Renting A Townhouse To Elvis? Our Experiences Owning and Managing Rental Properties

Elvis has left the building? No, his blue suede shoes were actually IN OUR BUILDING. Ask someone what they think about owning and managing rental properties and you’ll likely get a variety of different thoughts and feelings. Some may have had a terrible experience with a renter and vow to never touch a rental property again. Others may have found it to be a great source of side income. You may have heard others say that they love the tax breaks. So what are some things you should think about before getting into the rental game? Read on and find out. We have had experience with rental properties in the past. In fact, as I alluded to, one of our renters was an Elvis impersonator. He was great at what he did and turned out to be a great renter for us as well.

Recognize the risk that you are taking

Owning and managing rental property is a big risk. For most people, buying a home is the largest purchase they will make in their life. Buying or owning a home that someone else will live in means you are taking on this great financial risk, yet you are giving up a lot of control because you’re not living there. That’s a BIG DEAL that shouldn’t be taken lightly. Taking on rental property is not for the risk averse. On the flip side, there are steps that you can take to be smart, minimize risk, and hopefully have a positive experience with your rental property. At the end of the day, be honest in analyzing the risk you are taking.

Identify Your Goals and Exit Strategy

Rental property can’t be something that you go into haphazardly. You need to know why you are in it and what you want to get out of it. Over the last few years, my wife and I have had a couple of rental properties. Here is how we approached things on the front end:

 In the first scenario, we purchased a house, fixed it up and rented it out to a family member. Our goal in this case was to provide a solid rental for our family member that was in a bad rental situation. The house was very inexpensive, so we knew with solid certainly that charging a reasonable rent to our renter would provide us with a little cash flow on the side. However, after fixing the house up, we saw that some big expenses were probably on the horizon if we held on to it for the long term, so after that family member bought their own home, we decided to get out while we were ahead and we sold the home. All in all, we held it for a little over a year and a half.

In the second scenario, we were stuck upside down on a townhouse unit. We were looking to start a family and wanted some room to run around as our place did not have any yard whatsoever. So our options were either stick it out in our current place for a very long time, or take the plunge to rent it out. In this scenario, our goal is to come out relatively even on our cash flow and hold it until we are able to sell it and pay off the existing mortgage. We still currently have this property.

We were clear on the front end what we are looking to get out of it, and when we will get out of it. Have a plan now. Yes, plans, the market, and other variables will change and you may need to adjust. However, go into it knowing what you plan to get out of it.

How Will You Find Renters

Before you jump in, it’s important to have a clear idea if you are going to be able to rent your place and how much rent you plan to charge each month. After all, you probably can’t afford to have multiple months with no renters, so come up with a plan and budget beforehand.

In both of our scenarios we had renters lined up before we did the deal. With our house purchase, we had confirmation from our relative that they would move in when the place was ready. They were on a month-to-month lease and could easily get out and move into the house when the time was right. As for our townhouse, we had a couple of options for renters before we even put an offer in on the house we were buying and moving in to. Plans changed a little before we moved out, but since we had multiple options, things worked out fine. We’ve had to find additional renters since then, but we had things lined up before taking the initial plunge.

We have had great experiences posting our properties on www.rentals.com. Within the first couple of days posting on there, we had multiple inquiries and showings lined up. There are fees for a landlord to post their listing, but the renters we have gotten have worked out well, so a one-month fee is worth the cost in my opinion. We have also posted on Craigslist to cast a wider (and free) net. A ton of traffic has come from there, but it just so happens that the renters we have chosen have not come from Craigslist.

Screening and Paperwork

For many people, they are giving keys to a property to someone they do not know. That is scary. However, by being on top of things you can do your best to lower the risk. For our current property, I charge an application fee and have the applicant fill out a rental application. In most cases, a quick Google search of “rental application” or something similar can get you the information you'll want for your application. I’ve found the application to be extremely helpful because it gives you a good look at their employment and rental history. By charging a small application fee, it will help to offset the cost of you doing a background check and will hopefully bring forth the parties that are truly interested in your place.

Once an application and payment have been submitted, run the background check. You’ll have to decide what parameters you’ll want to use to determine what is acceptable. The townhouse complex we are in does not allow renters with crimes against others (assault, burglary, etc) so we obviously stick to that as the bare minimum and fortunately have not had to have further discussion about it. If the background check works out, call their employment and rental references. You need as much information at your disposal as you can get, so take the time to make the calls.

