In 2007, when T&H Realty Services was just a baby of a business, our main source of Clients was what we now term “Reluctant Landlords.”
These were Clients who DID NOT want to rent their homes. They had no genuine interest in being landlords and simply wanted the home to, somehow, go away.
But things weren’t so simple back then.
Because the housing market was falling off a cliff in 2007, many people simply couldn’t sell their homes without bringing thousands of dollars to closing to square the difference between what they owed vs. what they could sell it for.
In other words, these Clients were upside down on their properties.
So, they called us and we, instead, rented it.
Those days ended, for the most part, in 2012, and since then, almost all of our Clients are “Intentional Investors,” people who buy a property with the sole intention of renting it.
Are those days changing?
While we don’t expect a flood of Reluctant Landlords to come pouring through our doors, we do expect a steady stream.
And while our investors are still buying homes to intentionally rent, we’re starting to receive a few calls from homeowners who want to discuss options.
They go something like this:
“So I’m thinking about selling my house, but I know it’s probably not the best time to do that. I’d like to find out how the process works to rent my house instead.”
If you find yourself in this position, there are several things to consider. Obviously, from our perspective, there’s no better place to put your money than real estate.
However, in spite of what you may hear, real estate investing is not necessarily passive. Even if you hire a property manager, you will need to devote some time, and money, to ensure your asset performs well.
And maybe most important of all, you need to have proper expectations.
Let’s first review why it could make sense to turn your personal residence into a rental home:
- Recurring Income: Once you decide to rent your home, you will obviously begin receiving rent to offset your mortgage payment. Keep in mind that your rent may not exceed or even match your monthly mortgage payment.
You may need $2,500 per month to cover your expenses, but that doesn’t mean you’ll get it. The market will bear what the market will bear, so do your research and get very clear about what you can expect for rent.
- Tax Benefits: As you’ve probably read, owning rental real estate comes with a lot of tax benefits, including depreciation, mortgage interest, repairs, property management fees, etc.
Unless you are a CPA, it’s critical to hire the right person to handle your taxes. In most cases, the cost of a CPA to prepare your return will more than pay for itself and should protect you from making mistakes that could cost you dearly.
- Appreciation: While we’re currently experiencing some price contraction across the United States, rental real estate historically is a great place to invest your money if you are looking for long-term wealth generation.
Note: It’s not a get-rich-quick proposition. However, if you are patient and realize that there will be both good and bad years, you’ll be better off financially.
So, those are some of the “highlights” of renting your property. But, if you’ve done any research, you’ll also understand that renting your property comes with risks and potential headaches.
The general but extremely important statement I’ll make is:
If you rent your home, you need to treat it as a business.
What, exactly, does that mean?
Well, a few thoughts come to mind:
- When you move out, your home will need work. For example, when you pull that mounted television down and remove the hardware, there will be large holes. Not only will you need to patch those holes, you’ll also need to ensure that the paint matches.
That left rear stove burner that doesn’t work will need to be fixed. I realize you dealt with it for the past four years, but a paying resident shouldn’t have to.
Bottom line: Don’t approach this venture as, “It’s just a rental.” Approach its as a business, which means you’ll need to invest in that investment to maximize your return. To help, we put together a great blog with some tips on getting your personal residence into rentable shape.
- Your property will cost you money on an on-going basis. Being a Landlord isn’t a “set it and forget it” proposition. You will have real-life customers (Tenants) that will occasionally, and sometimes often, need your help and take up your time.
Think of your home as a living, breathing organism that needs attention from time to time. This will manifest itself in the form of maintenance and upgrades when necessary.
- You will have both good and bad years. A bad assumption some people make when becoming an investor is that their home, once rented, is equivalent to an annuity. Nothing could be further from the truth.
Sure, if you do this long enough, you will have some good years. Years when you have little to no maintenance, no capital expenditures, no vacancy, etc.
But, again, if you do this long enough, you will have bad years. Possibly REALLY bad years. Years when the roof fails, your HVAC needs replaced, your Tenant is evicted and… well, you get it?
In short, don’t expect and plan for best-case scenarios. You will need to establish an account with at least three month’s of rent in it for unexpected expenses or vacancies. Some people call it a Sleep Well at Night (SWAN) account. Whatever you call it, just be sure you have it.
We have seen multiple people enjoy success by converting their personal residence into rental homes. In fact, we have a lot of experience renting homes that we never intended to be rentals.
Let’s discuss a couple:
Case Study #1 – Personal Residence: Back in 2004, my wife and I were expecting our second child and wanted to move into a home with more space. So we listed our home on the northeast side of Indianapolis for sale and waited.
After several months, and an offer or two that failed for various reasons, we decided to rent the home for a while and try our luck in a year or two.
T&H Realty didn’t exist at that time, but we had plenty of experience renting homes, so it wasn’t a huge stretch for me to rent and manage the home where I once lived.
In other words, I was already a landlord, and adding one more wasn’t a huge stretch even though it was my personal residence.
That tenancy wasn’t a great one. The married couple who rented the home became a divorced couple by the time the lease ended.
Some rents were missed, and some damage above normal wear and done was done. After some make-ready work, we listed the home for sale and, this time, it sold pretty quickly.
So, renting worked out very well for me. I sold it at a slightly higher price than I would have the year before, and I essentially broke even on the rental side of things. Which, considering the circumstances, was a huge win.
Case Study #2 – A Flip That Flopped: If you know much about our history, you know that we used to flip a lot of homes.
Just a few years ago, we bought a REALLY nice home on Geist Reservoir. The plan was, like usual, to fix it up and sell it.
The trouble was, we overspent on the rehab, tried to get top dollar, and the market wasn’t having it. After multiple price reductions, we reluctantly rented it.
At nearly 8,000 square feet, this was hardly a “normal” rental property, but we didn’t have any other good options.
Fortunately for us, the home rented quickly and, during that year of tenancy, the Geist market heated up.
So when the Tenant vacated a year later, and left it in nearly perfect shape, we listed the home for sale again and this time, we received multiple offers. The kicker: Because the market had turned in our favor during that year, we got $50,000 more than it was listed prior to leasing it.
Clearly, it was a big win for us and leasing it proved very profitable.
Renting your home can seem like a daunting, scary task. If you are still scared after reading through this blog, renting may not be your best option.
However, if you are clear on what to expect when becoming a landlord, becoming a landlord could become a very satisfying proposition for you.