How Are You Renting Your House While Cruising ?

[Dakota450]

Originally Posted by foggysail

Depreciation was mentioned a couple of times in this thread. If you declare your income..........AND WE KNOW THAT IS TAXABLE, you are responsible to depreciate!!!

I did my best to avoid depreciation because I did not need it and further, I did not want to pay it back when the properties were sold. But the IRS has a gotcha!!! The law...and you can read it yourselves in most tax filing books states something like "when you sell, you are required to repay the depreciation that you took OR SHOULD HAVE TAKEN at 25% of the amount depreciated."

Avoid it at your peril.

Foggy

Exactly. You can deny it all you want, say you didn't have to do it and that's fine IF you don't get caught. I know for a fact that renting your home triggers tax changes. I just didn't want to argue the point.

[FloatyThing]

I am a property manager (PM), I own one property, and manage 75 houses (single family, duplex, 4-plex) professionally. I am a member of NARPM (narpm.org). ANY PM you look at, in my opinion, make sure they are active in NARPM....what a great organization!

I have seen it all. Good tenants, bad tenants, tenants that bail in the middle of the night, pet damage, adult damage, stable people turn unstable (I call divorce damage), great tenants who take care of the house as if they owned it. It's all out there....the question is....how do you minimize your potential downside?

Tenant provide their own credit report? NO! "professional tenants" and crooks WILL forge it. As an individual, you can't run a credit report on someone. Some say the credit report really doesn't tell you about the tenant. I totally disagree. Let's examine:
-I require that there be no property management company in
collections on credit report.
You would be amazed how many applicants look great on paper till
you see their credit report....2 or 3 other management companies in collections?
-Utilities in collections? This means they can't have the utilities put into their
name. When will you find this out? Typically after you have had them sign
a lease with them.
-Evictions? Are you going to do this from 2,000 miles away? Blindly hire an
attorney to do it for you? What about move-out inspection after? Clean up
maintenance?
- Middle of the night emergencies? Is you Sat phone on 24/7?

Property management fees
- Typically 7-10%
- PM company can't survive on 7%. There will be hidden fees.
- In my opinion 7% companies are cutting too many corners.
- Leasing fees on top? Most states this is typical
- Advertising fees
- $3,000 / year is high? That's a plane ticket a year? What about a tenant
who bails in the middle of the night and you have to fly home unexpectedly?
What about a poorly managed vacancy
causing it to take too long to re-rent? 1 month's missed rental income costs
you $2,500. It doesn't take long at all for that $3,000 savings to be chewed
up in plane ticket, hotel, stress, missed vacation time, relatives who dread you
calling asking for "another favor".
- "Dropping the price gets it rented faster" - And encourages the lower class to
rent your house....causing more problems. Slightly higher rent (in our market)
gets you better tenants without longer a longer vacancy.

Owners managing their own properties:
- Are you retired, or starting a new business? PM is a business, it takes
experience.
- Owners have too much "skin in the game". You become emotionally involved
You will be more lenient and take the excuses and the next thing you know,
the tenant will owe you several thousand dollars and you will NEVER collect.
- PMs have procedures and execute them regardless. Your tenants know they
can't buffalo the PM company, it's procedure. Pay by XX date or be evicted,
it's that simple.
- "Professional tenants" seek out individual owners to rent from and avoid PMs
- "Professional tenants" prey on your greed. "I have cash...today!" "I have to
move in tomorrow" Then you don't have time to check out their background.
Let me ask you this- If you where paying $100/night for a hotel...wanting to
get back to your wife in sunny places and an applicant walked up with 2 months
rent cash and "had to move in tomorrow"...wouldn't you be tempted? A PM
won't be....we will get the best tenant and run them ALL through our screening
process. Dangling carrots doesn't do any thing for a PM.

Ok, I am going on and on..... Finally some things to ask a PM as there are many bad PMs out there.
- Are you a NARPM member? How active in NARPM are you? (find them at narpm.org)
- Setup fee? Monthly fees? Advertising fees? Fees while vacant? Leasing Fees?
Fees added to maintenance invoices?
- When is rent due? When do you serve notice of eviction? What are the rules
for eviction in XXX state? How often do you evict? Do you have policies in
place to help avoid evictions (reasonable grace periods, etc).
- What's your screening process?
- 3 references
- How many units do you manage? How many employees do you have?
A small company can manage ~75 units per employee.
Look at their website, look at their vacancies online, look at the quality
of their advertising, pictures, etc.
- Call them anonymously as a tenant. Look at 1 of their rentals, experience
how they handle potential tenants.
- Call them after hours. Is there an emergency contact available after hours?
- Do you submit bad debt to collections (regardless of collection success, this
is VERY important because it let's the next PM know this is a deadbeat tenant).