I've also resorted to seeing if they have a public Facebook profile. If they do and they constantly are posting party pictures, they may not be the tenants for you. I also saw an applicant put a job on their application, but on their Facebook page they posted 2 days prior that they had quit that job. We didn't end up going with them for other reasons, but these are the details you need to know. This is your property and you want to gather as much information as you can.

If you decide to move forward with someone, it’s best to have them sign a lease. That way you can list out what is included, what the expectations are, how they are to submit payment to you, etc. It’s important to spell out what the terms are so that it is clear to everyone. The lease that we used was modified from a Realtor that we knew who used it for their rental properties. We adapted it so that it works with what we want as well as following the guidelines of the association of the townhouse complex we are in.

Maintenance and Upkeep

Depending on the type of property you have, there will be maintenance and upkeep. You must decide who is going to do the work. Will mowing be done by the renters or done by you? If you live in the frozen tundra like we do, what about snow removal? Clearly state this in the lease. If you are taking some of that on, you’ll need to account for it and plan it into your budget.

Our first house I took care of all lawn care. It was a small yard and it was located between my job and our house, so it was convenient. However, it was always just one more thing that I had to do every week. On the other hand, our townhouse has all exterior maintenance included in the association fees. It has been great to not have to deal with the year-round obligations.

What happens if the toilet breaks, the garbage disposal gets clogged, or a spring breaks on the garage door? These are all issues we had to deal with. Are they calling you or are you hiring someone else to do it. These decisions will make a significant difference on your bottom line, so think through them in advance. If you are quite handy, it will save you money to do it yourself. If you’re not, then the finances still better make sense for you after factoring in these costs to hire it out.

All in all, we’ve had great experiences renting out to others. I know there are horror stories out there, but we have been lucky. That’s not to say we won’t have one in the future (and if we do, you better believe it will probably make its’ way in a blog post), but we’ve been fortunate. If you have additional comments, don’t hesitate to leave them below or drop me a line. Happy renting!

7 Considerations For First-Time Home Buyers

With the housing market slowly crawling back, I thought it would be beneficial to share some insight on buying a home and trying to decide how much home you can afford. Here are some of the important things to think about before buying a house (particularly for first-time home buyers).

    1) Should I Rent Or Buy?

    I know that so many people want the “American Dream” to own their home as soon as they possibly can. However, first it would be beneficial to take a real hard look at IF you should buy in the first place. If I’m being honest with myself, I think that when we jumped into our first home, we may have moved too soon. Our 1 bedroom apartment was getting cramped and I wanted a place that I could put a stake in the ground and call my own. We did buy as the market was going down so I thought it was a great deal (we got it for less than the previous owners bought it for when it was brand new 3 years prior – so I was happy with that), but we got in just in time to ride the plunge even further down and watch quite a few of our neighbors go into foreclosure and become forced to sell. It’s important to run the numbers on a rent vs. buy analysis, similar to this one on Yahoo. However, if you’re really excited, it may be easy to be optimistic and play with the numbers to “prove” your case to buy, so be honest with yourself.

    2) How Much Can I Get Pre-Approved For?

    Before you go out and look, it is very helpful to get pre-approved for a certain amount. That way, the person financing your mortgage has looked at your financial situation and can give you a pretty good idea on a limit of what you can get approved for when you find the home of your dreams. Who should you use to finance your mortgage? That depends. Big banks have a more “cookie cutter” process, so if your financial situation doesn’t fall in the norm, it may be more difficult to get through the hoops. Smaller banks or lenders may be willing to work with you a little more, but since they are smaller, they may not be as able to take on a riskier situation. It’s good to shop around and ask others for recommendations. Yes, lenders are bound by similar guidelines, but different lenders have different niche’s, so ask around to find the best fit for you.

    3) How Much Home Can I Actually Afford?

    Wait, doesn’t that sound the same as #2? No, oftentimes there is a big difference between question #2 and #3. The number your lending institution gives you is how much THEY are comfortable lending you for a house, but you need to decide how much YOU are comfortable borrowing to be able to make the payments. The lender is not your financial planner. It’s their job to lend money and make money off the interest they charge you. You should run your own numbers and see what makes sense in your budget.

    4) How Much Should I Put On A Down Payment?

