Category Archives: Real Estate

Modified Theme & Rental Property Conversion Series

I am back at the hull after being away for a whole week. There are a lot of things to get done and as hard as I work, there’s always more to do. Last week, I am afraid, Aspire to Grace was sacrificed in the interest of staying ahead of this tidal wave rolling through.

In the last two weeks, I have had a business trip to prepare for and was gone for four days. I have also started the move out of my office. I am in the process of transferring files to an external hard drive that I can take with me when I move. In another post, I will talk about the remote storage service I will be using called Mozy. It is a great way to secure files against damage or loss to your computer or other physical hard drives.

Finally, I also traveled to Gulfport, MS last weekend and found a place to live. Our unofficial move date is July 17. In an upcoming post, I will let you know what I encountered and how I ultimately was able to find a good deal on a lease. So, stay tuned.

Modified Theme for Mondays – “Money Mondays”

I have come to realize that there are a lot of interesting things to discuss that relate to money that don’t necessarily have to do with making money. For example, this week, I’d like to share with you some additional insights related to the rental of my property, on which I intend to make money. Next week, for those of you that may be moving to a new location, I’d also like to discuss tips on finding a good deal on property for lease in a short period of time.

While I am still mostly motivated by activities that can make me money, sometimes I would like to focus my discussion on other interesting money-related issues, such as ways to save money. After all building wealth involves simultaneously making more money while spending less money.

So, I am modifying the theme for Mondays. From now on Mondays will be “Money Mondays” instead of “Make Money Mondays.” It just seems like a better fit. Please also let me know if you have any other suggestions for money-related content.

Rental Property Conversion Series: Property Has Been Listed, Now What?

My agent listed my house as a rental on the realtor’s database about three weeks ago. Since then, we have had a decent amount of traffic inquiring about the property, but no applications have been submitted. There are likely a number of reasons, but the greatest concern cited by prospective renters has been security in the neighborhood.

I live in an area of the city that has its share of crime, much like many other urban locales. There are very few, if any, areas of DC where crime is non-existent. In fact, even most of the affluent areas are within a one or two block radius of a crime hotspot. Whether it be a drug spot, a spot for prostitution, or an area with a high incidence of robberies and burglaries. You would be hard-pressed to find an area of the city existing in a vacuum immune to crime.

When I bought my house, I recognized that it was in an investment area. My research of this area before I bought my home indicated that it had specific plans for development and it was within 3 blocks of a commercially and residentially affluent area of the city. When I bought my house, there was a $650,000 difference between the price I paid for my house and some recently renovated homes 3 blocks way. These things were catalysts for my decision to invest here. Even taking into account the differences between the houses in terms of features and space, when considering the pattern of development, it seemed pretty likely that the location of my house was slated to appreciate significantly within a short period of time. Six months after I bought my house in 2004, it appreciated $50,000.

As an investor, I expected and accepted the edginess of the neighborhood coming in. But, I must remember that I came in at a lower price so my level of tolerance was much higher. As a higher priced rental unit, however, it understandably does not lend itself well to lower tolerance levels. This is demonstrated in the reluctance I am seeing from prospective renters.

My agent listed our property on the MLS real estate database, as well as Craigslist. I even went a step farther to list our property on the military housing database. Now, three weeks later with no submitted applications, my husband and I are reconsidering whether to sell, or at least whether to put the house on the market as a sale simultaneously with our rental listing. Another factor in our consideration is that our neighbor, who listed his house at full appreciation value, saw a contract for sale on his house within a week.

One of the reasons my husband and I chose to put our house on the rental market is that market indicators showed that the appreciation value on our house had fallen as of the end of last year in the wake of the economic downturn. So, we decided that we would convert it to a rental property in the meantime and wait for prices to bounce back. Now, market indicators are showing that the value of our property may not have fallen as much as we previously thought and that property values have recovered somewhat in many areas of this city.

Now, although there are a few things that will need to be done before listing our house for sale, we have decided to do a sale listing simultaneously with our rental listing. This basically would mean that if we get a credible lease application in the near-future, we will gladly accept. But, in a few weeks time, we now plan to list our house for sale. Thus, if we get the opportunity to sell our house at an acceptable price, we will move forward instead to sell the house.

