Category Archives: Renting My House FAQ
Can I Rent My House and Buy Another?
If you’re thinking of renting your house out while purchasing another, you likely have a lot of questions about how to make it all work. Whether you’re contemplating becoming a landlord by choice or by necessity, financing the investment is almost certainly a key concern.
The good news is that, while purchasing a second home may seem out of reach at first, there are actually several good options that will allow you to become an income property owner within your budget and with minimal risk. Many beginning real estate investors have to get creative when it comes to finding funds for their first purchases. Here are some of their top strategies:
1. Use a Local Bank
Local banks tend to be more community-focused than national institutions, and will often work with beginning real estate investors to provide financing, especially when there’s a solid business plan in place. In addition to knowing more about local properties than a distant corporate bank, you’re local loan officer likely knows you personally, and he or she is likely to consider your character and history when it comes to signing off on a loan. Even if you haven’t already established a relationship with a local bank, a loan officer from your community bank or credit union should be able to sit down with you and provide several options for financing the purchase of a second home.
2. Obtain Seller Financing
“Seller financing” simply means that the seller of the home you’re interested in provides you with the loan you need to make the purchase. Instead of making you a cash loan, as a bank would, the seller agrees to let you take over ownership of the house, while you pay him or her the purchase price over time, with interest. While this ties up whatever equity the seller has in the home, it allows her to collect the interest payments that would otherwise have gone to the bank. More sellers than you might think are amenable to providing buyers with financing, especially in a down market.
Another form of seller financing is called the “seller second.” This is where the seller loans you enough money for a down payment, to allow you to qualify for a traditional mortgage that covers 80% of the purchase price. Sellers eager to rid themselves of their homes (as many are, in this economy) may well agree to this if you ask.
3. Do a Lease-to-Own Deal
There’s no reason why you can lease-to-own a second home while renting out your first home. Under the terms of a typical lease-to-own (or “rent-to-own”) contract, you’ll pay a small “option fee” (generally 1 to 5% of the property’s value) up front, which reserves your right to buy the house at the end of an agreed upon period, usually three to five years. After that, a percentage of each month’s rent will go toward the purchase price of the home. At the end of the leasing period, you’ll have amassed the equivalent of a down payment through the option fee and your monthly payments, at which point you’ll qualify for traditional financing.
There are some common contract clauses to keep in mind with lease-to-own properties. If rent is not paid on time then the portion set aside for purchasing the home may be rendered void. Also, as the intent is ownership of the property, the landlord might include that he or she will be not be responsible for any maintenance on the home.
Conclusion
Don’t let the challenge of financing a second home deter you from investing in rental property. With determination and a little bit of creativity, you’ll be an income property owner in no time.
Is Renting My House Right for Me?
Trying to decide if becoming a landlord is in your future? With the house prices continuing to sag and the rental market heating up, many homeowners are considering taking the plunge.
Whether you need to move for a job, have inherited a house, are contemplating rental-house ownership as an investment strategy, or simply want to move without losing money in the sale of your current home, renting your home may be the right option for you.
While the pros and cons surrounding the “sell or rent” decision are somewhat unique to each homeowner, here are some factors to consider:
1) Local rental market trends
Do some research, or check with a local rental agent, to assess the demand for rentals in your area. In many markets, factors such as a major slow-down in new multifamily housing construction, high foreclosure rates (and displaced homeowners) and home price instability (which discourages new buyers from taking the plunge) have combine with factors such as continued job availability and population growth to produce a high demand for rental properties and low vacancy rates. This in turn has produced a health spike in rental prices, which can be good news for your bottom line.
2) Your profit margin
In addition to gathering rental market data, assess your personal numbers. If you’re considering renting your house as a long-term investment strategy, evaluate the return-on-investment (ROI) as you would any other investment. For example, let’s say you have a $50,000 equity stake in a house worth $200,000, and a monthly payment, including property taxes, of $1100.00. If you can rent the house for $1450 per month, that’s a monthly profit of $350 per month, or $4,200 for the first year. Let’s also assume the house appreciates in value by 2% during the first year, for an additional $4,000 in profit, bringing your total profit to $8,200. Now add the the $13,200 you made in mortgage payments for the year to your original $50,000 investment, for a total of $63, 200. When you divide $8,200 by $63,200, you see that the ROI based on your gross profit is about 13%. Even factoring in budget for maintenance and vacancies, you’re likely looking at a return 8-10% per year. Not bad.
3) Your investment time-frame
Depending on your situation, renting out your house can be a rock-solid financial investment. It can also, however, tie up a great deal of your cash, while requiring significant management overhead relative to other investments. Most successful rental property owners are in the business for the long haul. While it’s uncertain whether house prices will increase over three-to-five years, they will almost certainly increase substantially over the next ten-to-twenty years.
4) Your rental management plan
If your rental property is profitable enough to allow you to hire a property management company, which generally costs between 8-15% of your monthly rent (or $116 to $217 per month for the above example), you’re all set. Property management companies can handle all aspects of your rental management—from marketing your property and screening tenants, to managing the ongoing day-to-day responsibilities, such as collecting rent and handling maintenance. If you’re not able/unwilling to hire a rental management company, be prepared to spend 10-15 hours a month taking care of various chores related to your rental property. Even if you have dream tenants, you’ll still have basic home maintenance to take care of, as well as all the bookkeeping that goes along with running your income property business.
5) Local real estate market
If you’re living in an area that was hit hard by the recent economic downturn, and where it seems like the road to recovery is a long one, you may not be well-served by hanging onto your real estate. On the flip-side, there are many markets where the near future looks hopeful, if not downright rosy.
In conclusion, the decision to rent your house out is a personal one that depends on many individual factors. In order to accurately assess the likely profitability of the venture, your best bet is to contact a local real estate agent and a local property manager. Each of these professionals will be able to give you housing market insight that will give you a much clearer picture of whether or not renting your house is right for you.
Should I Hire a Property Manager?
It’s often difficult for new landlords to decide whether or not to hire a property manager to help them fill vacancies, manage tenant relationships, and maintain their rental property. Many assume that hiring someone to manage their rental property will cost a lot of money, which is especially unattractive to those who have become landlords through circumstances such as not being able to sell their home.
In reality, though, hiring a property manager can actually not only save you time, but money as well. While they generally only charge 8-15% of your monthly rent in exchange for their services (which amounts to $96.00-180.00 on a $1200/month rental, for example), hiring a management company allows you to delegate all the work association with owning a rental.
Tasks that property management companies typically handle include:
- Finding and screening tenants
- Drawing up lease agreements
- Collecting rent
- Property maintenance, including the hiring and supervising of outside contractors as needed
- Emergency response
- Conducting periodic property inspections
- Handling lease violations/evictions as needed
- Accounting
- Preparing annual tax statements
If all of that sounds like a lot of work, that’s because it is. If you choose to manage your own rental property, plan to set aside at least 10-12 hours a month to devote to these tasks, keeping in mind that you’ll essentially be “on call” to deal with some of these things as they arise, as opposed to being able to take care of them when it’s convenient for you.