Advice on becoming a landlord

[cyprant]

So I shouldn't be "counting" on the equity in the house being paid by renters but instead only by the amount of profit made each month after my expenses? The equity is the main benefit to me, not the $250 a month I'll be taking in after I pay mortgage, taxes, and insurance...

I will keep this brief. Be happy to add detail to specific questions.

First, Indiana law is rather landlord friendly. I have never had an issue evicting and even had an emergency eviction granted when tenant got super stupid. The catch is that the landlord has to be rental smart. Most aren't.

Second, it is a hassle. It is a PITA. And it makes you want to tear your hair out at times. You have to rent understanding all that it entails. Again, most homeowners don't.

Third, it is not generally a good idea to rent in lieu of selling for the average homeowner.


For you specifically OP, I would give you about 50/50 odds of breaking even between renting it out and selling it now. Meaning, that your net profit of renting will only be roughly what you would get by selling now. frankly, in order for you to come out ahead with the renting option, you have to have everything go right. Good tenant who pays on time. No catastrophic rehabs to bring it back to habitable condition for the future sale. And a real estate market when you sell that will actually be profitable. Even if you have 100% equity, you can lose profit by loss in market value. if even one of those doesn't happen, you're going to lose money by comparison.

in the end it's all about the math. Looking at sale prices and their relative proceeds now and in the future is not the right kind of math. You need to be looking at how long you would have to rent to reach the profit level of selling today. If you only make $100 month, it will take you 4 years just to break even with the expected earnings on a sale now. And that doesn't include any repairs or rehab that has to be done, that's just comparing your revenue in monthly rent against your monthly mortgage payment. A $2500 furnace replacement sets you back 2 years. Every month you don't get rent is another month you have to rent beyond that 4 years to break even.

Only you can decide what's "worth" it, but you'd best look far beyond the simple numbers of proceeds from a sale now versus a sale in the future.

 

[88GT]

So I shouldn't be "counting" on the equity in the house being paid by renters but instead only by the amount of profit made each month after my expenses? The equity is the main benefit to me, not the $250 a month I'll be taking in after I pay mortgage, taxes, and insurance...

I'm saying you need to be aware of how much money you're actually going to spend to get it. It does you no good to get $125K from the sale at the end of 10 years if it costs you $120K to get there. At the end of 10 years, you won't be any better off than the $5K you had available to you in the beginning.

 

[gungirl65]

Have a lease, require a damage deposit, make sure the neighbors have your phone number. Definitely check their references and verify employment.

 

[Yup!]

Rented for 12 months when we first moved to Indy. It was my home, we left it better and paid on time every month.

There is some great advice in here. If you are only going to profit $100-$300 a month as you see it, I think the margin is too thin and the risk outweighs the reward. You likely haven't factored in "credit checks, ad placement, and the little things you must do that add up. Having it sit empty while you clean and list it will eat up that years profit quickly.

from a renters perspective - you'd better have the cash to replace the furnace, hot water heater and any other repair immediately.

 

[Echelon]

...you'd better have the cash to replace the furnace, hot water heater and any other repair immediately.

And when that [insert random appliance here] does go out... and it will at some point in 5 years, every penny of your possible profit is now gone... and that is before all the other costs that you will inevitably incur over that same time period for other minor repairs... clogged drain, leaky faucet, etc.

We rented out my grandfather's house through a property management service for exactly 1 year, and they nickle and dimed us to death. If the tenant called, for anything, we got charged, if the tenant called and said a light was burnt out, we were charged. Don't use a property management service.

 

[Leo]

All good things above. I would like to add not to keep it too long unless you want to keep it until you die. After 1/2 of the depreciation life is gone, start looking to move it. I kept one well past the depreciation and paid it off. Of course by then it was old enough to need serious work. The cost of the work and the post sale capital gains ate up a LOT. I should have sold it earlier, even if I was just going to use the money to buy another place

 

[cyprant]

Well I think we have been talked out of renting it out... Hope it sells for what they say its worth...

 

[scoutsniper]

i rent and keep my place clean and in order and do basic maiantance to help out the landlord. guess im a good tenant thats rare??? lol

 

[jd4320t]

Lots of great info in this thread.

 

[Mark-DuCo]

I guess I am one of the rare renters that always pays on time and leaves a place better than when they found it.

 

[RobbyMaQ]

So I shouldn't be "counting" on the equity in the house being paid by renters but instead only by the amount of profit made each month after my expenses? The equity is the main benefit to me, not the $250 a month I'll be taking in after I pay mortgage, taxes, and insurance...

For future readers, I'm going to chime in with a tax implication here.
As a rental, you will get a depreciation deduction on the building(s) each year, based on its value (not including the land, spread out over 27 years).
Whether you choose to take that deduction or not, is of no consequence when you do sell it in the future, the depreciation accumulated will be recaptured and figured into your capital gains.

 

[Leo]

When I was single I rented a house for nine years. Paid on time, maintained it like my own all that time. I paid over $70K in rent on a house that could have been purchased for $65K the day I moved in. To make it sound even more silly, I had $100K in cash sitting in my bank account when I moved to town. I could have written a check and bought it outright, but I had only planned to be in that town 9 months to a year. I was just comfortable there, and owning my own house has never been that important to me. No such thing as homesick in my book. The old guy that was my landlord really hated to see me move out. He had no worries, and I had no worries, so I do not feel I lost anything.

The rent houses I "invested" in were a continual pain in the neck (None of the few good renters I had stayed very long) and even though I mostly had a little bit of positive cash flow and had some positive equity accumulation. By the time I figured up my time and expenses, I could have worked one saturday a month extra at my normal job and came out about the same. This was during a period of low inflation. If you get in the rental business in a period of high inflation, and you are locked into low interest rate mortgages, your numbers will look a lot better.