In the event that we sell, we would take a bit of a hit from the expenses that we put into preparing our house to rent, such as the refinancing costs. But, in the alternative, if we don’t sell, we could still take a hit from having a vacant property. We’d end up paying a mortgage here and rent in Gulfport. So, it may come down to a lesser-of-two evils situation. Ultimately, even if we take a hit on expenses by selling, we would still profit if we sell at or near our target price.

Who said real estate wasn’t a gamble?

MAKE MONEY MONDAYS is a forum to discuss ways in which you can create additional sources of income.  I try to focus on particular ideas and steps you can take to create alternative income and passive income sources.  I have also begun a series of posts called “Rental Property Conversion.”  This series follows my husband and I as we turn our property into a rental property.  I will also research and post other useful information in this category. If you like what you see here, please use the orange icon at the top right to receive my content updates by email or RSS reader.  

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Filed under Alternative Income Sources, business, Money Mondays, Real Estate, Rental Property Series

Finding A Home In An Unfamiliar Place

Yesterday, I started my search for a house in Gulfport, Mississippi, where I am planning to move in July.  My husband is stationed there and will be returning from Kuwait in August.  Ideally, I will have found a place for us to live and will be completely moved in and set up by the time he gets home.  Once there, I will also be setting up a home office so that I can continue work with my firm from Gulfport.  I will write more about setting up a home office in another post. 

Even though I hadn’t officially started my house search before yesterday, my husband had started sending me listings from Craigslist a couple of weeks ago.  The houses were gorgeous, but I decided to wait a while before seriously pursuing property.  At that time, although a few of the listings excited me, I was powerless to take any action.  It was too far out for me to make a commitment and I was not prepared to travel to Mississippi at that time to see any of the properties.  So, my excitement was futile.  I decided to just wait until the beginning of May to begin my search. 

I will also plan to travel to Gulfport at the end of May or the beginning of June to look at properties.  By the first part of June, I might be ready to make a commitment.  I might even decide to move a little earlier if the right place comes along. 

If you are planning to find housing in an place where you’ve never lived, here are some things you can do to stay on track.  This may be especially useful for my fellow military families who are moving to the next duty station in an unfamiliar area. 

Visit Before You Start Considering Property

If it is at all possible, I would definitely recommend visiting the place to which you intend to move before you start looking for a place to live. You will get a much better feel for how it will be living there, if you’ve seen it for yourself. You can also plan to visit different communities in search of one suited to your interests and budget.

I have only been to Mississippi one time in my life and that was back in February of this year when I went to visit my husband right before he deployed to Kuwait.  It was supposed to just be a visit to spend some time and say our goodbyes. 

Luckily, with limited things to do in Mississippi, we kind of planned on the fly to drive around in search of desirable communities for living.  At the time, we thought we might want to try and buy a house (well, really it was me that wanted to consider it) so we were actually looking at new houses for sale.  But, we ended up finding a couple of really nice communities and these became our target communities.  I will look at these and other comparable communities when trying to find a home. 

While in Mississippi, my husband and I were also fortunate to have had a waitress in a restaurant that lived in the same area and was able to tell us which areas to stay away from.  She had bought her house right before Katrina hit and was able to offer us some great insight into living in that area.

Property Listing Websites: Craigslist, Military by Owner

If you intend to find your own housing, as opposed to going with a real estate agent, websites offering real estate listings are a great and convenient tool.

Yesterday, I started with Craigslist (Craigslist.com) and Military by Owner (Militarybyowner.com).  On both of these websites, you can specify a state and an area for finding property, as well as other criteria such as the number of bedrooms and rental price range. 

Once I found a property I liked, I sent an email inquiring about whether the property was still available and whether it would be shown.  In some cases, I requested additional information, such as a street address or community designation and more photos. 

Since it is important to my husband to be only a short distance from the base, I also used Google Maps to determine the location of a particular house and its proximity to the base. Google Maps has a great satellite feature that allows you to view the street where a house is located.

Plan to Go and See Properties After You Have Made Some Selections

If it is possible, plan a second trip right before it is time for you to move to go and see the properties you have selected.  You will definitely want to do a walk-thru of the property to look for defects and things that were not represented or were not represented accurately in the property listing.  These things will be red flags that you will need to use to weight and rank your selections. 

In case you are not able to see the property yourself, maybe you can make other arrangements if you have family or friends in the area.  Recently a work colleague of mine moved to Washington state.  Since he wasn’t able to travel out there to see properties for himself, he got a friend to go and look at the properties instead.  It is always a good idea to have someone’s eyes on the property, someone that you trust, before you make any commitment.

