<B>Shayna</b> - Are you saying that renting for the longterm (after the mortgage is paid) isn’t a good idea? I don’t plan on moving back in, but as I mentioned, I’m think years in the future, when I may wish to retire.
StG
If American laws are anything like Canadian laws (and it sounds like they are), the only property you can sell without declaring Capital Gains is your primary residence. If you move somewhere else and rent the other property, the rent will be income, and selling the property will be a taxable Capital Gain. If you sell the other one and move into the old one, the other one will become your Capital Gain. The gubmint figures people only need one residence to live in, and all others are investments. Sometimes the gubmint isn’t completely stupid.
(Standard disclaimer - these are my not-completely baseless opinions. Get some professional advice on these issues.)
All the above is great advice. I’ve rented out a house in an earlier life and had nothing but problems. I think, perhaps, the suggestion to contact a large corporation’s HR department might be wisest if you decide to take this step. However, bearing in mind the fiscal consequences, you might do better with your $40,000 equity. What kind of return are you anticipating on your rental? Right now, at least, property values aren’t increasing the way they did, say, five years ago. It might make more sense to stick the money in an IRA. I’d start with an accountant. If you then decide to move forward, please, please to a thorough background check on your prospective tennants and have a snake-in-the-grass lawyer draw up the contract from hell. Honestly.
- PW
No, not at all. What I’m saying is pretty much what featherlou said – once a landlord, always a landlord as far as that piece of property goes. (Sort of – more on that below.) Once you convert it to rental property, if you decide you’re tired of being a landlord and sell the house, you’ll be hit with capital gains taxes on the entire amount of your profit.
There do appear to be a few options, but they all have contingencies that you may or may not be willing to do. For instance, you can sell whatever home you will have been living in, take the allowed exclusion ($250,000 for single and $500,000 for married) and move into your old house that you’ve been using as rental property, for at least 2 years, thereby converting it back to your primary residence. Then when you sell it you’ll qualify to take that $250K or $500K exclusion and potentially avoid paying taxes on it. But you’d have to want to move back into your old house for at least 2 years.
Or, if you’ve currently been living there for at least 2 years and only rent it for a maximum of 3 years before selling it, you could also avoid the capital gains tax.
This website seems to have some pretty good information: http://www.bankrate.com/brm/itax/tax_adviser/20010925a.asp
Then of course there are State taxes to consider.
In a nutshell, if your goal is to turn this property into a rental for long-term income and retirement planning, the best thing you could do is consult an accountant and find out all the potential tax ramifications before you do it, and any “loopholes” you might be able to take advantage of should you decide to change your mind.
And if you dare try to decipher it yourself, you can read the IRS’s Publication 527 (WARNING: PDF file) on Residential Rental Property.
What they all said. Really.
I am a tenant in my dad’s investment property. He has a family renting out the other half of the building, who love their home, but just don’t know from maintenance. He has me. And he has the tenants from hell.
Check your state/provincial tenancy legislation, and the city/county rental bylaws. Check with your savvy accountant. Then have your lawyer draw up an air-tight rental agreement, if you are still going ahead with it.
But I can’t express strongly enough: the two deadliest traps landlords fall into, are:
a) tenants from hell. Screen them every which way from Sunday.
b) deferred maintenance. The property managers above have said it, and it will destroy the investment value of your property if you don’t stay on top of it.
Thank you Fluffy. I’ve had tenants call the Housing Authority 15 minutes after reporting a problem because it hadn’t been fixed! I do have to find the repairman and get him there.
We’ve also had the experience of renting to Section 8 tenants, getting the approval from the City and Housing Authority that the apartment is okay, and then six months later, when the tenant hasn’t paid their portion of the rent and you’re trying to get them evicted, getting a list of items that have to be repaired before Housing will pay their portion of the rent. Who did all them damn damages anyway?
My plan is to keep the rental as a long-term investment, using it as retirement income once it’s paid off. As such, I don’t see myself selling it early, although things can happen that would necessitate the sale, I guess. Basically I’m wondering if it’s more work and expense than it’s worth.
Thanks again for all the tips and pointers.
StG
Slight Hijack;
Annie-Xmas-I feel for you having to hire outside contractors for maintenance. I have a maintenance man on site that handles the majority of it (stopped up toilets, leaks, broken windows, etc)
Do you have someone that does your routine maintenance?
Pets are both good and bad. They can cause more damage 9although kids can be far worse), but often the people who owe pets are good people.
As to letting “late” rent payments slide- find out when the rent payer is paid. If he/she is paid on the 1st & 15th, then the rent check should be "in the mail’ but the 1st. But if they are like me- paid every other week, you should know this and allow for a few days leeway. Same if they are paid on Friday- then if the rent is due Thursday, don’t be mad hurt or shocked that they don’t pay until Friday. BUT- the rent check should be there for you payday.
In general a single family dwelling like yours will not generate much in the way of “positive cash flow”. It will generate a nice tax deduction. As a rule of thumb, while you are paying a Mortage, the income works out to be just a bit higher than the expenses- and there are LOTS of those. The depreciation generates the tax loss.
Unless you are renting to freinds or family, you can’t do it from afar. It is a lot of work, also, and means a LOT of tax records.