I have managed my own property as an individual before I started doing this full time. I lost $3,500 due to back rent and repairs from a single tenant...because I got emotionally involved and took the tenant's BS stories. I now run everything through procedures, same policy for EVERYONE, no exceptions.
It is possible to get a good tenant and have no problems for years, but it's just as easy to get a bad tenant or a string or short-term tenants moving in and moving out, all causing you problems while you are trying to enjoy life. It's a question of how much you like to gamble.
Will a PM avoid all the stuff I have talked about? No, but using a professional full time PM company will give you better odds.

Choose your risk level
Be at peace with your decision
Go cruising....worry free

That's my advice.

[donradcliffe]

The worst horror story I remember was when a cruiser rented his house to his son...

[FloatyThing]

Yes, NEVER rent to friends or family.

[JayCall]

On the tax thing-first-as a tax attorney, I advise all client to abide by the tax code in its entirety-on a pragmatic level, taking all available deductions, including depreciation, with regard to rental property substantially reduces your tax burden most often creating a net loss on rental property that will offset other taxable income. To pay more taxes than you otherwise should is a bit perverse.

On "repaying" depreciation, you don't "repay" depreciation. What the depreciation recapture rules do is cause some of the gain on a sale to be treated as ordinary income rather than capital gain income. So it is not really repaying, it is just a means of recharacterizeng the nature of the gain on a sale. This makes sense as the depreciation offset ordinary income in the years it was taken.

The one real issue to consider is the effect of converting a personal resdience to business property. When you sell your residence, the gain on the sale is generally (within a generous limit) excluded from taxation, that is it is non-taxable. Gain on the sale of business or investment property is fully taxable, and as noted above, at least some portion taxable at ordinary tax rates.

The determing factor is the length of time you have lived in your home. If it has been your primary residence for 2 of the previous 5 years, it is treated as a sale of a residence. If not, it is a sale of business or investment property.

This is not tax advice, you should consult your own tax advisor for the complete details as they relate to your specific situation. Going back and forth between primary residence and rental property can end up being a complex tax issue.

[Cheechako]

"We have rented our house out for 18 years and the income was a major part of our cruising budget. We started out with a property manager, but the worst tenants we had were picked by the manager, and we have gone without one for 14 years. You learn to trust your instincts when you pick tenants, and we offer below market rents and usually have 5 or more qualified tenants to pick from. We start out with a 1 year lease and then convert to month-to month."

Yep, go with your gut. I've used a rental "open house" and always put two names on the sheet before anyone arrives....

[Dakota450]

Originally Posted by JayCall

The determing factor is the length of time you have lived in your home. If it has been your primary residence for 2 of the previous 5 years, it is treated as a sale of a residence. If not, it is a sale of business or investment property.

Better go back and re-read the tax law with regard to this statement. This was changed in 2009 to close the loop hole of people converting rental properties to primary residences, then living in them for 2 years to sell them and receive the $250k single or $500k capitol gains exclusion. Now it is based on percentage of use as to how much capitol gain exclusion is allowed.

[SV Demeter]

Yeah Im not worried about the Tax situation. Im a financial analyst by trade and get the depreciation recapture bit and cap gains vs invome. But thanks Jaycall for your concise explanation. We are renting the house instead of selling because we want to keep the house as a back up plan in the event our family decides we dont like cruising and want to go home. We dont have a big equity position in the place, so if after a year of cruising the rental issues become a pain we will sell. Annapolis is a relatively liquid market. As I mentioned earlier the Admiral has done commercial property management for 20 years and is well versed in everything folks are mentioning here like properly vetting tennants, eviction help, inspections, etc. I have no doubts in her ability to handle this house. Hell she evicted 3 restaraunts this past month and has been to court plenty of times over tennants. Its more a question of do we WANT to deal with that? Im picking up that 10% is a pretty standard rate for this sort of service in the US.

