A year ago, my wife and I took advantage of the slumping housing market and bought a house at nearly 25% less than it sold for brand new just a few years before! (The person living there had a job transfer and his employer more or less owned the house, so we got an incredible deal.)
We decided not to sell the old residence because questions occurred to me: 1) Would we also take a huge hit when selling because of the depressed housing scene? 2) Would this be a good time to rent our old house?
Because I had wanted to try my hand at an investment property for some time (and because we were in a position to buy a new house without needing the equity from our old house), we decided to take the landlord plunge. We closed on our new house on March 30, 2010, and the tenants took up residence in our old house two days later on April 1.
So how has it been? Quite good actually, but that’s not to say I won’t do a few things differently when this tenant moves out eventually.
Here are my top four changes for the next time around:
- I will represent myself as the property manager, not the property owner. I would like to keep a perception of separation between business and personal life. This is not to say I would lie if asked if I owned the property, but I would just refer to myself as the property manager.
- I will not give an option for a multi-year lease. Since this was my first time as a landlord, it gave me some comfort to think the tenant would be there for several years and I wouldn’t have to go through the process of finding a new tenant any time soon. In fact, in return for the multi-year lease, I discounted the rent.
- I will require that the renter hand over 12 post-dated checks for the rent up front. Rather than relying on the rent to be deposited (or mailed to me), I will require a years’ worth of rent checks, each dated the 1st of the month, January through December. This puts the burden on me to make the deposit each month, but also serves notice to the tenant that he or she better have the funds in the bank.
- I won’t assume the rental property will result in a tax deduction. I had heard that one of the great things about rental properties is they provide great tax deductions if you itemize (or at least that’s how I understood it). That may be true if you’re not profitable, but I was. The rental income exceeded the expenses (repairs, mortgage, depreciation, miscellaneous). So at the end of the year, because it generated a gain (even though the gain was reduced by the expenses), my rental property increased by tax burden, rather than decrease it. (This year, I’ll be sure to set aside a portion of the income for tax time in 2012!)
In hindsight (and because of advice from other real estate investors), I wouldn’t do that again. I found out that most renters will stay longer than a year anyway, so by discounting the rent, I shortchanged myself. Plus if I ever had a difficult tenant (but one who was not actually violating the letter of the lease), I would have a tough time getting rid of him.
That’s essentially it. I might add a few other smaller stipulations in the lease, but these four are the big ones.
My experience in year one has been positive overall. There have been a few small incidents, but the time it’s taken me to resolve them has been well worth it. And in most months, I have spent no time at all on the rental, other than checking to make sure the rent was deposited. In other months, such as when I had to replace a faucet or do tree maintenance, I may have spent three to four hours.
Now just for fun, let’s crunch some numbers to see what I’m “getting paid” to rent this house. (For simplicity sake, we won’t include the income it generates — it’s too hard to predict because some years will have more expenses than others, like when I may have to replace a roof or HVAC.)
All told, I probably have averaged about an hour a month on the rental. The mortgage has 24 years left. So 12 hours a year times 24 years is 288 hours. If the house appreciates at 4% year, it would be worth $550,000 when the mortgage is paid off. However, we lived there for seven years before we rented it, which gives us about $100,000 in equity. So what does this look like per hour?
($550,000 – $100,000)/288 = $1,562/hour
Not too shabby.
Matthew Pryor is in his 8th year with Sound Mind Investing, now serving as Director of Operations. He previously held the Development Director position for a crisis pregnancy center. He has also served on staff with Young Life in Virginia. He currently lives in Louisville, Kentucky with his wife and three children.