Have You Considered Renting Your Primary Residence?
By Paul Esajian on April 6, 2018
Life has a way of taking unexpected twists and turns. One day you could be the rising star at your company and the next you are working out a severance package. Anyone that lived through the mortgage collapse knows just how quickly things can change. There are many investors that were pushed into the business due to an unexpected layoff or started renting to get out of their property. Some ten years later they have built an expansive portfolio and view it as the best thing that ever happened to them.
If you live near a college and university where rent demand is off the charts or simply want to find a more affordable place to live renting your primary residence can be a viable option. Here are five things to consider if you have even thought about renting your primary residence.
- Numbers. There are plenty of numbers to digest if you want to rent your property. The most obvious is the rent received, but far from the only important figure. When considering renting you need to look at the big picture. Start with where you plan on moving to and how much money you would be saving or netting from the move. This number should be significant enough to drive you to pack up out of your home. Next you need to dive into the rental numbers. Start by adding all the expenses. You have your monthly mortgage payment, whatever utilities you will be paying (typically water and sewer), lawn care, snow removal and anything else you can think of. Finally take a good look at other rental listings in your area to give you a realistic snapshot of your projected rent. You should net at least a few hundred dollars monthly cash flow for a move to make sense.
- Management. Once you have ran the numbers and decided that renting makes financial sense you need to move on to step two. If you have never rented a property before you may not know just how much work it can be. Even if you find great tenants you should still expect to go to the property or be available to address an issue at least a few times a month. Do you have the kind of job where you can get up and leave if you need to? Do you have the ability to answer the phone during business hours? Are you handy enough to tackle maintenance issues? You cannot simply wait for problems with the property to work themselves out. If you want to reduce the chance of having a bad tenant, you need to be able to manage the property. The alternative to self-managing is hiring a dedicated property manager. For roughly ten percent of the rent they will handle almost everything with the property. This will obviously reduce your monthly cash flow but may be the only option if self-management is not realistic.
- Renting timeframe. Leaving your primary residence is a big deal. Even if the numbers are too good to pass up you still need to map out a plan for the property. Do you want to rent for one year, fix your current situation and move back in? Do you want to move on from the property and rent for as long as possible? Is there any chance, at any point, you will move back into the property? You should never be blinded by your current situation and make actions you know aren’t best in the long term. However long you decide to rent for should be determined at least a few years out. You can decide to go year to year, but you will eventually be faced with a maintenance decision that impacts your next decision. If the dishwasher breaks do you repair or get a new one? What do you do with the furnace or the roof? How long you plan on renting has a trickle down effect on almost every property decision you make.
- Property condition. The novice landlord expects every renter to treat their property like gold. In theory, this makes sense, but realty is completely different. This doesn’t mean your tenants will trash the house, but they will create some wear and tear. If you plan on moving back in you should anticipate a slightly different house. Tenants will ask to paint rooms, change floors and even knock down doors. You don’t have to acquiesce to every demand, but some changes make sense to maximize revenue. When these changes are made it changes how you would live in the property. Most tenants are clean, neat and will take care of your property. But, there will be subtle tweaks that will change the condition of the property.
- Worst case scenario. Renting may provide a short-term Band-Aid for your current financial situation, but you should always at least consider the worst-case scenario. What happens if your tenant stops paying or there is a major expense needed in the property? Do you have the capital, or access to capital, to stop the bleeding for a few months? There is nothing you can do that will totally prevent an eviction. The only thing you can do is to take your time screening to find the best possible tenants. Even then there is no guarantee. The percentage of an eviction, injury or major expense is minimal, but you need to have a plan just in case.
Many current investors got their start by renting their primary residence. This doesn’t work for everyone but can help improve your finances and help build a portfolio.