: rental income 14k, assm $5.5k, Prop tax 3k, Mgt 1k, Agent 1.4k, Misc Costs 1k. Leaves 2k. Had paid up mortgage thankfully!

If you’ve read this far, here’s the punch line, I aborted the Letting before it really got started. It was just too much hassle, refunded monies to tenants - cut a deal with agent - and gave up. Long distance US ‘condo’ land-lording is impossible, unless you have a trusted, knowledgeable friend or colleague on call - IMHO.

Well, our condo is not overseas, but it is 900 miles away and Texas says
"It's a whole other country."
We have had none of these problems, so far. Lots of reasons, but the main one
is an excellent agent on site. Keeps in touch religiously, very personable
and honest. A really quality person. Of course, I could be there pretty
quick if everything went to hell. So far, so good.

JG

 

[tryan]

I would try a home swap before I leased and left the country. Best I could do renting with a property manager was brake even (cost-wise).

But swapping might limit where you set-up base camp. Google "home swap" for websites facilitating this.

 

[Beachbumz]

We have rented our condo out several times while we traveled. The longest was 3 months and we have never had a problem. We are on the beach in Florida, so that makes it pretty easy to rent.

Beachbumz

 

[yakers]

To quote the great Janis Joplin tune "When you aint't got nothin, you got nothin left to loose.." 8)

I thought the line was "Freedoms just another word for nothin left to lose"

An interesting idea.

 

[deserat]

I did just that - I was called overseas for a short TDY and then that got extended into 3.5 years. I came back after the first six months and got the house ready to be rented. I called up 3 property managers and interviewed them. I went with the one who seemed to have the same philosophy as I, namely, I'm not a slumlord and I will be returning to the house and would like it to be livable. I have since returned and barring a few minor problems, it went OK.

First - I ended up having quite a few more renters than I thought I would. That tends to wear down the house more.
Second - although the property manager had a very extensive application process, a few of the renters turned out to be not quite the caliber I nor my neighbors would have liked - I found out that there were some serious problems with the last tenant (more of story below) such that they should have been evicted
Third - overall the house wasn't in too bad of shape considering I had a family with kids in it---luckily I had purchased commercial carpeting for most of the floors (it wore like iron) - even the refrigerator made it OK - the yard needs some help, but that's a downfall of mine
Fourth - I more than covered my costs, even with a few months of vacancies - I wasn't looking to make a killing, just cover the costs

The last tenant in there turned out to be a doozie - I had returned early and asked nicely if she'd be willing to leave early - at first she said yes, then she told my property manager that she thought I should eat the costs of the last few months she was there as I had asked her to leave early. I was out about 4 months of rent - we opted not to evict her - she did leave by the time I asked, but she now has a collections agency on her for the back rent. I also found out she had violated the contract by having pets and smoking ( found out through inspection when I returned). I also found out that her son hung with a 'bad' crowd and had lots of parties at the house. Amazing the house isn't in much worse shape if that is so.

In retrospect, I'd get an even more diligent property manager, have more inspections to determine if the rental contract is being adhered to and have low expectations when I return. I did more than cover my costs, so it was worth it in the long run.

FWIW - Bridget aka Deserat

 

[Nords]

I also found out she had violated the contract by having pets and smoking ( found out through inspection when I returned).

We did about the same managing a Hawaii house from San Diego.

We included smoking & pets as part of the deposit-- if either happened then the deposit went toward cleaning up the damage. For an incontinent dog that included carpet re-coloring.

If you rent out a single-family home within commuting distance of a military base, try their Housing Office. The senior officers/enlisted are occasionally shown around by "escort" employees who let them know what neighborhoods are a good deal and when a house is worth renting. You tend to get quieter families with steady income who take care of the house. It's no help with unruly kids but the threat of eviction works wonders with that problem.

 

[Martha]

Re: A different approach

I'm sure that the owners are writing off huge amounts of "rent" as a charitable donation. Volunteers maintain the landscaping and the interior is in far better shape than any tenant would ever leave it. And they've been perfect neighbors... talk about visiting the "wrath of God" on inconsiderate users.

If your home is paid off (or your mortgage is low) this approach might even result in positive cash flow.

Unfortunately, the IRS does not allow a tax deduction for rental value of property. Unlike gifts of cash or property, the Internal Revenue Code does not allow a charitable income tax deduction for donations of the rent-free use of property. The reason is that such gifts represent a gift of other than the donor's entire interest in the property.

