awesome! Do let us know how it looks, and can she take you to four or five similar places so you can see what kind of rents they are getting?
awesome! Do let us know how it looks, and can she take you to four or five similar places so you can see what kind of rents they are getting?
For your refi, you may want to consider shortening the term.
Time for an update, almost a month later. We have put an offer on a short sale single family home. So while we wait, we weigh the choice of whether to sell ours or try to rent it out. Our realtor is up for trying to sell it but knowing it may not, but we don't quite feel right about that. It seems like it's abusing her time and expense, though if she weren't willing and thought there was absolutely zero chance, she wouldn't have offered. She's a smart cookie that way. However, we don't want to take what we think it might end up going for. So we're basically trying to decide should we TRY to sell, but still be open to renting if it doesn't work out, or should we just make the decision to rent?
As we weigh our decision, I wonder about the tax implications? If we decide to keep the home for a few more years and THEN sell it, what are the tax differences between that and if we were to sell it shortly after moving into our new place, or are there none? I hate to hang onto it with the thought that we will sell it when the value goes higher again (we are hoping the market will go up, as markets will) just to find out that because it is an income property we owe a huge percentage of the sale price in taxes. If that is the case we might as well eat it now and save ourselves the headache of being landlords. I don't see our place going higher than $200 at any point, maybe if things reeeeeallllly heat up but I highly doubt it, and we could probably get $150 now. However, if we decide we are going to hang onto it for the long haul, that isn't so much relevant, we would view it more as a source of monthly cash, especially once it's paid off. My husband thinks that if we sell it and apply the money to our other mortgage (our own residence) that we wouldn't have an issue. What kind of professional to see about this? We don't have a tax person now. An accountant? A tax specialist? An attorney?
Those of you who rent, how do you manage your accounting for your rentals? I'm envisioning an account just for this house where in an ideal world all the rent goes in, mortgage payment and other expenses come out, and we have a cushion of $5000+ for expenses related to this house. The $5000+ might be a reach at least initially, but in the past I have always been amazed at how fast savings can grow when we set our mind to really making it happen. Am I totally off base?
@jenipurr, if you are reading, I have been thinking of you often in the last few weeks. How are you (most importantly) and your rentals recovering from the tornadoes?
Standard disclaimer... I'm not a lawyer. We did own a couple properties that we were going to rent a while back and actually rented in Duluth for a month... until DW decided she couldn't take being a landlord, even though nothing had gone bad yet
If you get the short sale, I'm guessing you'll homestead that? If so, then you'll have increased property taxes on the current home. Your Realtor should be able to address if sales taxes will be higher as well, but I don't think they would be. I have a great attorney up in Buffalo that I'd highly recommend... she does general and real estate law and is also a licensed Realtor.
Given the liability risk with a rental, you'd want to set up an LLC and quit claim the house title over to the LLC (I'd consider this a gray area at best but it's been all the rage for friends with rentals). The LLC should carry an umbrella as well. Technically, the LLC should carry the mortgage as well and it should be financed as an income property (rates will be a bit higher). But, it's highly unlikely the mortgage company cares, since you've had the loan for a while already.
If your current home isn't in a highly desirable rental area (eg, right next to the university, right next to a teaching hospital, etc), then I'd run the numbers with a 10% vacancy rate. So, if I thought I could rent for $1500 then I'd assume a monthly income of $1350. If you had a property manager, they'd charge around 10% as well. You might want to take that amount as income for your time. So, if your at least cash-flow neutral at $1200 a month in rent, I'd consider it (just an example.. use your own numbers of course).
All rent will flow to the LLC and then pass through to you on your return (if you and your DH set the LLC up as a partnership, then the LLC will file a Schedule K and you'll each get a Schedule K-1 from the LLC to file).
If you sell the house, the money will again flow through. So, if the house is paid off by the time you sell, you'll likely pay quite a bit as a sale will push you up a tax bracket or two (or, if you're already at the top, you'll be facing a rough AGI adjustment). One option, though, is you can use the LLC to find SEP retirement plans for you (a fee-based financial advisor could help advise between a simple k, sep, and solo k). If you sell within two years, you may be able to roll the money into your mortgage, but that's where I'd talk to a real estate lawyer.
@benhyr, super helpful, thanks. Interestingly I have been researching business fillings and just a few weeks ago would not have known what an LLC even is! If you are willing to PM me the name of the lawyer, I would appreciate that. Thanks very much again!
I've never been a landlord, or even a homeowner for that matter, so I don't have a whole lot to contribute to this conversation. But I must say, now that I've read it all at once, it reads like a book called "Diary of a Potential Landlord". Very interesting to see your thoughts and responses to the other posts over time as your knowledge grew.