I will continue to search for properties over the next couple of weeks and will then plan a trip to Gulfport to see these properties for myself.  Even though my husband will not be home to visit with me, he will participate in the selection through the internet and by email.  He will be able to see the properties online and we can discuss our options on the phone. 

Have you ever had to move to a place where you have never lived or even visited?  How did you find a place?

TOUGH LIFE THURSDAYS is a self-development forum.  It takes from my own experiences and desired self-improvement, and I hope it will evolve through input by you and others.  If you like what you see here, please use the orange icon at the top right to receive updates by email or RSS reader.


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Filed under Career, Family, marriage, Marriage and Military, Real Estate, Tough Life Thursdays

Rental Property Conversion Series: Real Estate Management Walk-Thru

My next step in converting our primary residential property to a rental property is to hire a property manager.  The management agent that I expect to use is with Long & Foster and came highly recommended by a friend.  

Although Long & Foster’s management division is on the higher end of management fees, they offer a comprehensive service.  Since my husband and I will not be in the same state as our rental property when all is said and done, I may be willing to pay a little more for the peace of mind in knowing that proper care will be given my property and my tenants. 

With Long & Foster, I would pay the first month’s rent as commission, with a monthly management fee of 10% of the monthly rent.  The management fee is in addition to other fees for actual services or repairs procured by Long & Foster for the benefit of my property. 

On Friday, the L&F management agent came by and provided a walk-thru of my property wherein she noted things that I am required to do by law in DC in order to rent my property. 

Security Gates

I have three doors on the house, which provide access to the outside.  All three doors have security gates that require a key to lock and unlock the gate.  Pursuant to DC law, this is a fire hazard.  Therefore, I am required to replace the locks on these doors with single cylinder locks – locks which can be locked and unlocked by hand, without a key.  Since it may defeat the security function of the gate if someone can just reach around and unlock the gate with their hands, I could also add a welding component to the lock to hinder access from outside.  I am also permitted to just remove the security doors as I do not have an obligation provide the security doors as long as all main doors are steel doors. 

I will explore which is the least costly option.  I will probably remove the security doors and will need to install one steel door, as the other two are already steel. 

Fire Extinguishers

In DC, I am required to have a fire extinguisher mounted on the wall in the kitchen and in the hallway on the upper level.  This will be a simple installation that I will most likely do myself. 

Ground Fault Interrupters (GFIs)

The agent informed me that, in DC, you are required to have GFIs at all faucets, which would be in the bathrooms and the kitchen.  The GFI is pretty recognizable as the outlet with the colored reset buttons.  What isn’t clear to me is whether  you must have a GFI outlet at each faucet or whether, if there is an outlet near the faucet, then it must be a GFI. 

Really, it doesn’t matter for me because my house already has GFI outlets at each faucet. 

Other Tips

In addition to these things that I am required to do, she also made suggestions in a few other areas.

Make the Dehumidifier Disappear

She took note of a dehumidifier that I kept stored in a room at the back of my house.  She suggested that I keep it out of site when I am showing the property.  Apparently, a dehumidifier may give the impression that there are moisture problems in the home. 

I had already planned to get rid of it.  I’d used it a couple of years ago when I had a leaky roof that caused some moisture problems in one of my rooms.  I have since replaced the roof and rectified this problem.  So, I no longer need it. 

But, apparently a lot of other people in this city do because I listed it on craigslist this afternoon around noon and by 1p I’d already had 4 inquiries about it. 

Hire an Accountant

 She suggested that I hire an accountant to help me sort out the differences in personal taxation when including a rental property business.  As a general overview, she added that I should expect to report rental income as passive income and depreciate certain renovations and capital improvements to the property. 

This suggestion is timely, since I’d already been thinking about hiring an accountant on some other tax issues.  Now I can kill two birds with one stone. 

Insurance

In anticipation of converting my primary residence to a rental property, I am already preparing to convert my homeowners insurance to landlord insurance, which will include coverage for the property building and landlord liability. 

She also suggested that, in the event that the property is initially vacant when I move to MS, that I wait to convert my insurance to ensure the property is covered during the vacancy.  I haven’t researched this yet, but it seems that under a landlord policy, the building may not be covered unless and until there is a tenant in the property.  Thus, if the building is vandalized or burglarized while vacant, the homeowner is not covered under a landlord insurance policy. 

