Fabulous Financials

21 comments:

1. Boston Gal, 9 May 2007, 10:09
   

   Hi Single Ma,

   You do have a problem. Will your new employer help with selling costs if you sell your home?

   If your primary concern is not paying twice (rent and mortgage) and you are OK with possibly losing some money – then I highly suggest putting the townhome up for sale and getting the place rented.

   You can do a tenant-at-will (30 days notice to vacate) and give them a break on the rent in exchange for being accomodating about showing the home for sale (keeping the place tidy and skidadling when realtor brings potential buyers thru).

   If you really think the housing market is too soft and you need to wait until at least the builders sell off their inventory before you try to sell, then focus on the tenants.

   I would get a broker to find a tenant and pay the fee. See if you can get a longer term lease (18 months or 24 months) instead of 12 months of less. Less turnover means less cost and more time means the local real estate inventory could turn in your favor.

   Good Luck!

    
2. cyn94601, 9 May 2007, 10:14
   

   First of all, what a wonderful problem!;-)

   I live in Cali. The ONLY way I got into my first house was by buying a duplex and renting the other unit. So I became a landlord more out of necessity than desire.

   Having said all that, do you have section 8? We have it here and it’s housing help given to low-income people – usally mothers. In california, you can still screen the tenants and still make selections based on credit, background checks etc. The best part is up to 90% of the rent is guaranteed. So you will get paid!

   Downside is the same as with regular rentals – stopped up toliets, general complains, finding the right person, etc.

   Also, this may be one of those times that selling the house yourself will cost you more than save. When I sold my first house, it cost me 15,000, but it got sold in 15 days. I didn’t have the network to make that happen and if it had been on the market for months, I would have paid it anyway in mortgage. You may be in a better position, but just something to consider.

    
3. cyn94601, 9 May 2007, 10:23
   

   Beatiful house by the way! You should have seen my first house – just awful! I paid 335,000 and while it was a duplex, it was really, really bad! Our housing costs are just crazy!

    
4. IRA, 9 May 2007, 11:10
   

   I feel your pain. I had the same dilemma – to rent or sell my current condo and hope to break even. First, I looked at rentometer.com to get a feel for rental comps in the area, and decided that I’d be losing money every month if I rented it out. The association fees and property taxes are pretty high. Then, I called the realtor that I used 3 years ago when I bought my place. She told me what she thought I could get for my place. So, I decided to sell.

   If you decide to rent out the place and you want to avoid paying a management company monthly fees, consider buying a home warranty from AmeriSpec. It’ll cost you $500 for a year’s worth of coverage, but if anything goes wrong, you pay $55 for someone to come out and fix the problem (includes plumbing, appliances, heating/cooling etc.). The AC unit on my new place is on its last legs. So, I’ll probably get the warranty, knowing it’ll probably conk out on me this coming year.

    
5. prlinkbiz, 9 May 2007, 11:26
   

   Hey girl! I have been in your situation- landlord and renting my own place! Here’s my two cents from personal experience:

   Keep the house and rent it, and manage it yourself as much as possible.

   Place ads for tenants (found mine on Craigslist), run background and credit checks, and make sure you get a solid lease with a solid deposit for them (mine have a 2 yr lease).

   Why sell at a loss when you can have someone else helping you keep your asset and build equity for you? The money you are willing to take as a loss on the house if you sell could hold that property for another year or two, think about that.

   Set aside an account with holding costs for your rental, incase of late payments or emergencies (had to pay my own mortgage since rent was late and buy a new AC this last month- was glad for the money I had set aside!)

   If you have equity in your house, set up a heloc if you need to hold the house or in case of emergency- or just in prep for you to pull cash out and use as your next downpayment.

   One other thing with renters, consider setting up an LLC and deed the property to the LLC, just to protect yourself- but will have to do that after the heloc set up I believe.

   Also, don’t forget the huge benefit owning a house is as far as all things credit are concerned. And once you have renters, you can get a new owner occupied loan.

   You can do it! I’ll shoot you an email too!

    
6. Opinionated Diva, 9 May 2007, 11:35
   

   I forgot to check where you are located, but in most areas it has become a buyer’s market. From what you mention (several “for sale” signs in your area, builders offering lucrative incentives, houses sitting on the market for over six months, etc.), it sounds like your area is a buyer’s market as well. All that considered I would try to rent the house if that is still an option.

   Question though…why is the rental broker charging YOU for finding a tenant? Usually the brokers charge the tenant a fee…at least that’s how it’s done in NY as I have had to pay the broker’s fee multiple times.

    
7. Kimber, 9 May 2007, 11:47
   

   Aren’t you starting a new high falooting 6 figure job? Seems to me that when you play at that level plus combine your career with a daughter (who will have trouble adjusting to the move, believe me), your most precious resource is time not money.