The one thing I would suggest if you continue to progress towards a goal of becoming a landlord is to spend some time going to look at other rental properties. Other posters have talked about the importance of figuring out what is truly realistic rent for your area, but no one has flat out said that the only way to be able to do that is to look at a lot of places and judge them. As someone who has been renting for the last 21 years, and moved 5 times during that period, I've found that many landlords seem to have unrealistic expectations of what their properties are worth. I can't tell you the number of places I've walked into and said "who the f*** would pay this much to live here???
If I had to guess I'd guess that the people who are trying to overcharge or at least push the rent to the top of what a rational person would pay probably end up taking less than perfect tenants because those are the only ones who apply (because they know they have issues that will prevent them from being accepted at the really good places) and then the landlord nervously accepts them and for one reason or another the relationship doesn't last long. If you are offering good value to the tenant in terms of what the rent is versus the quality of the place I'd expect you will have interest from more than one potential tenant and with good screening you will hopefully pick well and have less problems, as opposed to only having one interested potential tenant and having to decide whether to risk it on them or pass up another month's rent and hope that someone better comes along.
I really appreciate everyone's take. You have all truly been so helpful.
A girl at a party tonight was telling us that she already signed a lease for September 1 in a place she likes because the rental market is so tight right now. Our neighborhood is very desirable and we have a nice fenced yard and superb access to bus, freeways, etc. We are hopeful we can get a good price.
We were thinking of going to see some places, like jp1 said, to compare prices.
Now I am trying to get my head around the legal aspects. We just might go see a lawyer. That way we can also have assistance in writing a sound lease AND with the business filings and organization. I just wish I knew about the short sale status now. The uncertainty is hard . . .
I believe the tax law states that you must have lived in a house for 2 out of the last 5 years to avoid capital-gains taxes. This can be any combination of years (so live in the house year 1, then rent for 3 years, then live in year 5). Or in your case, you could try renting for the next 3 years, then sell and not pay capital gains taxes. If you're doing well on the rentals and making money it may be worth it to you to keep it, if it's a headache then you can sell. As far as taxes and such from the rent itself, it's probably worth speaking with a lawyer or CPA (esp one licensed in your state).
Another idea if you don't want to spend the money on a lawyer would be to research your state's landlord/tenant laws in books at the library and online. Every state is different and you want to be sure that you put in the maximum protections for yourself in your lease and also make sure that your lease doesn't contain anything in it that would be illegal in your state. Details such as the maximum security deposit, notification and reasons allowed for non-renewal, fees allowed for late rent payment, where you have to store the security deposit, etc. I'd assume that you can also purchase online a basic lease suited for your state from somewhere such as the state's realtors' association for a modest fee. Every small landlord I've rented from has done that. You also will want to research in advance what the eviction process is for your state. Hopefully you'll never have to utilize that knowledge, but it would be better to be prepared...
Hey Fidgie! somehow I missed this. Everything here in the recovery has been hard...we were so fortunate to have little damage. Two of our rentals are very close (one neighborhood over had houses destroyed) but luckily they both suffered minimal damage. They are both condos though, so I am worried about the assessment...there is some damage to the property, trees, roofs, etc...and then we had to have private security for several weeks due to looting, ugh...so I am fearing an assessment for that. One unit had a mystery 2x4 shatter a window, and the other was fine. They are both short term furnished rentals so we were able to get a guy from FEMA and an insurance adjuster in there pretty quickly. Completely seperate from the storm, one of them was rented entirely through our peak season (football season) but the people renting it had to cancel due to a tragedy in the family. So, that was hard emotionally and also is going to be hard financially because we have to get on the ball renting it now. Luckily, we got a bit of an escape and heading to a friend's destination wedding for a week, so I am relaxed and ready to dig in.Originally Posted by fidgiegirl
Re your post...there are all sorts of accounting rules. Phantom losses, depreciation, all that stuff. And its all changed about 3 times in the past 10 years regarding personal/rental how long you have to hold it, rules, etc. It would probably be best to find a good book on it and/or a good accountant and also be prepared to have things change on the tax end. You DEFINITELY need to have an account specifically for the rentals, especially if you do end up setting them up as their own corporation. I think they call that Piercing the Veil. We do all transactions related to rentals on separate receipts, accounts, etc.
Except for one we own outright, ours our mortgaged in our own name so a lawyer friend was really iffy on if deeding them to an LLC would even accomplish anything except more paperwork since the limited liability would probably not be valid. So, we just stuck with keeping them in our names and doing the schedule e on the IRS form. We bought an umbrella policy and properly insured all the rentals so we're banking on that. At a point when we do not have them mortgaged and we do have a significant portion of wealth in them, I have read it is best to put each property in its own LLC, so that way all the others are protected if something happens at one.
Your $5000 cushion is probably ok. There could potentially be a lot more damage, and you also need to account for paying the bills when the place is vacant, but if you properly screen your tenants and know the ages of your big expenses (roof, hvac) then probably not. Good luck!
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