Making the DecisionWe were lucky to be in the position that we were in this past winter when we decided to rent out our (my) old house instead of selling it once we found our new home. For one, we could afford to buy the new house without selling the old one. The last house was purchased by me alone on a smaller salary and Nate's savings + wedding gifts + my savings was enough to move forward on a new loan with 20% down. Oh, and we don't have any other debts so the ratios worked in our favor. The other major factor working in our favor was that the rental market in Austin was/ is super competitive right now. We knew that we would be able to rent out the place for a profit and we knew that it would rent pretty quickly.
Knowing that we *could* rent if we wanted to, we just had to decide if we wanted to become landlords. The pros and cons list looked a little like this:
Pros for renting:
- Easier in the short term- We wouldn't have to worry about selling, which could have been much tougher than renting.
- $$$- We stood to make a monthly profit of over 20% or $225 after carrying costs (but minus major unexpected maintenance).
- Equity- We stand to gain equity over the next few years if the market continues to grow and we should be ever-so-slightly chipping away at that mortgage as the months go on.
- Backup home- It was nice to have another home to live in as we painted our new home. In addition, ithe future, if/ when we do a big addition project, this could also serve as our temporary home for a few months.
Cons for renting:
- The bookkeeping- The tax laws are confusing. I have a general idea of what deductions we can make and when we should claim our income, but this will be the year that we finally hire outside help to file our taxes.
- Potential loss of equity- The market could improve, but it could also decline and negate any profits that we make monthly.
- Unexpected maintenance costs- These could eat away at our profits big time. Insurance should cover most big things, but there would be deductibles involved.
- The time- Even in the best-case most minimal situations, we're going to have to spend time maintaining a separate property including paying bills and filing documents.
Property ManagementObviously, the pros (money) outweighed the cons somehow (money) and we made the decision to move forward with the rental (to make more money). Next, we weighed our options on using a property management company vs. managing the rental on our own.
Pros for hiring property managers:
- Easier and probably less stressful- The property management companies offer services ranging from signing a tenant to maintaining the property. We wouldn't have to do much more than sign some checks if we chose this option.
- Saves time- We wouldn't have to communicate with the tenants, advertise the listings, or research the landlord laws.
Pros for DIY property management:
- Saves money- The standard start-up fees alone would eat up several months worth of profit and the monthly fees would eat up a decent chunk of what we would have left.
- Control- Sure, we could let the pros do everything blindly, but it would be nice to have an idea of what's going on with our own home and how exactly the maintenance work is being done.
- Flexibility- If things didn't work out the DIY route, we knew we could always start using a management company, but we wouldn't be able to ask for a refund if we changed our minds.
Finding TenantsAgain, the money made the difference in the equasion and we made the leap towards doing it all ourselves. Living and working less than 15 minutes from the rental was probably what pushed us over the edge.
The first thing that we did before finding tenants was to pick up a lease packet from Austin Tenants' Council. Talk about a lifesaver! For $20 we received all of the legal forms that we would need along with a bunch of helpful booklets on what we should be doing to comply with the law.
Once we had our forms ready, we did a bunch of little things to make the home tenant-ready including paint touch-ups, fire alarm checks, etc. Finally I made a genius move which not only got us the best tenants ever, but found them in about a week!
My Genius MoveInstead of creating an ad on Craigslist, I actually scanned the "Housing Wanted" section for people who would be a good match for our place in both budget and location. The people who place ads there generally write a few paragraphs about their wants as well as information about their own backgrounds. When I found some seemingly perfect tenants, I sent them emails that included pictures of my furnished rooms and more information. The first two people that I contacted were interested and the very first person that came to see the place took it! The best part was that I was able to get an employed, late twenty-something female tenant out of the deal (as opposed to my worst nightmare: drunken frat boys).
Managing the Property*knocks on wood* Over the past six-ish months, managing the property as been about as easy as finding a tenant. We've received our rent checks by mail at the beginning of each month and have had minimal maintenance problems to deal with. So far, we've had to hire a company to chop down a tree that died in the drought, a plumber to replace water lines to the toilets (preventative maintenance), and Nate swapped out the faucet and snaked the dryer when requested. We're definitely not regretting any of our choices six months in, but I'll be sure to update again later if my opinion changes.
If you're interested in becoming a landlord, I'd suggest thinking about the following first:
- What kind of profit margin will you have after mortgage, taxes, insurance (after including renter policy), and maintenance costs?
- What is the rental market like in your area?
- Do you have the cash flow to cover emergencies in both homes?
- What are the tenant protection laws like in your state? How hard will it be to evict, if necessary?
- How long do you plan on holding onto the property? How will capital gains taxes affect your profit margin?
- How will the extra income affect your income taxes?
- Who will take care of the property while you're out of town?
PS I did get one late night phone call about two months ago. The neighbor, who was out of town, had a pipe burst in their home and my tenants discovered the leak when they saw water flowing through the wall of the neighbor's house. It was really bad! They had water flowing through their house for several hours and ended up gutting the entire first floor!! Luckily we haven't had any catastrophes yet, but I keep that in mind when I think about how smoothly things have gone for us.