Thinking about Renting out our House, what steps to take?

[cheetamorf]

I have a new job out of state and so my wife and I are moving out of the state at the end of the month. We had planned to sell our home (purchased in fall of 2020) for simplicity sake and because we would have had a good return on investment out of it. Unfortunately, our local market seems to have fallen more rapidly than in other areas, and now our home is garnering limited interest with a glut of homes nearby on the market. I am not optimistic that it will sell at a price I want (roughly 10% lower than it would have easily sold in April). As such, we are thinking of renting it out as we are in a great area for rentals and similar homes are gaining substantially more than our mortgage (expected rental for $3100, mortgage + taxes = 2375). Our neighbor across the street has a slightly nicer house and has 8 applications sight unseen for 3550, so don't think that finding a renter would be difficult, and believe that long term the home will continue to gain value due to its optimal location.

I am wondering what steps we should take in the event that the home doesn't sell within the next month and we decide we do want to turn it into a rental property. Should I create an LLC and put the home in it? Any other concerns from a liability perspective? What are most people's umbrella policies with rental homes?What should I be looking for in a property management company? Any tips to the trade?

Thank you for your help!

[bovie]

Do you want to be a long-distance landlord? That is your primary question to answer.

If you decide that you do, then yes, it could make sense to re-title the home in an LLC. You will also need a new insurance policy.

Personally, I would sell it even with the 10+% "hit" (which isn't really a hit unless you think that home prices in April were normal, otherwise your home value is likely still quite inflated) and just be done with it and move on.

But being a landlord from another state is also something I would never do, so there's some bias in there.

Good luck.

[StarTrekDoc]

Agree with bovie - #1 do you want to landlord? Even with management company, it's a process.

#2- Typically yes, LLC for exposure. The tricky part is this is your primary home and capital gains 2years in 5 years is probably in play. I'm not sure what happens if you take it out of your name what happens (along with mortgage). -- right answer -- check with a real estate lawyer/expert on this for long distance properties in your current and future state.

[auggie1983]

Don’t waste your money on a lawyer to figure out about mortgage. There will be a due on sale clause. It’s never enforced but theoretically could be

[fatlittlepig]

don't complicate your life, make a clean break.

[Hank]

Do you want to be a landlord? Do you want to be a long distance landlord?

If you were to purchase a rental property for optimal expected cash flow and appreciation, what property would you buy? How many doors could you buy anywhere in the country with the amount of equity you have tied up in this place?

Almost certainly you would not have purchased your former residence as the best possible rental property investment(s). Bail out now, take advantage of the $250K individual/ $500K sale of primary residence capital gains exclusion, and put your gains into VTI.

If you want to invest in real estate, look at REITs, debt funds, syndication, or deliberate direct investment. Don’t screw around as a long distance hobby landlord with your former home. (I’ve been there. My returns have been decent, but it isn’t worth the time or stomach lining.)

[99mkw]

People have given lots of good advice. If you do opt to sell, I'd like to prepare you for the regret you may face down the road. We weren't up for being landlords when we moved across town for a better school district, so we sold our old place that was still underwater from the '08 housing crisis. It was a bit disheartening to have Zillow tell us two years later that the place sold again for 100k more. Yours is unlikely to bounce back quite as high and if you're in another state you may not keep up with how hot (or cold) your old market has become. We had been accidental landlords once before and hated it so we made the right choice for our sanity, but it was still disheartening. Just think through the best case and worst case scenarios and make your choice. Try not to look back, but if you do don't fall into a regret mindset.

[Tim]

"I have a new job out of state and so my wife and I are moving out of the state at the end of the month. We had planned to sell our home (purchased in fall of 2020) for simplicity sake and because we would have had a good return on investment out of it."

Stop there. Your plan did not work. You were going to live here.
Two things happened:
1) did not live here for more than 5 years.
2) the RE market cooled of in less than two years.

So far, two mistakes. Sunk costs. Was this luck or skill?

Your decision point is not what you have in it. The decision point is would you sell it and invest the net proceeds in a rental property at this location?
Run your numbers.

• If yes, sell it and buy another property.
• If no, sell it and lick your wounds and hopes.

Just because you own it is an emotional attachment unrelated to your financial decision. Do you want to be a real estate investor long term and is this a good deal? That is the question you need to answer. From your post it seems no. Sell it and move on. Hoping for a price recovery is a fools game. Live to fight another day. Exit the investment, you are moving.

