Owning a rental property is NOT for everyone. It comes with it’s issues and efforts. If you are seeing it as money in the bank that you don’t have to earn or work for, you have probably never owned a rental house. When it goes well, it can go very well. But when it goes wrong, it can go extremely wrong!! So when deciding if you want to rent out your primary home while you travel, here are some things to consider so you can make a more informed decision. Most of these points also apply if you’re looking at trying to invest in real estate as a means of self support while you travel. Some of the points will be amplified for investors (Pro 1-4 and Con 1-4), others won’t be so relevant (Pro 5, 6, and 7).
Depending on your finances, your mortgage, homeowner’s fees and other considerations, you may be able to rent your house for more than your payments, which leaves you in a great position to rent out your house and use the extra monthly income to supplement your cost of living. There’s a lot of considerations and calculations that go into this decision, but many traveling families are using rental incomes to either completely or partially sustain themselves.
Even if you’re not making a net positive on a monthly rental basis, as you make a monthly mortgage payment, you are paying a portion of that to yourself by paying down equity in the house. Usually if you’re planning to hold a house for only a few years, you lose more money in real estate commissions, escrow fees, transfer taxes and other expenses. But if you’re planning to hold it for a longer period of time, often the break even or get ahead point is somewhere between 5-10 years. So as you hold on to the house, it goes up in value, you pay down what you owe, and you are slowly, but surely saving/making money. Often if you are traveling as a young family, this is one of the few opportunities to be setting aside savings for the future. It’s quite possible that you are not funding your IRA and other retirement planning solutions, nor a 529 college savings plan for your kid’s college, but if you hold a house long term, while you are living your dream life, it can provide you with an ongoing income as well as a nest egg when you sell it. Of course you have to maintain it and manage renters, so this is not free money, but rather an investment in your future.
Educational experience with real life application
Involve your kids in the property management. When a tenant moves out, take the family to the property for the turn over. Have them help paint, and clean, and repair. Talk to them about how much you’ve spent to fix the property up back to it’s rentable state. Explain the opportunity costs of not having it rented for a month while you worked on it. The cost of advertising. Then review what you make each month. What it costs each month, so the margin of income monthly. So how much do you have as a net income each month? How much did you just spend on repairs and lost rent? Did you come out ahead with a one year rental lease? They can learn practical skills on home maintenance and repair as well as applied math, which is much more meaningful than theoretical numbers.
Gift that keeps on giving
When you purchase a house, you own it. There are STILL many fees associated with it or you will lose it, including property taxes, insurance, and utilities. But if you are able to purchase and pay off a house, you can hand it down through the generations. This is more common in Europe where home prices are quite high and families tend to hand down the houses to future generations, thus saving them the significant expense of mortgage payments. As a gift to help the next generation along, you can give them real estate without the acquisition costs as a gift or inheritance. This gives them a big boost forward financially, providing them with a savings and potential income source. This only works if they appreciate and respect the opportunity. If they have the sense, easy come, easy go or have the belief that it’s just “too much work to maintain” it’s not worth your contribution or effort.
A home base to return to
Most traveling families aren’t out indefinitely. Maintaining a home allows you to come back to a home base where all of your furniture or memoires may be stored. You probably chose the house because of the good location, good schools, near family, value, or other reasons. By not selling and buying, but rather just holding, you are saving significant amounts on closing costs.
A place to store your excess things
Rather than paying to rent a storage unit for your personal items while you are gone, you can place a shed in the back yard of your house and lock it up. Make sure it’s weather proof. This way you can save money on renting a unit and you don’t have to haul your items across town and back while you are away, simply drag them to the back yard. The cost of storage needs to be a cost of consideration if selling or renting your home is the best option. If you “sell everything,” this may not be as big of a consideration. But if you have family heirlooms, you may wish to hold on to them while you are on your journey, but not drag them along with you.