If you are taking on a rental property, whether or not you will hire a property manager, you should research your state’s property requirements for rental properties.  I’ve only had an initial interview with my prospective property manager.  She gave me some very good information and suggestions.  But, before I sign my management contract, I intend to do a bit of my own research on these and other issues that will be important as I get down to crunch time. 

Have you ever dealt with property management for a rental property?  I’d love to hear your stories.  Please share in the comment section, or, you may email me at suprieta@gmail.com.

MAKE MONEY MONDAYS is a forum to discuss ways in which you can create additional sources of income.  I try to focus on particular ideas and steps you can take to create alternative income and passive income sources.  I have also begun a series of posts called “Rental Property Conversion.”  This series follows my husband and I as we turn our property into a rental property.  I will also research and post other useful information in this category. If you like what you see here, please use the orange icon at the top right to receive my content updates by email or RSS reader.  

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Filed under Alternative Income Sources, Make Money Mondays, Passive and Alternative Income, Real Estate, Rental Property Series

Development, Interrupted

I took this picture yesterday of a newly developed property in my neighborhood.  The development has been a slow process… almost two years, but we seemed to be getting close to completion.  The doors and windows had just been installed within the past two weeks.  And then this…

img_00041

This signature appeared earlier this week.  I don’t know how easy it will be for the owner(s)/developer(s) to fix this, but I suspect that now we are in for further delay on completion of this project.  This saddens me because it means that my neighborhood is not progressing quite as quickly as myself and a lot of my neighbors had hoped. 

There is no point in me asking why something like this would happen.  I can perceive of the many reasons why these types of things happen.  But, it doesn’t make it any less disgraceful.  

TOUGH LIFE THURSDAYS is a self-development forum.  It takes from my own experiences and desired self-improvement, and I hope it will evolve through input by you and others.  If you like what you see here, please use the orange icon at the top right to receive updates by email or RSS reader.  

 

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Rental Property Conversion Series: Staging Your Property for Show

This week in the Rental Property Conversion Series, I am discussing the next steps to take in converting a primary residence to a rental property.  So far in this series I have covered:

Refinancing Mortgage Loans

Refinance Settlement, Power of Attorney and Escrow

Setting the Appropriate Rent, Part 1

Setting the Appropriate Rent, Part 2

Staging Your Property for Show

Although the term ‘staging’ is often associated with preparing a property for show before a sale, I also recommend taking a lot of the same steps for showing your property to prospective renters.  When you stage your property for show, you are essentially optimizing the presentation of your property.  There are a number of things that you can do to prepare your property for show and I will take you through some of the things that I will be doing. 

I have not yet listed my house for rent.  But, once my property is listed, prospective renters will have the opportunity to do a walk-thru of the premises before making a commitment.  So, I will try to make the best impression that I can make by taking the following steps:

Curb Appeal

The first impression that you make when showing a house is the presentation from the curb to the door. 

If you are like me and you already have some landscaping done in the front yard, you may just need to tidy it up.  I have a very small front yard, which has a sod- grown lawn and small evergreen plants that border the walkway.  Over the past year or so, the front yard has been somewhat overwhelmed by weeds and a lot of the mulch that had been used to isolate each plant has washed away. 

The simplest thing that I can do right now is to uproot the weeds, replace the mulch and cut and trim the grass and edges.  To keep my costs down, these are things that I will probably do myself. 

But, if you feel that you do not have a green thumb or if you have a much larger front yard to tend, it may be worth it to hire a professional landscaper.  It is probably worth the investment to make a very good first impression. 

Other things that should be done to spruce up the entry way to your home is to clean and refresh paint on the window sills and doors, sweep the walkway and clean or replace patio furniture.    

Painting and Finishing

Once your prospective renters make it into the property, what will they see?  I recommend a fresh coat of paint and finishing details such as patching up marks and scratches on the walls and cleaning carpets and floors.  Walls and floors take up such a large area in the room.  They are your canvas for other decorative details. Marks and blemishes look bad and will detract from the other details of your presentation.

When painting the walls, it is best to use neutral colors.  Colors such as whites, beiges, and yellows are very neutral.  There are also a series of other colors that, when diluted by white, are barely noticeable as tints.  Stores such as Home Depot will allow you to customize colors according to their color specifications.  They have colors throughout the spectrum that can be diluted to almost white. 