Based on the responses it sounds like there are two groups of folks here:

Group 1 says hire a good PM, pay your 10%, and mix another rum drink.

Group 2 says do the due diligence yourself, maybe hire a handyman to be on call to help with repairs. Find good tennants you can communicate via email with and save yourself the money, acknowledging the risks but at the sametime admitting that many of the pitfalls still exist despite paying the 10% to a PM.

What it will probably come down to for us is how much we can get in rent for the place. If we can get enough in rent to cover the mortgage and the PM then thats the way we will go. If its looking like we will have a tough time covering both then we will need to consider other options.

I want to thank everyone who has replied so far to this thread, even those of you who YELLED AT ME .

Thanks again.

[Celestialsailor]

FloatyThing...GREAT post!!! If I had someone like you here, I feel I could trust them. The one's I've met here, I cannot based on the people they allow in a rental unit. I will take your advise and look deeper into it...Thanx again

[foolishsailor]

@floatything...

Great post. Thanks for the info. Can you move to ireland i have two properties for you to manage!

We have two properties we are looking to build and then rent over the next two years. We rented our last place for 3 years to two tenants ourselves and i think we were just lucky. For me personally i would be gladly willing to part with 10 or more percent to know i have less worry or difficultyy, especially when we make the pacific puddle jump and are a costly and time consumin distance from home.

We were hovering over doing it ourselves, asking family to assist or getting an agency onboard and after your post we are convinced. You directly addressed many of the concerns we had.

I will be printing out your post and using it to vet the various agencies in my area.

Thanks

[David_Old_Jersey]

IMO / IME the main consideration for a low aggro rental is having a property suitable for rental. "Homes" of owners are often the worst to rent out, due to both design (requiring constant maintainence / being easy to damage or degrade) and emotional attachment to the property (the Tenants haven't actually "trashed" it - just lived in it as a rental).

Expect (and accept) that some of your rental will be spent on maintanence and repairs, and that some aggro will be involved - that's just how it is. How much aggro depends on you (and what you have pre-planned for / already know how to deal with - rather than having to work things out as you go along).


My advice is to brainstorm every possible scenario that could go wrong, from Tenant flooding the property , degrading the property without any major single events, to simply staying put and telling you to FO on the rent . If you can't get 'em out in short order (by legal or other means), then you might want to re-consider the location you are renting in - sooner or later you will get a bad tenant.

Tenants? if you get a good one - treat 'em nice .

In OP's case, given starting from a low knowledge base, I would start with a good PM (a good one is as hard to find as a good tenant - you only find out whether they are good or not when things go wrong, and that only happens after you have "married" 'em!).....depending on how things go, you can always switch to self managing later - possibly mixed up with a PM only finding (and vetting, with you) new Tenants.

[xiabbo]

10% is reasonable however they will not really do much for that money. I would say your best bet is to put the handyman on retainer. This is the key element - you must trust this person. Next call an attorney and get a reasonable rate for piece work and a flat rate for an eviction. Then happy cruising!

[denverd0n]

Originally Posted by Dakota450

Better go back and re-read the tax law...

Uh... I think you're the one who needs to re-read the tax laws. In particular, take a look at this web page, updated just this month:
Sale of Residence - Real Estate Tax Tips

The $250k/$500k exclusion is just as it has been for a long time now. If you have owned your home for at least two years, and lived in it as your main home for at least two years, then you get the exclusion. No percentages, no nothing. You get the exclusion.

[Dakota450]

Originally Posted by denverd0n

Uh... I think you're the one who needs to re-read the tax laws. In particular, take a look at this web page, updated just this month:
Sale of Residence - Real Estate Tax Tips

The $250k/$500k exclusion is just as it has been for a long time now. If you have owned your home for at least two years, and lived in it as your main home for at least two years, then you get the exclusion. No percentages, no nothing. You get the exclusion.

Start here. When I have more time, I can look up the actual IRS publication on this.
Home Sale Exclusion Modified Based on Qualifying Use

[Dakota450]

Ok I think I found it. Look at IRS publication523 and look under non-qualified use. I really wish I was wrong on this but I don't think I am. If I am, please someone tell me as this has really put a monkey wrench in my plans to sell a second home. The link to the publication is below.

Publication 523 (2011), Selling Your Home