Why I Won't Rent Out My Home

Here's a piece that advocates renting out your home if you can't sell it. The story gives all the positive arguments for renting and dismisses most of the negatives (or only covers them briefly). But it does say the following:

One big drawback [to renting] is the potential for bad renters—but if homeowners SCREEN very well they won't necessarily have this issue. Another is the potential for the renter to skip out on rent. Homeowners also face the possibility of running into a "perpetual tenant" who knows how to work the system. Such a tenant might, for example, pay a deposit and then live in the house for 60 days rent free while the landlord files eviction paperwork. The stress of having to fix frequent issues—particularly in an older house—can be another drawback. (That's why it's a smart idea to have a handyman that lives close to the property that you can regularly call on.)

Here's why I won't rent:

• Don't want the time hassle -- finding a tenant, repairing needs someone else has, getting payments, etc.

• Don't want anyone living in one of my biggest assets -- Even if I know them, I'm not comfortable turning my house over to them.

• Too big of a risk -- Even if you do all the screening you can, you can still end up with a huge problem.

• Laws favor renters -- If something goes bad, many of the laws are tilted way in the favor of the renter. It's often so bad that the owner has very few options for getting out a bad tenant. And even if they do, damage is likely to occur prior to final eviction.

A home two doors down from us hadn't sold in two years (the owners are crazy -- asking for a price that would have been a stretch three years ago -- so no wonder it's sat there) and a few months ago they rented it out. The family moved in, paid the rent, did NOT pay any utilities, messed up the landscape, damaged the inside of the home (from what I heard, they worked on their car's engine in the living room -- believe it or not!), and then left in the middle of one night -- leaving the owners with a damaged property and holding the bag for the utility costs. Sure, the owners had the security deposit, but there was no way it covered all they lost, not to mention the time and effort to get things fixed.

Our neighbors did all they could to screen their renter and it still worked out this way. Nope, I'm not going to take that risk.

Comments

[Janet]

I've had a very good experience renting out a property, maybe because it's in a very upmarket area. When I got divorced I could not afford to stay in the home so rented it out. My first tennant lasted 3 years. They paid really well but did not look after the place very well, I had allowed for repainting periodically so that was not a problem, the damage to the garden could be fixed without it being too expensive. The current tennant is a deam, pays on time and does all the small maintenace himself. The rental I get for the property covers the mortgage on the rental property and the smaller home that I bought as well as all property taxes and levies. Property in South Africa is always going to be a good investment as we have a very serious housing shortage so even if the market flattens it's never yet dropped. Not only do I have a good income from the property but also an asset that has doubled in value every 5 years.

[Matt H]

Ostensibly the laws favor renters, but this is another example of well-intentioned laws having negative consequences for the group they claim to be helping.

If FMF weren't scared off because of these laws (and quite reasonably so), he'd be adding to the supply of available rental property and driving down the price of rent.

[Kevin M]

Another drawback - you'll lose potential tax savings on the exclusion of any gain on the sale when (if) you do eventually sell the original home after it's converted to a rental. It used to be the 2 years out of 5 years test, but that doesn't apply anymore per the Housing Assistance Tax Act of 2008.

[scootdawg]

While I agree that its a hassle, I did rent at one time and found a really good manager. He was cheap and he screened primarily based on one area where you are allowed to discriminate: credit score. What's nice about this is people with really good credit are generally really good tenants. He always set the bar real high and it might take a little longer to find someone but it works well.

[John]

Whoever wrote this article, I think you need to re-evalutate your financial reality. First of all, your house is not YOUR asset (not yet at least), the fine print on that huge loan you took out says that if you can't pay your mortgage, that pile of brick and mortar belongs to the bank.

One of the most common misconceptions is that a person's house is their biggest asset when in fact they don't even own it free and clear. Yes, you have the rights to use and enjoyment, and the right to use it as an asset (a profit making vehicle), but you aquired that asset through OPM (other people's money).

To NOT rent out your house is losing a valuable potential revenue stream (if you have the option). Its one tool in the wealth building toolbox.

Now, if you are happy with your financial situation and perhaps are just too lazy to take on the RESPONSIBILITY of being a landlord, then that is your decision. But don't write an article on something that you obviously have NO experience in doing. Otherwise, the title of the article would be "Why I wont rent out my home ANYMORE"

[L Simmons]

On the flipside, I pay rent so the owner WILL keep up the maintenance. I don't want the hassle of doing it myself or I would buy my own home.

