Renting out your FHA home

[Mr. MedSchool Money]

Hello,

Wife and I bought a house during 2nd year of medical school (now 4th yr about to match) using an FHA 203K loan. Mortgage for 180K (1200/month). Many improvements and excellent neighborhood probably means the house is closer to 220K in value right now. Property taxes have not caught up and due to a few credits, its being taxed at a value of 145K.

We want to keep the house as our first rental property as we move away for residency. We think we can easily rent it at 1500-1600/month and we are exploring management options, so it can be almost totally passive.

Downside is that we would not have a down payment for a new house in residencyland. I have heard of some big hospitals, like Mayo, that have credit unions that will help residents buy a house with 0 money down.

Does anyone have experience with turning your current house into a rental? What did you consider when setting your rental price?

Is this a bad idea? The goal would be to keep the first house as a small income stream or even to break even on it and pay it off after residency for pure passive income. Thanks!

[The White Coat Investor]

Ha ha. Long distance landlord. Passive. Ha ha. Good luck with that. Seriously, it's tough to find a good property manager and you'll still have to manage them. I'd sell it.

I also wouldn't buy a house in residency. Here's why:

https://www.whitecoatinvestor.com/10-reasons-why-residents-shouldnt-buy-a-house/

Set rent by the going market rate. The manager can help with that.

If you do decide to buy with $0 down AMA, here's a list of lenders: https://www.whitecoatinvestor.com/websites-2/physician-mortgage-loans/

 

[hightower]

Yes bad idea.  After management costs you'll barely be able to pay the mortgage with the payments from tenants.  And that's IF you are able to keep it rented every month.  Do you have cash on hand to cover 6 months or more of mortgage payments if this happens?  What about for emergency repairs that your insurance won't cover (broken furnace in February, A/C in August, water heater goes out, leaking roof, broken toilet, oven, etc, etc)?  You'll need to hire a landscape company to cut the grass, maintain the outside of the house.  Do you really want to spend time on the phone, long distance, in the middle of your busiest rotation month or while you're trying to study for in-service, exams, boards, etc?  Have you factored all of these costs into your "income stream?"  Not trying to be negative, just want to make sure you've really thought this through.

My advice is sell this house and cash in on the current high market prices.  Then, take that cash and put it in retirement accounts or pay off student loans.  While in residency, rent a small place and save money, contribute to retirement accounts, pay down debt, etc.  Save up for a down payment on your first attending house 3-4 years after you start working as an attending and have 20% cash on hand for a down payment.  This would be the appropriate thing to do.  If I could invent a time machine, I would go back and do the same.

For someone who has a tough few years ahead of them as a resident, a long distance rental property is the last thing you should be worrying about

Be happy that you can cash out and get a good price now while the getting is good.  That could change overnight at anytime.  You'll have plenty of opportunities to get in on the real estate investment game after you are an attending and making real money.

[Mr. MedSchool Money]

Thanks for getting back to me. I was really leaning towards renting it. I will have to think more about it. There's a good chance that we would be 1.5 hours from the house in residency and my parents live across the street from the house and have offered to "manage" it. Which is either a wonderful or horrible idea, haha. Thanks for the advice!

[startupdoc]

Do not forget capital gains tax. You should think of it in two ways: keep the property for under 3 years and sell (to avoid capital gains tax) or keep it for many years to overcome the loss in capital gains tax if you had sold it earlier.

I had a condo in residency. Now that I'm an attending, I am renting it out and live 1.5 hrs away from the property. It is not as passive as you would think. At this point, I myself am considering selling it prior to the 3 years to avoid the capital gains.

[q-school]

How are the rest of finances? Is your emergency fund set? I would personally not want so much of my net worth tied up in a house—whether I’m living in it or renting it.

Consider selling and renting in your new place. Housing markets go up and down. How long is residency going to be? What if your renters flake? Do you want to deal with two mortgages?

Take the small profit and run!

[wideopenspaces]

Sorry, I'm also in the"sell it" camp. Unless you are not a typical med student- ie spouse earns a good salary, you have 6 months of cash in an emergency fund ( that would cover both the mortgage and expensive repairs), putting money into retirement, no other debt, etc. Residency is literally the most stressful time in your life to this point, and trust me, you don't want to be distracted by this rental. Not worth it. Take the money and use it as an emergency fund or pay down student loans. And definitely don't buy a house in residency. Pay off your loans, then buy a house.

[The White Coat Investor]

Mr. MedSchool Money wrote:

Thanks for getting back to me. I was really leaning towards renting it. I will have to think more about it. There’s a good chance that we would be 1.5 hours from the house in residency and my parents live across the street from the house and have offered to “manage” it. Which is either a wonderful or horrible idea, haha. Thanks for the advice!

Click to expand...

Perfect. Sell it to them.

[MPMD]

This is one of the things I like about Dave Ramsey, he gets a version of this question all the time and his answer is:

"If you didn't own this house right now would you borrow X to buy it?" X=current mortgage.

The answer to that question if you don't live in the same town is basically always a pause followed by "... no."

You're talking about gross cash flow over your mortgage payment of max $400/mo? That's not going to generate net cash flow on a $200k house. Half of that gross is going to go to maintenance if not more. You throw a new roof in that mix or something and you've got yourself a real money pit.