For military families who PCS, it makes sense to continue owning a home when you leave a duty station … as long as you can find renters who will cover your mortgage. When a rental property is managed correctly, it allows the owners to break even or make a profit on home expenses. This allows them to buy or rent at future duty stations.
However, keeping your home as a rental property is a risk, especially if your PCS orders take you to a different time zone. If you are not available to maintain your property, you will need a property management company. The relationship between the owners and the property management company can make or break the rental property’s success.
For the past five years, my husband and I rented out a house we bought at a former duty station. We had steady rental income, even when we were stationed overseas. However, our success didn’t come without a few horror stories. If you are considering turning your house into a rental property, here is what you need to know:
What to do when managing a rental property
Make sure that the rent in your area will cover your monthly mortgage payments, with a cushion of a few hundred dollars. You will need to leave that cushion to save up for periodic home repairs. If the average rent is below this amount, you will lose money.
Find a reliable property management company. You cannot rely on a friend to check on your property and fix broken appliances. Research to find a reliable company that will handle emergency repairs, do tenant screening and handle the legal aspects of renting out your home.
Calculate your rental company’s fees. Many companies charge 10 percent of the monthly rent as their management fee. They may also have a realtor incentive fee when attracting new renters. Get these numbers into your budget up front.
Know the tax laws. If you manage a rental property without using it as your primary residence for more than five years, you will be charged 10-15% in capital gains taxes when you sell the home. This is a huge portion of your profit, so you should plan to reside in the house or sell it before that date.
Beware of a mortgage Adjustable Rate Mortgage (ARM). An ARM gives you low payments and low interest for a few years. Then the rate can increase every year afterwards. This will drastically impact your mortgage payments and profit from renting. It may be smart to refinance into an ARM mortgage if you are only going to rent out the property for a few years ... but you have to plan ahead to sell it in time.
Plan for the property to be empty. Renters who are military families may break a lease with PCS or deployment orders. They have to give you notice, but it’s possible your property will sit unrented between tenants. Be sure you have enough savings to make a few months of mortgage payments out of pocket. If you are living on base or paying rent at your next duty station, you won’t have enough to cover both mortgage and rent from one BAH.
Get property insurance. You will have to pay insurance on the property you own. Since property insurance doesn’t include flood, wind or hail damage, you may need to apply for extra coverage in your area. This covers your house in case of flooding, hurricanes or tornadoes.
What not to do when managing a rental property
Don’t ignore credit screenings. Your management company should do credit checks on all prospective tenants. Take these results seriously. Yes, you don’t want the property to sit vacant as you turn away renters. But accepting a tenant with a low credit score can mean it’s a renter with a bad history of not making payments on time, if at all. We once allowed a tenant in with a borderline score because we wanted to be nice. She started missing payments and facing eviction. She eventually left the property peacefully, but left us with thousands of dollars of damage from her unauthorized pets. Unless you live in the state and are willing to go to Small Claims court, there is no way to demand that money back. We could have waited months for a better tenant and had much less financial loss.
Don’t ever assume an issue is resolved. When using a property management company, you won’t have direct contact with your tenant. Constantly call or email your management company to follow up on repair issues. Ask to see all receipts of work done, and save them in a file. The biggest headache of managing our property was that I had to follow up about three times every time we wanted something to be done.
If you follow these guidelines, your house can become a profitable rental property, giving you benefits for years. It’s great to have passive income from renters if you are stationed far from home. Just make sure you stay on top of any financial changes and you don’t commit the top rental property blunders!