Everytime, I make a request to keep HIS property up, that is his excuse to "inspect" the property. While I really have no issue with that, I dislike the constant threats of eviction while I pay my rent on time, live in a clean environment and got rid of the verbally ok'd dog.

The dog I understood, it wasn't in the paperwork.

I did not break his house. I am merely reporting to the rental company issues that need attention. The house is old, the repairs are costly. HENCE WHY I DON'T BUY A HOUSE, I RENT! So someone else can take that burden!

I will be moving out when my child's school year is complete. The landlord has made this a miserable experience and I have been a "professional" renter my adult life.

[Apex]

I am a landlord and I am not sure of the laws in various other states but in MN eviction is not very hard. You file the paperwork with the county, takes about 2 weeks to get a court date. You got to court and if the tenant is in violation of any clear terms of the lease (especially unpaid rent) they are evicted on the spot and told to evacuate immediately. If they do not you can get a sheriffs writ in about 1 day. The sheriff then shows up in 24-48 hours and physically removes the tenant from the premises.

In MN this is how the process works. Even if its January and its 20 below zero. They are kicked to the curb. The utility company cannot shut off their heat in the winter but the courts will kick them out if they do not pay and it takes less than a month.

[sahm]

We did decide to rent out our old house. We've had some issues- bounced checks, late payment. Our main purpose was to get through the housing slump. The house has dropped so much in value and there are so many foreclosures that it made more sense to rent it out. I'd like to acquire more rental properties, but we are taking a slow approach- let's get this one under our belt. Fortunately we haven't had any really big issues. The house is newer than our current house and the landscape is maintained by the HOA (which we pay dearly for). It's definitely not for the weak at heart or super tenderhearted person!

That said, growing up my dad had a rental and wasn't much at all. It was a tiny house that he had no trouble renting out. Unfortunately everytime a tenant left, we had a TON to clean up. It was not fun, but my dad said he did generate decent income over the years from it.

[MBirchmeier]

I've got to ask...

If your neighbors aren't grounded in reality and/or not doing their homework in finding out how much their house is worth, what do you think chances are they aren't grounded in reality and/or doing their homework in screening tenants as well?

I'm not saying bad renters don't slip through the cracks when you diligently screen, but of the landlords I know those who have had bad tenants, are mostly those who don't adequately screen their tenants.

[ProsperityJunky]

I think you know where I stand on this: http://www.freemoneyfinance.com/2008/10/the-easiest-way.html

If you think about renting as business it changes some of those concerns. Yes they are still concerns but you understand it is now a business and no longer a personal asset. As with any business, you would not expect it to be free of any challenges. If it did, you probably wouldn't be in business since many businesses are created to solve a problem or fill a need.

I agree if you want a hands off investment. Go with mutual funds. Renting is not for everyone but I still really like it as an investment option.

[F. Morana]

Interesting discussion - the upshot here is that FMF is not in the business of managing rental property, and sensibly, does not wish to do so as an amateur. To let-out one's own home in this way, for the sake of a few extra dollars, is really just another sad form of financial desperation -- and it defeats the whole purpose of owning one's own home in the first place. (Consider, if you're renting-out a portion of your home, then YOU are living on a rental property!)

Rental properties, as a rule, should be professionally managed multiple properties that are built and maintained for that purpose. Only with considerable expertise and experience can this business run well, and the management needs to be on full-time alert toward misuse and abuse of the properties, and for emergencies.

All others should enjoy their homes & stay away from business ventures in which they may have little expertise, experience, or inclination to take-on what amounts to a real & substantive professional obligation.

[acm]

John,
I wouldn't assume that FMF's house is owned by the bank. Seems just a few posts back, he said he hasn't had a mortgage in years.

http://www.freemoneyfinance.com/2008/10/your-year-30-fi.html

[FMF]

ACM --

You are correct -- I haven't had a mortgage for a long time.

For more details, check out this post:

http://www.freemoneyfinance.com/2008/01/how-i-paid-off.html

[Tomcat1066]

John,

Based on your post, I'm going to guess you're a fan of Robert Kiyosaki, right? After all, he makes similiar arguements as you do about a home not being an asset.