   Yes, gasp, taboo for a financial blog, but dem’s the facts.

   If you were an experienced real estate investor, I’d lean towards renting out. I agree that selling resale while the builder is still selling new is a losing proposition (one reason I advise never to buy in a new development).

   But since renting will require learning a whole new skill set at a time when you’re wanting to impress your new boss…

    
8. Single Ma, 9 May 2007, 12:27
   

   @ boston gal – Yes, my employer will help pay some of the selling costs. Considering all the “for sale” signs in my neighborhood, I definitely think the housing market is soft.

   So a longer term lease is a good idea?

   @ cyn – Yes, there’s Section 8 in the area. Aren’t there limits on how much they will pay for rent? Boy I have a lot to learn! If I sell, I’ll probably work with an agent. No time for FSBO.

   Thanks on the house. $335k doesn’t buy much where I just moved to either.

   @ IRA – Thanks for the rentometer link. I’ll check it out. My house is still under warranty. 10 yrs structural, 5 years HVAC, 2 years plumbing, and can’t remember the rest…

   @ prlink – I’ll respond to you in email. Have a few questions about screening. Thanks for your input!

   @ opinionated – Yes, the market is turning but sellers are holding pretty steady on their prices. I don’t know if it’s really a buyer’s market or just a market “correction.” Prices have gotten out of control.

   I don’t know too much about rental broker fees. I’m still learning so I could have made a mistake.

   @ kimber – What does my “high falooting 6 figure job” have to do with a decision to rent or sell my home? This isn’t our first move and my daughter will adjust just fine. If anyone will have a problem, it’ll more likely be me. I hate change.

   My most precious resources are time AND money. I can’t afford to spend either of them unproductively.

   I’m not exactly sure how to take your comment, so I’ll err on the side of caution and just ask…
   What’s your point and what exactly are you recommending?

    
9. Ticia, 9 May 2007, 13:03
   

   Hi Single Ma!!!

   The broker is good way to go!!!

   I also have 2 homes and they are with a real estate company… that is another good option, where they look after the propery, manage it and all…didn’t you say you had some friends in this area–can they help?

   Best Wishes…

    
10. Kimber, 9 May 2007, 13:31
    

    Well, geez, girl, you’re more a superwoman than I am then (but that’s why you’re fab). I couldn’t handle my own six figure job and moving (I think I was darn close to a mental break down – at least crazier than usual) and I didn’t even have a trooper (not then, not now).

    So this is purely a financial question.

    I vote for renting then. Sounds like you’d be looking at a nasty loss with selling (and I’m loss adverse). Can’t help much on the real estate investing front (paper girl myself). But you’re getting great advice there anyhoo…

     
11. Kimber, 9 May 2007, 13:35
    

    BTW…my 6 figure job came with a 3 figure work week so that’s the neighborhood I was driving from.

     
12. faithfeedsme, 10 May 2007, 4:55
    

    My thought is…have you thought about offering it as a rent-to own?

    You could get a 2 year lease, with someone who wants to purchase, but cant right away,(after 2 years of rent to own, they can refinance) They make a down payment, and part of their rent money goes towards down payment, but if they break the lease they dont get any $$ back.

    You would have a renter, but they would take better care of the property, than a traditional renter, as they would “own” the property for themselves.

    Just a thought, when I was a single mom, and my ex had SCREWED my credit big time, that is how I bought my first house.

    Just thought I would share with you. I just found your blog, and I think you are amazing.

     
13. MsJayy, 10 May 2007, 5:05
    

    Decisions, decisions. I’m risk adverse myself so I’d probably look to rent & use someone to help me manage the process for me from finding a tenant to managing rent. Good luck! I’m sure you’ll work it out.

     
14. Ms. Shoestring, 10 May 2007, 5:20
    

    I tried posting before but my comment didn’t show up. Anyway, short story shorter, if you decide to go the renting route, have you thought about trying to get on the offbase military housing list? My friend who lives near Andrews is attempting this as well.

     
15. Single Ma, 10 May 2007, 5:32
    

    @ Ticia – The more I think about it, the more a management company sounds like a good idea. Especially since I’m a little wet behind the ears. This is outside of my comfort zone but I’m learning.

    Yes, I have friends who are still in the area. Knowing my neighbors really well also gives me a piece of mind when I consider renting. I’m sure they’d be willing to help if asked. Not sure if I want to bother them too much though.

    @ kimber – Trust me, I’m on the brink of insanity. I just had a friend tell me yesterday that I was “wack.” It hurt my feelings but I guess I have been acting kind of weird lately. *shrug*

    @ faith – Welcome and thank you for reading. You present very good points for a rent to own arrangement. I’ve been discussing this with a real estate investor friend and he’s been sharing the ins/outs. To be honest, I’m open to ALL options. I just need to get MOVING and finally make a DECISION.