    The quick answer, in my humble opinion, is “as much as possible,” especially if you plan on being in the home for quite some time. As I mentioned, the lending institution is going to make money off of what they lend you. The more they lend, the more they make. You may say, “yeah, but a few thousand isn’t going to make a big difference.” Did you know that on a 30-year mortgage at a 3.5% interest rate, you stand to pay $616 interest on every $1,000 you borrow? That means you’re paying 62% more to borrow every $1,000. If your interest rate is 4.5%, you’re paying $824 interest to borrow each $1,000. If your interest rate is 6%, the total rises to $1,158 which means you’re paying back 116% on every $1,000 borrowed. So don’t look at every $1,000 as what it currently is (and what you could purchase with it today), but what you can save on payments if you put that money down now (and free up more cash down the road).

    You may say, “Yeah, but I need to furnish the place and buy all new _____ for our new house.” While it may be nice to have all new _____ in your new house, I would suggest making those additional purchases for the house over time and get as much of a down payment as you possibly can. Remember, still leave some emergency fund cushion in your account to have just in case. In addition to a down payment, you also need to consider closing costs on the home. These are fees charged by your lender, title company, etc as well as prepaid insurance and other expenses. This money is due at closing. In many cases, you can try and negotiate to have the seller pay a portion of these costs.

    5) What If I Can't Get At Least A 20% Down Payment?

    The reality is that you will have to pay PMI, or private mortgage insurance. In laymen’s terms, if you don’t put at least 20% down initially, the lending institution deems it too risky to take on your mortgage without some sort of insurance. With PMI, you’re taking out an insurance policy on yourself (and you are paying the premiums) to help offset the risk of them lending money to you. So because I’m more risky, they are making me pay more to show that I can pay what they are lending me? Correct. At that point, really ask yourself if that additional money paid out is really worth it, or if you can be patient and save up some more so that you can get to that magical 20% threshold. This tool will help you estimate what you may expect to pay in PMI.

    When I was on the small side of 20% down on a house (our first house we put 0% down. I’ve learned a lot since then and the laws have changed a lot since then), I rationalized it by saying how happy I was going to be in a home instead of cramped in a smaller living situation. I tried to use logic to convince my feelings of excitement to own a home. However, now that I’m on the good side of more than 20% equity on a house, I can tell you that you’d have to do A LOT of convincing for me to take on a payment where I have to pay PMI again. Better to not be leveraged and put that money towards something else.

    6) What Other Expenses Do I Need To Consider In Owning A Home?

    After you’ve taken care of your mortgage payment and potentially PMI, you also have to pay taxes. The nice thing is that MLS listings show how much the taxes have been in the past on each particular property (or you can look it up in the county records), so you can get that number pretty easily. Taxes will add a substantial amount to your house payment each month, so you need to plan accordingly for it. After all of those, you need to factor in homeowners insurance.  Using a mortgage calculator, like this one on the FHA website, can help you add up all of these expenses to show you what you can expect to pay in an inclusive mortgage payment. Once that is calculated, things like utilities (which hopefully the previous homeowner can give you an estimate) and other homeowner expenses like lawnmowers, snow blowers, garden/yard tools, etc., need to be accounted for. Also, regular maintenance on the house pops up more often than you’d guess, so this shows that home-ownership can be quite expensive when all is said and done. Add up all of these numbers to give yourself an accurate picture.

    7) Plan In Some Cushion So That You Don’t Become “House Poor”

    The “American Dream” may be nice in your mind, but it’s no fun to live in a house that was a little more than you could afford, has rising taxes each year, increased utility costs each year, and more unexpected expenses than you planned for. The bottom line – leave plenty of cushion in your budget. Fannie Mae recommends that no more than 28% of your budget go towards home expenses. You could be in this house for the next 30 years or more. You can’t predict the future, your future income, future market conditions, and future tax implications, so leave yourself some room to enjoy the house you’re going to take so much time paying for.

    Personally, I’d rather live in a house that’s not quite as fancy and have money to take vacations with the family and enjoy life a little more than to have the nicest house on the block and try to figure out how I’m going to make my mortgage payment each month. Some people can have the nicest house on the block and still easily pay their mortgage, and that’s great. However, for many of us, that’s not the reality.

    Blessings to you all as you go through your home-buying process. If you have additional insight, feel free to post in the comments below or contact me.