In addition to painting, you may also want to finish or refresh items that are not in their most presentable form.  For me, that includes things like the caulking on the tub in the master bathroom.  The caulking has corroded over time and will need to be refreshed before the house is shown.  Other finishing tasks might include spot cleaning, replacing light bulbs or filling in large empty spaces.  For example, if you recently took a large table out of a room, you may need to place another piece of furniture or some other item in its place to maintain balance in the room.    

Repair Work

This may not be imperative for your walk-thru.  Some things that will need repair may not be obvious to visitors walking through the property.  The most important repairs, however, will be the obvious ones – things that are most noticeable to the eye.

Examples include large cracks in the walls or ceiling, broken doorways, or broken windows. 

Less obvious repairs should definitely be disclosed and repaired before your tenant moves into the property.

De-clutter and Depersonalize

Two of the most important things to do before your property is shown are easily the least obvious to the property owner.  If you are like me, you may have piles or clusters of things that you keep out in the open for ease of access or because you do not have enough storage space in which to keep them. 

For the purpose of showing your property, you are advised to clear away all piles or clusters of papers, clothes and other articles.  The general rule of thumb is that there should be as little of you in the property as possible.  Present your property as you would imagine finding a hotel room or model home.  For the most part, the only things that should be apparent are furnishings and minimal creature comforts that would make for comfortable accommodation. 

MAKE MONEY MONDAYS is a forum to discuss ways in which you can create additional sources of income.  I try to focus on particular ideas and steps you can take to create alternative income and passive income sources.  I have also begun a series of posts called “Rental Property Conversion.”  This series follows my husband and I as we turn our property into a rental property.  I will also research and post other useful information in this category. If you like what you see here, please use the orange icon at the top right to receive my content updates by email or RSS reader.  

 

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Filed under Make Money Mondays, Real Estate, Rental Property Series

Rental Property Conversion Series: Setting the Appropriate Rent, Part 2

Last week, in part 1 of Setting the Appropriate Rent, I encouraged you to look at your mortgage obligation as part of your analysis.  I suggested that you start with a 1% rule for rental income to total mortgage obligation.  This week, we pick up with a discussion of the expenses you expect to incur as owner and landlord, as well as considering the comparable rates in your area. 

What expenses do you expect to incur as owner and landlord?

There are at least a few common expenses for a property-owner/landlord to consider, including property taxes, management & maintenance fees and insurance.

Although 35% of the rental income at first glance may be a safe set-aside to pay expenses, it will be beneficial to have as accurate a picture as possible of the types of expenses you expect to incur and an estimate based on your expectations. 

For primary to rental property conversions, the benefit of having lived in the property that you own is that you should have a feel for what a lot of your expenses will look like. 

Property Taxes

As a homeowner, you should be aware of the tax bill on your property without having to do much research.  Depending on your jurisdiction, your state or local tax authority should send you the proposed tax assessment for your property and the resulting tax bill. 

Some may even have the property taxes rolled into the mortgage payment each month.  If so, the lender essentially collects your estimated tax amount on a monthly basis as part of your mortgage payment and holds that portion in escrow.  At the end of the tax term, the lender makes the property tax payment to the taxing authority out of your escrow account.  For purposes of your rent analysis, remember that if your mortgage payment is $1500 and includes your tax payment, any rental amounts in excess of $1500 will cover your mortgage and property taxes. 

Property Management & Maintenance Fees

Will you hire property management? If you are planning to have a property manager, plan to pay at least 10% to 15% of gross monthly rental income for property management fees, although I have seen as high as 30%.  I’ve also seen a very high charge in the first month such as 60% of the first month’s rent and then lower rates, such as 10%, in the following months. 

It is wise to do a search online of the property management companies in your area to get a feel of the average charges for management services in the same locale.  The decision of whether to hire a property manager will depend on your circumstances.  For my husband and I, it is necessary because we will not be living in the same state after our property is rented.  Thus, we will need someone to look after the property, be available for tenant maintenance and repair issues and we would like the property manager to handle rent enforcement. 

Your situation may be different.  You may be living in the same general area as your rental property.  You may feel comfortable handling your tenant’s maintenance and repair concerns and you may also be comfortable with collecting rents.  But think long and hard about what goes into managing your own property.  Really think about whether you are up for the task.  It may be worth the cost to pay someone else to handle tenant issues.