Helps establish residency
Home ownership helps you to establish residency for your family. So if you have a teenager and want to return and attend college as an instate tuition student, you need to be established as a resident of that state. Home ownership is a big (but not definitive) way to do that. Maybe also arrange with the tenants where you keep a bill in your name, probably water or garbage service as electric can get out of hand quickly. You may also arrange to receive mail there and just have them set it aside for you. I would not have your regular mail go there, but occasionally send yourself or have family send you a note or postcard there so you can show your connection.
Can dramatically set you back financially
Especially if you don’t have good tenants, you are trusting them with a $200,000 or more asset for a mere $1200 deposit. They can trash the entire $200,000 and you have little to no recourse. If they take the appliances, destroy the built in cabinets in the kitchen and bathrooms, leave a water leak unattended and the drywall molds (picture the dreaded “black mold”) and rots so the tiles on the floor and walls erode and crack, you aren’t going to get anywhere NEAR your costs from the $1200 deposit. Not to mention that they are not likely to pay their last month’s rent and can stay up to 6 months while you follow legal channels to get them evicted. During this time, you still need to be paying the mortgage and you’ll have to pay for the repairs before you can get it rented again, so it will be sitting vacant for quite a few more months before you can actually begin to advertise it for rent again. In the meanwhile, you have acquired legal fees for eviction also. Your homeowner’s insurance may cover some of this if the damage is extensive enough, but often you carry a $5,000 deductible first, so you’re now paying for almost a year of mortgage, taxes, insurances, legal fees, and a $5,000 deductible, all while facing a year of lost rent. This is a bad scenario and rare, but completely possible. And it does not cover the mental stress and possibly added expenses of flying home to deal with the situation from wherever you are.
It is hard to schedule, plan or time vacancies, but they will happen. Based on Murphy’s law, which seems to inevitably rule our lives, it will happen at the most inopportune time. Just when you finally decide to commit to that safari in Africa, purchase the airfare and safari tour tickets, your tenants will give notice. So not only will you have a big expense coming up, your rental will not be bringing in income while you are gone and/or you will have to reschedule your trip to deal with the turn over. This can be left to a good property management company to deal with if you are comfortable with yours. This would be one of the items to understand and negotiate before signing on with a property management company.
Equity tied up in property
When you have your 20% down payment, any sweat equity, and any paid down equity tied up in your property, it’s not very accessible. The only way to access it is through a home equity line of credit, refinancing your mortgage, or selling the property. Real estate is not a liquid asset. Another consideration, rather than real estate, would be to sell your house and put any savings into the stock market. You can establish your level of risk by choosing mutual funds, stocks, or bonds. This money is much more liquid, meaning you can sell a stock or fund and have access to your money within days, not weeks or months. But while your money may make as much or more in the stock market as it would invested in a house, you are also losing the potential rental income and other benefits of having a home.
Headache and stress of management
Even with a good property management company handling most of the issues for you, rent collection, interviewing and placing a tenant, evictions, repairs and maintenance, advertising, etc, you ultimately are the one who’s affected by the decisions and unless you have a very comfortable cushion, you may not like the fact that you’re buying new carpet for the house every year. You have to stay on top of the expenses and make sure they are reasonable. Maybe you want to put tile into the house as a more durable and cleanable flooring rather than replace flooring every year. Maybe you decide not to accept pets. Things tend to run at status quo, even with poor decisions, when it’s your money being spent, so you have to stay on top of it and make sure you are happy and comfortable with the decisions being made on your behalf.
As with many things in life, there isn’t a right from wrong, just many directions you can take. Hopefully the insights above can help you make a more informed decision if this is new territory for you. There is a lot of upside potential to holding and renting real estate, but as with everything that has a big upside, there is a substantial downside. If you are not prepared to weather some of the ebbs and flows, this may not be a positive experience for you. Also, if you want to live without responsibility and feel more “free”, this will not be a great idea. But if you go into it prepared to absorb some hits and willing to perservere, you may find significant benefit to renting out your house while you are away or even investing in some real estate. You will likely find that with the right property profile, you can make a monthly income and save for your future without the commitment of an office job.
Next week we will look at the Pros and Cons of Selling Your Home.