Military families who buy houses often find themselves wondering if they should turn their home into a rental when they receive Permanent Change of Station (PCS) orders. It’s a big question, and there is no single right answer. There are so many factors to consider! Most of them fall into two major categories: the property itself, and your disposition for the difficult business of landlording.
Is It A Good Rental Property?
First, you need to realistically evaluate the property and it’s suitability as a profitable rental.
Is your house appealing as a rental? You have to consider your property and the people who might rent it. A large family home is more desirable if it is in a nice neighborhood with outstanding schools. A city condo will want to have parking and be near shopping and transportation options. A small starter home will want to be in a safe neighborhood. You want to have a house that is very average for your market.
Is your house over-improved or filled with features that require extra maintenance and repairs? This may include a pool, fancy landscaping, butcher block counters, a septic tank, water softener, or anything else that requires special care. You can not count on tenants to take extraordinary care of special things. You may be able to write a lease that charges them for not taking special care, but it will scare off renters and be a hassle for you.
Is your house in good condition? A tenant isn’t going to want to deal with a fridge that has to be closed “just right,” a window that someone has to go outside to close, or a shower that you have to jiggle to get to turn off. Is it painted in neutral colors, and does it have good curb appeal.
Can you get enough rent to cover your mortgage, plus 20-40% for expenses and vacancies, plus the customary property management fees for your area if you choose to use a property manager?
Am I Prepared To Be A Landlord?
Do you have a big emergency fund for your family, and another big emergency fund for your house? (I like $10,000 per house, but sometimes that isn’t enough.)
Can you cover the mortgage out of your monthly cash flow if you absolutely have to, or would you have to dip into savings or go into debt if the house is damaged or vacant?
Do you have, or will you get, umbrella liability insurance to help in the event you are sued?
Will you use a property manager, and have you looked into the fees in your area? They could range from a flat 5-8% per month to 10% per month plus one month’s rent each time it re-rents. These fees might be a little negotiable, but markets usually have customary fees.
If you aren’t going to use a property manager, how will you handle management of the property? The hardest parts for most long-distance landlords are turnovers and repairs. Do you have friends or family can that pitch in if necessary?
Will your job, location, and family situation permit you to return to the property’s location if necessary? Have you set aside the funds for such a trip? Even properties managed by professionals need to be checked on by the homeowners once in a while. That’s tough if you’re living in Australia and have three kids under three.
Do you have a good list of providers you trust: handyman, plumber, electrician, etc?
Do you understand taxes in general, capital gains taxes, depreciation, and the recapture of depreciation?
How do you feel about stress and uncertainty? Are you good at separating your emotions from challenging situations? Will it bother you when your tenants call you at 2 am, or on Christmas, or while your wife is in labor? What if they are telling you that their dog has bitten a neighbor, or the dryer has caught fire, or you have bats in the attic? Or that they’ve left the keys in the mailbox and they’ve moved out.
Do you understand the landlord-tenant laws in the state of the property? What about Fair Housing laws? Do you know the eviction process? Do you understand the Servicemember’s Civil Relief Act and how it applies to you and your property?
Do you have an amazing lease template? Do you know what items you need to put in your lease? Do you know what is legal in your state?
While it seems long, this is not a comprehensive list of everything you need to consider when deciding whether to turn a property into a rental. It’s a starting point for your thoughts, your research, and your decisions.
By Kate Horrell, Military.com
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