Maintenance and repair fees should also be anticipated.  If you are using a management company, that company may use an in-house technician and charge on the basis of hourly labor rates for routine maintenance and repairs.  Alternatively the management company could outsource maintenance and repair work to third party contractors.  At any rate, expect maintenance & repairs typically to occur during normal business hours with higher rates for dispatch outside of normal business hours during the week, and on weekends and holidays.  

If you are planning to manage the property yourself, you can either do the work or hire a contractor.  Since you have been living in the property prior to conversion, you should be aware of maintenance schedules on most items and the typical costs associated with such maintenance.  If you will do repair work yourself, acquaint yourself with area contractors and familiarize yourself with average rates for services in your area.

Landlord and Rental Home Insurance

You should plan to have insurance on the property and factor in insurance premiums as part of your fee calculus.  Be sure to thoroughly research the type of insurance that is appropriate for your situation and your property once it is rented.  Policies range from minimal to broad, comprehensive coverage and premium amounts will be dependent on the scope of coverage. 

Think long about the kind of coverage you will want.  Do you want only to cover the property building?  Do you want to cover yourself against landlord liabilities?  Some policies even cover lost rents.  In this economy, it may be good strategy to be covered against lost rents.  Premiums on insurance vary, so do your homework. 

Utilities

As the landlord, you must decide whether to maintain the utilities, which are already in your name or turn responsibility over to your tenants.  If you maintain the utilities, you will have to recover your payments in the rents you charge.  The rent is usually higher on a unit that has the utilities included (maintained by the property owner) and this should be a consideration for you when you are approaching the competitiveness of your rents. 

If your rents are higher because of utilities, be mindful of how your rent will fare in the marketplace.  For example, when a real estate agent is searching properties to present to his client, whose price range is $1500, and you are charging $1700 with utilities included in an area where the average rents are at $1500 or below, you stand to lose. Even if yours is a better deal with the utilities included, the real estate agent that is looking for properties at or below $1500 will never see your property in their search.  So, they will never have the opportunity to sell your ‘better deal’ with utilities included. 

Also, if your tenants maintain the utilities, they are more likely to conserve the use of water, gas, and electricity and you will avoid unexpected increases in utility expenses based on your tenant’s usage. 

Mortgage Refinance

Last week, I encouraged you to consider your current mortgage obligation in your rent analysis.  Maybe you have refinanced your mortgage to obtain a more favorable interest rate and reduce your monthly mortgage payment.  But, you must be sure to factor your refinance closing costs into your rent analysis.  You must figure out how much rent you can charge and over what period of time it will take to recover your refinance closing costs. 

You must consider the cost of your refinance in conjunction with the interest rate you are moving to, whether your closing costs are rolled into your loan, and, if so, the long-term interest you will pay on those closing costs and whether and how long it will take for your monthly mortgage savings and rent profits to be enough for you to break even and begin to profit. 

I wanted to speak more openly here about the consideration for the costs of refinancing and how this piece should fit into your own analysis. But, I soon realized that this involves much more complex cost factoring than I am able to include in this discussion.  Thus, if you are planning to refinance your mortgage before converting your primary residence to a rental property, you should consult a professional accountant to help you ascertain benefits, as well as likely gains or losses.

My personal analysis considered the fact that I was in a 7 yr. ARM that was to reset in year 2010.  Thus, it was advisable for me to refinance now, while rates were at record lows.  But, I will need to take into account my closing costs and new interest rate when setting my rental rates to determine our break-even and positive cash-flow points once our property is rented. 

What are the comparable rental rates in your area?

Your analysis for where to set the rent must consider the comparable rents in your area.  You are most likely to attract renters if your rent is competitive with other rents on similar properties.

If you are working with an agent, that agent should have access to a comprehensive real estate property location system such as the MRIS (Metropolitan Regional Information Systems, Inc.) that will allow them to look up properties listed for rent.  Such a system will be able to bring up properties according to search criteria such as location, specifics of the property and the rent amount. 

My real estate agent tells me that competition is key.  You have to imagine that you are in competition with other comparable property owners in your area who also have their rental properties on the market.  Whoever sets the most competitive rent wins!! 

Well, it is slightly more complex than that when you consider the specs of the property and individual circumstances, but setting a competitive rent is definitely important.

Even if you are not using a real estate agent and do not have access to such realtors tools as MRIS, you can use such online resources as Zillow.com or Craigslist to peep rental rates on comparable properties in your area. 