NEVER rent to relatives, especially inlaws. If you feel sorry for them, just give them 1st months rent and security deposit to move into someone else's property. At least that will be all you lose.

 

[pudly]

Just saw this link and thought I'd throw it out there for you. It is about landlord/renter laws in the various states (like handgunlaw.us for gun laws). I can't make any claims for the quality of the info.

Landlord-Tenant State Laws & Regulations // Landlordology

 

[edporch]

Using due diligence in choosing who you rent to is more important than an "ironclad" lease.

Also, I only rent on a month to month basis with either party being able to cancel with 30 days notice for ANY reason.
I also let them know up front that if they become a pain in the ass to me, that will be reason enough to give them their 30 day notice.

 

[88GT]

Just saw this link and thought I'd throw it out there for you. It is about landlord/renter laws in the various states (like handgunlaw.us for gun laws). I can't make any claims for the quality of the info.

Landlord-Tenant State Laws & Regulations // Landlordology

That's pretty close. Most of it is taken from IC directly, just in summary form.

However, there are two issues. First, the returned check fee: the website states that the max allowable is $25. The IC referenced as evidence does not apply to landlords. That is the portion of IC dealing with consumer loans. Rent is not a loan; ergo, payment of rent with a check that is returned for NSF is not subject to the maximum. Second, IC on tenant's property allows an exception to the warehousing requirement if the property is abandoned.

 

[ArmedProgrammer]

Using due diligence in choosing who you rent to is more important than an "ironclad" lease.

Also, I only rent on a month to month basis with either party being able to cancel with 30 days notice for ANY reason.
I also let them know up front that if they become a pain in the ass to me, that will be reason enough to give them their 30 day notice.

this ^^^^

For those who wonder why - The idea is to avoid the drama in the first place. Many landlords try to use the contract to "go after" renters that owe them the money from a long term lease. Much smarter to simply cut losses and very quickly evacuate the place. If someone is a PITA - get them out, and get someone in that is easier to deal with. No fault, no problem, 30 days notice and we're cool. The most money I will lose is 30 days worth. And not paying rent = being a PITA. Both get your contract terminated, unless I see a good reason for it.

NO RENTER is BY FAR preferrable to a BAD renter.

Due diligence saves all kinds of problems.

If you come to me wanting to rent one of my places: a) I WILL check all kinds of social media. b) I WILL call your references c) When I call them, I will call them at a time different that you would expect, and from a different number. I will call prior landlords. d) and when they answer the phone, I'll ask them if they have a place for rent. If they hesitate or say "huh?" , I know that it's your buddy and you gave me his number...

All of that kind of stuff.

That said, if you rent from me and are NOT a PITA - I will fix things that break in a hurry, and treat you extremely well. That's why I don't have to go through the above process all that often.

 

[88GT]

Due diligence is over-rated inasmuch as there is no fool-proof way to guarantee that the paper dossier on the applicant will mean diddly squat. I have had gainfully employed active MPs (as in military police) screw up. You do what you can, but there is no magic panacea for preventing a tenant from becoming a douche-nozzle.

If due diligence were as successful it is being made out to be, month-to-month tenancy wouldn't be necessary.

 

[88GT]

this ^^^^

For those who wonder why - The idea is to avoid the drama in the first place. Many landlords try to use the contract to "go after" renters that owe them the money from a long term lease. Much smarter to simply cut losses and very quickly evacuate the place. If someone is a PITA - get them out, and get someone in that is easier to deal with. No fault, no problem, 30 days notice and we're cool. The most money I will lose is 30 days worth. And not paying rent = being a PITA. Both get your contract terminated, unless I see a good reason for it.

NO RENTER is BY FAR preferrable to a BAD renter.

Due diligence saves all kinds of problems.

If you come to me wanting to rent one of my places: a) I WILL check all kinds of social media. b) I WILL call your references c) When I call them, I will call them at a time different that you would expect, and from a different number. I will call prior landlords. d) and when they answer the phone,I'll ask them if they have a place for rent. If they hesitate or say "huh?" , I know that it's your buddy and you gave me his number...

All of that kind of stuff.

That said, if you rent from me and are NOT a PITA - I will fix things that break in a hurry, and treat you extremely well. That's why I don't have to go through the above process all that often.

So if they are a PITA, you won't fix things?

 

[ArmedProgrammer]

NO - geez 88GT. No - I will do exactly as edporch above said - and invoke the 30 day notice and get someone who is NOT a PITA. No fault - if it doesn't work for them or it doesn't work for me - we go our separate ways.

Given fairly careful screening - that hasn't happened often.

My point was that when I have a great tenant that's been reasonable to work with - I will bust ass to go above and beyond.

Right now all my tenants fall into that category.

But I'm not a bigtime landlord like you guys. Only have a small number of places. I can't say whether or not my approach scales well - since , frankly , I haven't done it. It's what's worked here, and we can sleep at night.

Nothing is a freaking panacea - but due diligence helps a lot. Especially intelligent due diligence. Maybe that doesn't scale well either, I don't know. I do know that it's saved my bacon enough to be worth doing. But again - I'm a small time guy in a one-horse town. And I've seen a lot of landlords give themselves more headaches out here in Salem than they needed to.

 

[RobbyMaQ]

Anymore I've come to love google street view. I can look at the previous rental properties a potential tenant has listed, to get an idea of what shape they were in. It's not 100% accurate, but just another tool in the toolbox (especially if the drive is too far to see for myself)