    I’m having the house cleaned and the paint touched up this weekend. Since May’s rent was free, I don’t feel the pinch yet. But I’m on it though.

    @ msjayy – I wish I had as much faith in myself as you do. Whenever I have a problem, you always end with “you’ll work it out.” Sometimes I’m not as confident but thanks for believing in me.

    @ ms shoestring – Blogger’s acting up again, huh? Gotta love ‘em.

    If I go the rental route, I’ll definitely target the military. That’s actually my preference, but I know I’m not supposed to say that. LOL

     
16. Bklyn Diva, 10 May 2007, 6:23
    

    the rent to own option in the comments sounds like a good one.. also you are getting great advice..

    interested to see which route you go :)

     
17. cami, 10 May 2007, 6:33
    

    “If a sales price is difficult to gauge due to market volatility, how do I determine a fair amount to charge for rent?”

    To me that is a very important question. If you were to rent it out, would it cover the cost of your PITI? If not, how much would you be losing it month, not only do you have to consider the difference between your PITI and what you can get for rent, but if you go the broker option anything that they charge you as well. If you’re looking at a comparable cost between renting the place for a year and the loss that you would have to eat now if you sell, it might be worth the peace of mind to just sell it now.

    I’d recommend checking out sites like craiglist to see how much comparable places are going for, and to see how saturated (or unsaturated) the rental market in your area is.

     
18. Beth B, 10 May 2007, 11:58
    

    I would call/make appointment with a few of the rental agencies in your area and ask them:

    What is a reasonable rental rate for my house?
    What percentage of the rent does the rental agency keep?
    What kind of screening does the agency do for finding renters?
    How does the agency handle late payments?
    Is the rental agency on the military’s list?
    How does the rental agency handle repairs?

    You may also want look into how your taxes will be affected by having this house become a rental property.

    Also, I would not for a second hesitate to let the neighbors know that you are looking for a tenant and do they know of anyone reliable who is looking to rent? Most homeowners like being able to help choose their neighbors! I know I would. Would I prefer to tell my neighbor that my dependable coworker is looking to rent a nice house or would I prefer be left alone and take my chances on who ends up living next door. You know the answer to that question.

     
19. Madame X, 10 May 2007, 17:17
    

    That is a tricky situation singlema– the early bird commenters bring up a lot of good issues. here’s some other things you might want to think about, as if you didn’t have enough on your mind already!
    You had some issues with the construction– do you think the house will “age” well? Will it show better now as a nearly-new house, or will it hold up well and still look ok after being rented for a few years?
    Do you know when the developer will be finished building new units? If there are a lot of similar properties on the market right now, maybe it’s best for you to wait until most of them have been absorbed and the building is finished, so you are competing with fewer other homes, and it’s an even playing field with all of them being previously lived-in.
    I think I am leaning towards the idea of you renting it out, given what I know about the situation– another question might be whether you are willing to lose a chunk of money now, vs. a trickle of small monthly losses that might later be made up when you sell the place for a better price in a few years. Hopefully you could get enough rent that you wouldn’t have negative cash flow each month, but it’s a worst case scenario worth looking at.
    Oh, and the other question might be how much your new employer will help out– do they only give you money if you’re selling? And is there a time limit on when that has to happen?

    anyway, I don’t know if I’ve been much help, but good luck, hope it works out!

     
20. D, 11 May 2007, 13:23
    

    Hi Single Ma,

    I’m laughing, cause no way am I an expert. This one multi-unit will be the death of me yet.

    I would tell you this – I sold my first house, by holding the mortgage. I did not sell it on contract. It has been a real boost to my monthly income and networth.

    I realize you have not been in your home for a long enough time frame to build huge amounts of equity, but that does not mean you are not in a good place.

    I would list the home Lease Option or Rent with the Option. You can phrase it anyway that you like.

    I would require a minimum $5k down, less than 20% required by banks, but enough to help cover any possible nightmares that could spring up. The lease would be for 1 year, with a rent that would cover my payments and expenses. I would calculate a portion of the rent to be applied to the purchasers down payment “when” they complete the sale. The 1 year would be extendable with an option and a slight increase of payments.

    This would help them build equity and help to insure their stake in the property.

    I would let them know, that I have no intention of being a landlord. That I fully intend on selling the property. Meaning, they need to take care of everything – maintenance etc.

    I would also set it up, if they do not close, they lose their downpayment and the dollars that I would have applied at closing.

    Email me if you want me to dig in deeper. A lawyer could handle all the paperwork for about $350, that’s what mine cost.