Also keep an eye on the general rental market conditions.  The rental market ebbs and flows, especially in this economy.

If you are preparing to convert your primary residential property to a rental property, one of your task items will be to set an appropriate rent for your property.  When doing your analysis, it is important to start with three considerations:  your current mortgage obligation, your expected monthly expenses, and the comparable rental rates in your area.   

Indeed, there may be other cash flow items for your consideration.  Any analysis will depend largely on your individual circumstances.  For more information on what you should be thinking about when setting the rate on your property, you should consult with a certified accountant or an attorney specializing in real estate finance. 

Writings on Aspire to Grace are strictly the opinion of the author based on her experiences and are not offered as authority on the topics of discussion.

MAKE MONEY MONDAYS is a forum to discuss ways in which you can create additional sources of income.  I try to focus on particular ideas and steps you can take to create alternative income and passive income sources.  I have also begun a series of posts called “Rental Property Conversion.”  This series follows my husband and I as we turn our property into a rental property.  If you like what you see here, please use the orange icon at the top right to receive my content updates by email or RSS reader.  

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Filed under Make Money Mondays, Real Estate

Rental Property Conversion Series: Setting the Appropriate Rent, Part 1

I have created the Rental Property Conversion Series as a way to provide useful information to you about the process of converting a residential property into a rental property.  This forum follows my own encounters as my husband and I convert our primary residence to a rental property. 

In this post, I introduce some important factors to consider before establishing the rental amount for your property.  This is the third topic covered in the Rental Property Conversion Series.  Since this topic is a little lengthy, I will break it up into two parts.   Stay tuned for part two in next week’s Make Money Monday post.

Previous posts in the Rental Property Conversion Series were:

Refinancing Mortgage Loans

Refinance Settlement, Power of Attorney and Escrow

Setting the Appropriate Rent, pt. 1

If you are preparing to convert a residential property to a rental, you will need to determine how much rent you would like to collect on the property.   Chances are you are looking to net a profit from the rents you collect.

Before you can choose an appropriate rental rate, however, it is important to consider at least three things: your mortgage obligation on the property, the expenses you expect to incur in your roles as owner and landlord and the comparable rental rates in your area.  In this post, part 1, I discuss the consideration of your mortgage obligation.  In part 2 of this topic next week, I will discuss the considerations of your expected expenses and comparable rents in your area. 

While there may be other factors for you to consider in your specific situation, these three considerations are among the most important.

What is your mortgage obligation?

Before establishing the appropriate rental amount for your property, take an account of your own mortgage obligation.  What is the balance on your mortgage loan?

Julie at RevNYou, a website about real estate investment, has a 1% Rule that says your gross monthly income on a rental property should ideally be 1 % of the mortgage loan amount.  While Julie discusses this rule in the context of quickly investigating rental properties you would like to purchase, I think it is also a good starting point when thinking about establishing the rent for a property that you already own. 

According to Julie, although having a monthly rental income that is at least .08% of the mortgage loan amount is probably ok, after fees and other considerations, your cash flow may be a bit tight. To ensure a sufficient cash flow after the mortgage and fees are paid, therefore, the 1% rule is ideal.  It is also a lot easier to calculate 1%.

Julie recommends setting aside 35% of your rental income for any fees, including management fees, taxes, insurance and maintenance.   So, if you own a home and have a $300,000 balance on the mortgage loan, under Julie’s 1% rule, you should be making at least $3,000 in monthly rental income.  After you set aside 35% for fees, or $1050.00, you should have enough left over to cover your mortgage.  

But you must also take into account your specific circumstances.  Thus, if you have liens or other outstanding debts on the property, or your mortgage interest rate is a higher rate such as 7% or 8%, you will have to account for this in your analysis.  The bottom line is that you ensure all of your obligations can be paid. 

Next week I will continue with part 2 of this discussion – considering your expected expenses and the comparable rents in your area when setting the appropriate rent for your property. 

MAKE MONEY MONDAYS is a forum to discuss ways in which you can create additional sources of income.  I try to focus on particular ideas and steps you can take to create alternative income and passive income sources.  I have also begun a series of posts called “Rental Property Conversion.”  This series follows my husband and I as we turn our property into a rental property.  I will also research and post other useful information in this category.   If you like what you see here, please use the orange icon at the top right to receive my content updates by email or RSS reader.  

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Filed under Alternative Income Sources, Make Money Mondays, Passive and Alternative Income, Real Estate