If so, do a google search and I'm sure you'll find plenty of people who disagree with his position about a home not being an asset.

[AdamCO]

A house is a pretty horrible investment, if you compare the rates of return (bubble years excluded) to pretty much any other investment vehicle.

The other side of that is the bank will let you borrow $300k to buy a house but probably not let you borrow that amount to buy stocks.

People who think the market will "bounce back" to 2005 prices anytime in the next five years are totally delusional.

[Jim]

My father has been a landlord for over 20 years and he now manages 21 units. He's had hundreds of tenants over the years. SO I can tell you from experience what its like from growing up with a father who was and still is an active landlord.

Being a landlord is like taking on a part time job. If you don't have interest in it or don't have the time then don't do it. Many people jump into renting properties without knowing much about what work is involved or how best to handle rentals.
You have to consider all the potential time, effort and costs involved.

Some people are just not suited for it. My father and I bought a rental from a woman and we got a great deal on the property partially because she absolutely hated being a landlord.

As far as eviction goes, laws vary by state but, but generally I agree with Apex, its not that hard and it really shouldn't take months to evict a tenant. I think usually landlords get stuck in those situations cause they are simply unfamiliar with the eviction process and don't know how to do it. My dad's first eviction was the worst, after he figured it out they were fairly easy. In 20+ years of renting my father has never had a tenant fight it that far. He's only had real problems that led to true court ordered evictions a few times.

In my state if rent is 7 days past due you can file a 3 day eviction notice, then if they don't pay within 3 days you can file court proceedings. It usually doesn't get that far though, if renters are past due and you give eviction notice then they usually just leave. If you do end up going to court then its easiest just to hire a lawyer that specializes in evictions. Its not too expensive to hire legal help and it really speeds things greatly by using someone who knows all the ins and outs of the court. Even if it does go to court the worst case (for my state) is that it would take about 3 weeks to get a settlement so you're looking at roughly a month maximum if the tenant drags it into court.

Jim

[Jim]

Adamco said: "People who think the market will "bounce back" to 2005 prices anytime in the next five years are totally delusional."

Every market is different. Maybe you live in Michigan or Ohio where the market is horrible. Maybe you live in Florida or California where they had a big boom and big bust. But maybe you live in other areas that never had the giant booms and values aren't depressed. Much of the rockies and NW and some of the midwest and south have faired OK compared to other places.

Nationally there are many markets that are now above the 2005 median prices.

Median prices per market for 2005 to 2008:
http://www.realtor.org/research/research/metroprice

Jim

[Rick]

I am a fan of some of Kiyosaki's ideas, although certainly not all of them. But I also apply these to some other things that some people may not consider "assets." Kiyosaki said basically that something is not an asset unless it is a "performing asset" -- that is, it makes you money. A house used for rental purposes is thus a performing asset. I also think of my credit score as an asset. I use it to make my money, at the cost of a hit to my score (I do credit card arbitrage). Other assets might include friends, a professional network, etc.

Basically, renting out a house is indeed a business, and it comes with all the other challenges of running a business. A business has capital expenses, and capital depreciation. Stuff wears out. Stuff breaks. Tenants damage your property. That's all part of the cost of doing business. The trick is to charge the correct prices and choose the correct customers to maximize your profit. Running a business and being an entrepreneur is not for everyone, but it's certainly for some people.

Finally, I disagree with the statement that a house is a horrible investment. I have read that a house generally provides a "real" (inflation adjusted) rate of return of 1% annually. Speaking of an investment property, let's say you bought a house for 200K. You put 20% down (40K). You rent out for a monthly payment equaling your mortgage payment. Over 30 years, you put another 40K in repairs and improvements in the house. At the end of 30 years, you sell it. You put in a total of $80K in this investment (40K down, and 40K in repairs). You sell it for $269 in today's dollars (1% annual appreciation). That means a total return on investment of $229K, or about a 4% "real" return (inflation-adjusted). Actually, that assumes all repairs are done at the begining. Since your repairs are actually spread out, your return is a good bit higher.

A 4% or 5% inflation-adjusted return is nothing to write home about, but it's certainly not horrible. It can very easily function as another asset class in your diversified portfolio.