    I would think you do not want to just rent this new home. Yet, it would be a perk over the other properties to set it up as a rent to own. Many people, just don’t have enough for a down payment.

     
21. kitty, 13 May 2007, 14:53
    

    You can rent-with-option if you believe the market will continue to go down, but if you think the market may go up, you don’t want to commit to a specific price. I decided against rent with option when I rented out my condo for this reason, but this was 8 or 9 years ago, so the real estate situation was different. There was a raising market so I didn’t want to commit a specific selling price. Right now it may be different.

    Have you checked out how much you can get in rent? I might’ve missed it in your post. Will your rental income cover your expenses? You do get to deduct all of your expenses from taxes, but you don’t want to loose money.

    There are additional tax breaks you get when renting – I am not sure you are aware of them. In addition to all your expenses (including what you pay your agent if you have one), you get to deduct depreciation. If I remember correctly – you need to check it – the amount you get to deduct for depreciation on residential rental property is property value (what you paid for it+improvements or current value whichever is less) divided by 30 (or 25?) years. The amount you are allowed to deduct as depreciation is taken into consideration when you sell (provided you sell for more than cost – depreciation). It is still a good deal because when you sell the max federal tax rate for depreciation you were allowed to deduct is 25% vs 28% you may get when you deduct it (this depends on your tax bracket). By the way, this is all done on schedule E, so it doesn’t matter if you itemize or not.

    When I bought my current property I rented out my old condo. There
    were some differences with your situation, though:
    1. This was in 1998 (if I remember correctly) so the housing market just started to pick up after the long housing slump.
    2. I was not moving away, but simply moving to a townhouse from a one bedroom condo in the nearby complex, so I didn’t need a managing agent.
    3. I live in a fairly expensive area, and this was one of the most sought after condo complexes in town, mostly owner-occupied, so it was very easy to rent out. Also, one bedrooms are for singles or childless couples, and there were not that many of those who could afford $1250 a month that I initially charged. I called a couple of real estate agents to find out the going price, also checked the ads. I kept the amount the same for a couple of years because I really liked my tenants, than raised to $1300 and kept it at that.
    4. With a condo, you are not subject to rent restrictions or controls, if I am not mistaken (not that there are any in my area that I am aware of).
    5. From what I was told, evictions are quick and easy in this area. I didn’t have this problem – my tenants always paid on time and kept the property cleaner than I did when I lived there. My friend had to evict her tenants for non-paying (and also because she had a co-op and co-op board changed rules to restrict renting to no more than 2 years) which is how I found about evictions in this area.

    I charged 1 month deposit + last month rent. This provides the same protection as two months except it sounds better since tenants officially get the right to live last month rent-free. You don’t want your tenant to just “assume” that they can do it unless specifically agree because if something is really damaged beyond normal wear and tear (normal wear and tear is OK) you need to have the protection of the deposit.

    If you allow pets, you should ask for the additional pet deposit and include mandatory black light inspection (for urine stains) when they move out. It is up to you if you want to allow them or not. I like pets, and I have a cat myself, but if you get irresponsible people, the smell is very difficult to remove – something another of my friends found out. Same with smoking – it is perfectly legal to say “no smoking” in your ad if you don’t want your place to smell of smoke. Or you might not care. It is your property so it is your decision.

    Check out income, references and credit history. If you have an agent, the agent will do it for you. I didn’t do it because I really liked the people the moment I saw them – you know how sometimes you just see people and feel like you can trust them. Sometimes first instinct is the best, but my friend got burned for not doing her homework, so it is better to be safe. Ask for more than one past residence because the last landlord may just want to give a good reference just to get rid of someone.

    You don’t have to require a one-year lease. It all depends how easy or difficult finding tenants is in your area. Month-by-month with two months advance notice is a perfectly fine arrangement, and it makes it easier for you not to extend lease if you don’t like your tenants. I originally asked for a one year lease, but this young couple wanted 6 months, so I said OK because I wanted them. I also told 2 months notice is enough to break the lease, but I knew I can always find another tenants with this property. They ended up staying 4.5 years with month-by-month/two months notice arrangement after the first lease expired. I think if you really like your tenants, it pays to be flexible.

    By the way, renting out my condo turned out the best financial decision I ever made. 4.5 years later when my tenants bought a house and moved out I sold the property with enough gain to pay off my current mortgage. In hindsight I wish I held it for two more years, but I was afraid I wouldn’t get this lucky with tenants the second time or that the real estate market would turn.

    But my timing was different. Also, if your company gives you assistance on selling/buying new property that may make a difference. If this assistance is big enough, it may be worth while not to loose it. So I don’t know what is the right decision in your case.