Also, because it is not deductible, the "gift" might have gift tax consequences if the value of the gift is more than $11,000 a year (or whatever the current gift tax exclusion amount is).

Once I was on the board of a local charity. Our town had a lot of empty office space. We thought we might get some space for free and the giver could have a deduction. Didn't work out because the owner's couldn't take the deduction. Instead, someone gave us money that could be used to pay rent. The money of course was deductible.

 

[Nords]

Re: A different approach

Unfortunately, the IRS does not allow a tax deduction for rental value of property...

... Instead, someone gave us money that could be used to pay rent.  The money of course was deductible.

Ah, Martha, you're destroying all my cherished illusions. But apparently when the IRS closes one loophole, the Lord opens another.

I don't know the exact financial deal (but I'm going to have to ask the pastor next time I see him!). They're probably charging "market rent" and donating it back to the church. (After all the owner is a banker.) As long as no one gets greedy on Schedule E then the IRS is probably ignoring it.

 

[Martha]

But they still don't get ahead because the "market rent" gets counted as income for them, washed out (maybe) by the gift of the cash back. So at best they are not behind and not ahead. Except maybe on God's ledger.

 

[GTM]

Anybody try or consider this?  What would be the upsides/downsides?

Sure there will be issues but with a good management service or individual to take care of things it should work out.

The real problem is getting away from work for 2 years.

 

[Nords]

But they still don't get ahead because the "market rent" gets counted as income for them, washed out (maybe) by the gift of the cash back.  So at best they are not behind and not ahead.  Except maybe on God's ledger.

Hmmm, let me put some numbers on the math:
$1500/month rent x 12 = $18K (Call it a long-term lease from 2000.)
Excise tax 4% $750
Property tax $2500
Depreciation ~$5K
Maintenance/repairs/utility costs/management fee ~$2500K
Mortgage interest ~$8K

Even without getting too creative the house income nets out to zero on Schedule E. So there's no income to pay tax on.

Meanwhile they return the $18K rent as an offering to the church. Admittedly its deduction may be limited by their income or other issues, but essentially they're paying
~$14K for an $18K deduction. At this point I would guess that this bank exec would sharpen his pencil to reduce the $14K or raise the $18K until he reaches a net zero. So they're not ahead or behind.

You're also right that they're only delaying the inevitable depreciation recapture, but when they return they'll resume living in the place for at least two years. At that point they could sell and pocket the cap gains or just keep the place until it's handled via their estate.

In the meantime their house is watched & cared for by people they trust.

 

[P.S.]

Did this when lived overseas for two years.  Worked because tenant
1. was in for the long haul (>6y);
2. made only two requests/reports during his tenure:
- the kitchen faucet and pipes were leaking,
- could we pay for curtains (sure why not..).

Parents had a house in the Dallas area that they rented for >10y without problems. Key was an excellent property manager, since they live thousands of miles away.

 

[Martha]

Fair enough Nords, maybe it would make sense. Though unless their income is very high, the property taxes and mortgage interest likely is deductible anyway. But you do get the benefit now of the depreciation and are able to deduct all the expenses even if your are at a high income.

Even if they go back to living in the house, they still have to pay taxes on the recapture of depreciation, even if they live there 2 out of 5 years. But the rest of the gain is sheltered (up to 500,000).

 

[LEX]

(Erratum) Yakers, your are right.  The right context of the Quote is from"Me and Bobby McGee' by Big Brother as belted out by the late Janis J.   I was attempting to paraphrase Dylan, from Like a Rolling Stone. It should have stated:  "When you ain't got nothin, you got nothin to loose...."  Leave it to me to attempt but fail at literary reference.  But, there are many of us ER's that have less than perfect recollection of the late 60's, but I do know I had a great time.  8)

 

[Nords]

Even if they go back to living in the house, they still have to pay taxes on the recapture of depreciation, even if they live there 2 out of 5 years.  But the rest of the gain is sheltered (up to 500,000).

I've always wondered how that's tracked. The longer they live in the house after returning to it, the less likely anyone is to remember depreciation capture. (Least of all the CPA doing the taxes.) I guess that's what TurboTax is for.

I thought the depreciation would bring the house down to a new basis, and gains on that basis would be sheltered up to $500K. But I bet reading about the rules makes one decide that 1031 exchanges are "simpler"...