[Rick]

Sorry, I can't do math. Your total ROI is $189K, or about 3% annual real return. Still, not too shabby. This is about equivalent to the bond portion in your portfolio.

[kitty]

I had an excellent experience with renting out my condo. In fact, the decision of renting it out vs selling it during a down market of the 90s was the best financial decision I've EVER made. If I had sold in the 90s when I upgraded, I'd have sold at a loss. When I sold in 2004, I sold with enough of a gain to pay off the mortgage on my current townhouse.

Yes, condos are easier to rent out; very little maintenance is required: condos are usually newer and in better conditions than usual rental properties; and you are only responsible for the inside of the home. Evictions with condos are easier since it's not really "rental property", although, in my town evictions are pretty easy and quick in general - as my friend found out when she had to evict her tenants. Incidentally, even though she had to evict, she still came out ahead financially - both because of rental income and because she was able to sell with a huge gain.

While I was renting it out I had a pretty good cash flow. The rent covered my expenses even before tax breaks. With tax breaks - and I am not even counting depreciation - I came out ahead.

You could say the bubble helped me, but I sold a couple of years before the top. In fact, even today the prices here are higher than in 2004, so I don't think at the time we quite reached the "bubble" levels.

I did get lucky with tenants. They paid on time and kept the place cleaner than when I lived there myself - even though they had two "new" kids while living there. When I sold it, people who came to look at the place could believe it had been rented out and not owner-occupied. A friend of mine who rented out her co-op, also in the 90s, wasn't lucky with her tenants - the first family was fine, she had to evict the second for non-payment. She still came out ahead financially since hers was a cheaper property than mine and the margin between her income and expenses was higher; she also sold later and with a larger gain.

Certainly, there are horror stories. But if you check your tenants carefully, you are more likely to come out ahead.

As to house being a horrible investment. Nobody said you need to keep a house you are renting out forever. The prices don't go up linearly. There are downturns, then there are mini-bubbles, then down turns again. If happen to move during a downturn, it makes sense to rent out. You can sell during the next "seller's market". "Buy low sell high" holds for real estate as well, and unlike the stock market, the real estate market is easier to time as it takes years to turn around.

@Kevin M (tax breaks): It depends on timing. If you can sell now with gains and you don't think the property value will go up much, you should sell and take advantage of tax breaks. But it's better to pay taxes on capital gains than sell a place with a loss - and the losses on your home are NOT tax deductible. But while you rent out you get to deduct depreciation - a huge tax break. Sure, you have to pay it back - unless you sell it for less that (value-depreciation), but a) this may not happen for years and in the meantime the money you save on depreciation is in the bank or invested and earning interest and b) the tax rate on recaptured depreciation is 25%; if you are in a higher tax bracket you get larger savings when you deduct it. Tax breaks on rental is actually what makes renting out a property worth-while.

@Jim - there is a difference between renting out 21 properties and renting out one property. With 21 properties the tenants are changed more often, something goes wrong in at least one of the properties more often, etc. One property is a whole lot less time-consuming. A lot depends on your tenants and the condition your property is in. Properties marked as "rental" are usually older and not as nice as properties that used to be owner-occupied, so they tend to require more maintenance.

@: F. Morana: "the upshot here is that FMF is not in the business of managing rental property, and sensibly, does not wish to do so as an amateur. To let-out one's own home in this way, for the sake of a few extra dollars, is really just another sad form of financial desperation -- and it defeats the whole purpose of owning one's own home in the first place."

It doesn't have to be "financial desperation". It can be a smart investment. Nor is it the difference measured in "a few extra dollars". It could be a pretty large amount.

Additionally:
a) managing a rental is hardly rocket science - you don't need a degree to do it. Especially if it is just one property b) FMF can hire a company to manage his property for a small cost - depending on his expenses and potential income this may or may not make sense c) it isn't a few dollars if you choose to rent instead of sell during the down market. When I "upgraded" from a one bedroom to a townhouse, the only offer I had for my condo was at 114K, and this offer fell apart. My purchase price was 125K. When I sold it in 2004, it was for 215K. No, it wasn't the "bubble" price yet - the bubble price was over 300K, I sold too early. I don't consider 100K "a few dollars". If you do, you must be seriously rich. While I was renting I had extra few hundred dollars a month, plus I got to take off over $4000 a year off my taxes for depreciation. Sure, I had to pay most of it back (the difference being the difference between my tax bracket and 25%), but only after I sold - in the meantime the tax savings were invested - and at a smaller rate. By the way - I used the gains to pay off the mortgage on my current residence. So now I live in a much larger property which is currently worth 400K, and I pay less for it every month than people here pay to rent a studio. All because I chose to rent out instead of to sell.