[StarTrekDoc]

People have given lots of good advice. If you do opt to sell, I'd like to prepare you for the regret you may face down the road. We weren't up for being landlords when we moved across town for a better school district, so we sold our old place that was still underwater from the '08 housing crisis. It was a bit disheartening to have Zillow tell us two years later that the place sold again for 100k more. Yours is unlikely to bounce back quite as high and if you're in another state you may not keep up with how hot (or cold) your old market has become. We had been accidental landlords once before and hated it so we made the right choice for our sanity, but it was still disheartening. Just think through the best case and worst case scenarios and make your choice. Try not to look back, but if you do don't fall into a regret mindset.

We're experienced landlords in residential real estate.

We sold our primary house last year while moving to new house 1mile away instead of keeping it. Had already topped the 500k capital gains max. If we had kept it and sold 1 year later; 800K more. -- oh well.

Slept easier though and enjoying the runup of the new house --- would of could of should of. Life goes on...

[Larry Ragman]

Only commenting here on the rental questions.
1. An LLC is unnecessary. Some people use them for an extra layer of protection, but they are an expense and minor administrative hassle for dubious protection.
2. However, you should convert your homeowners insurance to a “Fire” policy for the rental, and up your liability insurance to the min necessary for umbrella insurance, then get an umbrella policy.
3. I use $3M, but whatever reasonable amount the insurance company will underwrite is fine. It’s inexpensive.
4. Ask around and get recommendations for property management companies. Some will be uninterested in single properties, but there are plenty out there. Best to get someone who you can get to know, not just a faceless large company.
5. Expect to pay ~10% of monthly rent, and half to all of first month’s rent each time they find you a tenant.
6. It is reasonable to expect that they will periodically inspect the property, and deal with tenant issues. This doesn’t really get you off the hook, because they will call you for authorization to spend on repairs, etc.
7. Shift over your utilities to the tenant
8. Taxes. You must begin taking depreciation on the house, but remember you will have the depreciation recaptured at 25% if you eventually sell. If you use a tax preparer ask in advance what records you should be keeping. If you do it yourself, read Stephen Fishman’s Every Landlord’s Tax Deduction Guide (NOLO). Interest, taxes, insurance, maintenance, repairs, supplies, management fees, even travel to check on the property are all tax deductible. But by some bizarre rules (passive activity loss limitations) you can deduct losses only up to the amount of any other passive income, assuming you make >$150k. However, unused losses can be carried over and used later.
9. Bear in mind the 2 years in 5 rule. You can avoid capital gains if you sell after you have lived there 2 of the last 5 years.
10. Require your tenants to get renter’s insurance.
11. Write your lease to require the tenant to be responsible for the first $100 (or whatever) of repairs. We hardly ever enforce this if something breaks, but it does cut down on frivolous demands.

p.s., my son owns a small apartment building. Last night a drunk ran into the side of the building and cut the gas line. Fortunately no explosion. He was 2000 miles away. Property manager can only do so much. YMMV.

[Kamban]

I have a new job out of state and so my wife and I are moving out of the state at the end of the month. We had planned to sell our home (purchased in fall of 2020) for simplicity sake and because we would have had a good return on investment out of it. Unfortunately, our local market seems to have fallen more rapidly than in other areas, and now our home is garnering limited interest with a glut of homes nearby on the market. I am not optimistic that it will sell at a price I want (roughly 10% lower than it would have easily sold in April).

You are lamenting on the fact that you would have gotten 10% more if you had sold in April than selling now.. That is water under the bridge.

What you have not said is compared to your purchase price in 2020, what is your expected selling price now. Will you break even with the 6% realtor fees. Will you make a little profit. Will you have a small loss ? or a huge loss. This will be the deciding factor. Except for the last option, everything else points to sell.

[Tim]

You are lamenting on the fact that you would have gotten 10% more if you had sold in April than selling now.. That is water under the bridge.

What you have not said is compared to your purchase price in 2020, what is your expected selling price now. Will you break even with the 6% realtor fees. Will you make a little profit. Will you have a small loss ? or a huge loss. This will be the deciding factor. Except for the last option, everything else points to sell.

The last option, a large loss is similar to any investment, a large loss can turn into a bigger loss.
I agree with the “water under the bridge”. The least loss or most profitable way out should guide one’s choice.