I would say that you’d get a better return by selling it (tax free) and just having more equity in your new residence. Maybe you can buy something bigger. What can be good is if you buy some acerage with a main home and a smaller “mother-in-law” unit right there. That could be a rental.
Otherwise, what coudl happen is that you decide to rent, but after a couple of years decide it is too much bother. Then, when you sell the rental, all that gain is taxable. Tax on $40K is a lot. I’d only convert a residence to a rental if I had a loss going in.
DrDeth - Actually, the house on the 22 acres I’m hoping to buy is quite small. I’m think if I don’t keep the current residence, I’ll try for a 10-year mortgage on the new place and perhaps build a log home when I’ve paid off the little house. Then I could keep the little house as a rental.
StG
I don’t know if this is true, but it’s worth checking into:
If you rent to a military family, when they leave, it’s my understanding that they must leave the property in a condition that meets the military’s exceedingly high standards, and if they don’t, you can sic their CO on them.
If you’ve a military base nearby, it’s worth looking into.
We have two on-site maintenance people and inside tracks with several licensed contractors, eletricians, plumbers, etc. But finding on-site people can be tricky, even with beepers and cell phones. And if they can’t fix it, I have to get a licensed person.
I must preface this by saying that IANAL (L=Landlord … hee-hee), and am in fact a renter. Many of the comments here have been about how renters tend to not take care of the houses/apartments in which they live. These are the things that have helped me take better care of the properties I have rented:
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The list given at the beginning of the lease period that helps the renter itemize any damage/defects already in the dwelling.
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Even more helpful, upon giving notice to vacate, a list of all the things that must be done/not done to avoid losing the damage deposit. I’ve only had that one time, but if I ever rent again, I’m going to ask for it.
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Requiring enough of a notice to vacate (in our case, 60 days, although I think 30 days would have been enough) that they have time to complete that list.
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Access to an inexpensive carpet-cleaning service. In our last apartment, the guy who cleaned the carpets for the complex only charged us $35 to clean our two-bedroom apartment, and he did a great job. Because it was so inexpensive, we had our carpets cleaned about three times a year. If I were a landlord, though, I’d probably shell out the money to have it done a couple of times annually anyway.
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Responsiveness. If you as an owner take months to fix a hot water leak in the bathtub that increases my water bill to $80 a month and my gas bill as well (true story; happened when I was young and naive and didn’t know much about renter’s rights), then how can you expect me to keep the place looking good?
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Reasonableness. The more you, as a landlord, let me, the tenant, customize my home (within reason), the more I will feel like it is my home, and the better care I will take of it. I’m not talking about letting me knock down a wall or anything, but small, undoable things, like painting the interior walls, and planting a garden in the back yard.
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Understanding. Even with the best tenants, your house will show normal wear and tear, especially if they live there for any length of time and especially if you use, as featherlou recommended, “Cheap paint. Cheap carpet. Cheap fixtures.” Yes, if you paint the kitchen walls with cheap white flat paint, which is (grrrr) impossible to clean, you will have to repaint–at least partially–when your tenants leave. Yes, if you put down cheap linoleum in the kitchens and bathrooms, it will peel up at the edges, dent easily, get dingy, etc. I’m not saying not to use builder’s grade stuff; just know that the reason it is cheap is that it’s not built to last, regardless of what your tenants do.
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Objectivity. Contrary to popular belief, homeowners let stuff slide in their own homes. They see the carpet every day and thus may not realize that it is slowly getting to the point that it needs to be replaced. If they rented that same home out, though, and saw the cumulative wear only once a year, it would be quite noticeable. Unless they plan to write into the lease agreement that the renters cannot walk on the floor or own furniture, landlords should expect normal wear and tear.
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Education. Ask them if they have any questions about how to take care of certain things. In our current place, we had to ask about how to clean the wood floor, how to clean the stovetop (it’s one of those smooth-top ones), and how to work the fireplace (it’s gas). The current owner is a total sweetheart, but she didn’t think to volunteer these things. If we hadn’t asked, we could be unintentionally ruining her stuff. (Well, not really. We would’ve looked up how to take care of it anyway–but most renters won’t.)
I apologize for the length of this post, especially because I’m not a landlord, but if you do decide to rent your house, I think these tips might come in handy.
I’d like to chime in and agree with skeptic_ev. Most of my landlords have been great–very responsive and helpful. However, I did rent a house in North Carolina whose owners lived in Maryland. They were horrible. It took weeks to get anything fixed. We would have to call/write several times before they would get back in touch with us, and instead of hiring, for example, a plumber to fix the problem, they would get their father-in-law (who lived nearby) to take care of it when he got a chance. You don’t want to be that kind of landlord.
I also think it shows consideration on the landlord’s part to pay to have the carpets cleaned, the exterminator visit, etc., at least once a year.
I guess there’s a fine line to walk here; you don’t want to put a lot of money into a rental, because chances are very good that it will take hard use at the hands of renters and need to be replaced often. You make a good point that cheap stuff just doesn’t wear as well or last as long, though. I guess the trick is to find the compromise that you can live with.
Heck, I guess you could even try making it a really nice place and trying to find higher-end renters because it’s so nice. Just don’t be surprised when even the high-income professionals that rent your place leave it in a huge mess when they move out. There just seems to be a mentality that comes over people when they’re renting - “It’s not mine, so damage and dirtiness doesn’t matter.”