[kitty]

" Such a tenant might, for example, pay a deposit and then live in the house for 60 days rent free while the landlord files eviction paperwork. "
It is your choice of how much deposit you want. When I rented out I asked for the first and last month rent in addition to the deposit - i.e. 3 month upfront. A friend suggested it - he used to own a duplex, rented in one apartment and rented out another, this was what he did. A lot of people chose to live last month without paying, than you have no more deposit money if they broke something. Asking for the last month rent upfront helps protect against it; it also provides a little bit of an extra cushion. An added benefit is that your prospective tenants have to have 3 months rent in cash - so you know that they at least had been able to save that much money.

[F. Morana]

Sorry Kitty, if my comments were slightly off-topic.

Your comments pertain to the renting-out of a home that you'd already moved out of, and for which you were waiting for market conditions to improve. And that was a good strategy, insofar as it netted you $90K.

My comments regarding "financial desperation for the sake of a few dollars" pertained to a different, but common situation in which people use their homes both for rental income AND for living quarters, which seems to me to defeat the whole purpose of owning one's own home in the first place.

Certainly the IRS makes no bones about it: the renting-out of property of any sort is a BUSINESS.

Janet - Rational markets usually resolve a"a very serious housing shortage" by increasing supply. What is preventing an adequare increase in supply? Are your NIMBYs worse than our NIMBYs?

Matt H - Alas, government-imposed artificial supply restrictions (e.g. zoning, NIMBY) drive up rent much more than do eviction laws.

Question:

Should tenants be able to check their landlord's credit?

[Matt H]

(no name 10/21 11:27 PM):

That's a fair point. Certainly tenant's rights laws aren't the only thing pushing up rent, though I still believe they play a role. Zoning and NIMBY play a big role too, especially height restrictions and open space laws.

(no name 10/22 12:49 AM):

I would say no with one exception: rent-to-own. Before making one of those agreements, definitely get a credit check on your landlord. Better yet, don't make one of those agreements.

It would be nice to have some kind of landlord reputation agency similar to the credit reporting agencies though.

[Troy]

to each their own, however

A vast majority of renters are good, pay on time, and don't destroy property.

Simple generalizations would tell you if a large percentage of renters were "problem" renters, there wouln't be many people willing to be landlords.

But there are alot of landlords, and alot of rentals. That is because for the vast majority, it works.

Sure, there are always examples of crappy renters who make a landlords life horrible, but that is the exception.

It is like the evening news. The bad accident makes the headline.

The other 755,000 drivers that didn't have an incident you never hear about, because it isn't news.

[Jim]

Kitty said: "there is a difference between renting out 21 properties and renting out one property... One property is a whole lot less time-consuming."

Well yeah of course. I wasn't meaning to say otherwise. But even with 1 unit you can get some bad luck like a broken water pipe or a seemingly good renter who has problems.

Being a landlord is a part time job. Of course the time commitment is much less (on average) for a single unit than multiple units. But you can also hire more work out if needed.

In general I think being a landlord is a good idea for people who can do it. Or if you don't want to or don't have the time than hiring a property manager will work fine. I just think people should have a more realistic idea of what it means to be a landlord and they should fully understand the work it could entail.

Jim

[Miss M]

I don't know how I missed this discusion. I am considering renting out my current house in a few years, I won't be able to sell it for what I owe so I need to hold on to it for a long time (in Los Angeles it's going to be a long wait to get back to 2005 prices). I'd stay living in it but I hope to start a family in a few years and my house/neighborhood is not kid friendly. This all hinges on being able to find a larger house in a good neighborhood for a reasonable price, so I'm in the weird position of cheerleading the crash even though it's pushed me underwater. The current house is next to a university and houses rent quickly, I'm currently planning repairs and changes to make it "tenant friendly" and easier to maintain. I know landlording will be time consuming and at times frustrating, but I'm willing to try.