I have a house that I bought for my parents a few years ago in a different state. They are thinking of leaving the country so they no longer need this house. I’m a little hesitant on selling it because its mortgage payment is very low as I got it whenever interest rates were at their lowest. But if we do sell it I can put all that money into our current house which as a high interest on it. Renting it is nice since we’ll have an extra income that’s mostly passive. My concern there is how much work will be involved in that since we live in a different state and have small children- we can’t afford to keep flying back and forth to check on the house. I’m aware of property management companies but I’ve heard some stories about how negligent they can be. If any one tries those I’d appreciate some insight there. Anyone had a similar situation or has any advice?
What state is in it? Generally red states like Texas are more landlord friendly, while blue states like California tend to be more tenant friendly. If the house is in a state that is more landlord friendly, I'd put it up for lease and hire a property management company, that's actually what I'm doing right now. If the property is in a blue state, sell it, it will become hell to maintain that as a business long term.
If you want to keep the house, Hire a property manager. They will take care of everything.
Yes, property management company will take care of everything
If you pay down the principal on the mortgage of your primary residence, will you keep your current loan or refinance and would you change the payment duration (e.g. 30yr to 15yr fixed) and how much will it cost to refinance? How much proceeds (minus fees and realtor commission and estimated quarterly taxes on remaining proceeds) do you get selling the out of state house? How much will you save from saved interest per year? If you rent out the out of state property, how much per month does the market charge tenants for such a property, do you get a say in choosing the tenant, how much property taxes do you pay per year, do the tenants pay for home insurance, utilities, HOA if any, and how much will the property manager charge, how much will reserve funds per year for maintenance and repairs and replacements cost (3% of value of house), and how much rental income tax will you pay quarterly on the true profit? How much will you earn after taxes and all fees and costs per year? Which of the two options ends up being higher? What if you took the proceeds from sale of out of state property and invested in index fund tracking S&P 500, and held it for longer than a year. What will you earn per year after subtracting long term taxes on stock market investments? (I think usu. People use 5-8% per year as avg long term stock market returns for S&P 500)
Use property management. If overall it's a cash flow positive property then keep it to sell later when you need the money. Assuming the house is expected to appreciate at 10%+.
Call your neighborhood's top real estate agent. Many do property management on the side.
Being an out of state landlord sounds like a terrible idea. 1) How will you know your property is being taken care of well? You effectively will have no knowledge of the state of the property unless you visit frequently. Being out of state comes with several downsides. First, unless you intend to travel frequently to your rental, you won't be able to keep an eye on the state of the property. Second, you won't be able to perform your own repairs. 2) With the rise in squatting occurring nationally, your property, with you being an out of state landlord, is the perfect target for squatters. 3) Your incentives and those of the tenant management company are fundamentally misaligned. Tenant management companies are incentivized to act like slumlords (meaning not addressing tenant repair concerns etc..) which causes potentially small issues to balloon into larger ones. Additionally, often times management companies charge a tenant finding fee, which incentivizes them to have frequent tenant turnover (which is exactly what you don't want) to the point that they choose not to renew good tenants so they can collect the finders fee. So expect a management company to do the bare minimum, not perform repairs proactively, and extract as much as they can from your property. Your house will depreciate (think wear and tear) at a higher rate and every tenant turnover is rolling the dice on getting a bad apple (think forced evictions, massive property damage, vandalism, turnover to squatters etc..). 4) Speaking of incentives, the way you make money as a landlord is via appreciation. Your goal is to find a great tenant, charge them enough to cover the mortgage, hope they are handy and don't ask for much (or optionally offer to pay for parts), and that you have low turnover. A general rule of thumb is assume the rental will be vacant 1 month out of the year (meaning 11 months of rent needs to cover 12 months of mortgage). Another rule of thumb is expect to spend ~1% of the purchase price annually on maintenance. 5) A stable tenant, who proactively keeps the property maintained, and intends to stay for a long time, is worth far far more than extracting ever higher annual rents. So consider no annual increases, if the tenant is great, you get a nice lock-in effect and peace of mind that your property is well taken care of. Your goal is to get your tenant to emotionally invest in the property. Those higher rents just increase the risk the tenant leaves and that you end up with a bad apple, one who can cause tens of thousands in damage and wipe out years of income. 6) Having been a landlord, the only way I found to do it effectively was to: A) Being present and responsive to tenant concerns. B) perform all my own repairs, I'm fairly handy, and do work to code. This saves you money in the long run and builds trust with your tenant. C) Be extremely careful in tenant selection, effectively charging flat rent year over year, achieving a lock-in effect. D) Achieving my profits via property appreciation.
Really depends on the state. If it's in washington, Oregon, California, NY, Illinois or New Jersey. I would say hard no. Pretty much all blue states will be more risk than it's worth.
Why do you think you need to fly to the house all the time? When you were a renter, how many times a year did the landlord visit to check on you?
Crunch the numbers, you gave none.....