About a year ago, I had an opportunity to work for a great company and had to relocate out of Greensboro, NC. I lived in a townhouse with my wife and son in the house desirable north-side of Greensboro. I had bought the house nearly 4 years ago when when we moved there. While planning the move, I didn’t want to sell our house since I had built up a bit of equity (along with the down payment) during the past four years. Many people were renting in the neighborhood and my neighbors lived in a house owned by an absentee landlord. As per my rough calculation, the rental in the area (about $1,000 / month) would cover my mortgage, property tax and HOA.
Greensboro is a mid/small-town with a population of about 100,000. The economy is vibrant though not as ‘hot’ as the Raleigh-Durham corridor, about 60 miles east.
I decided to read-up a bit on absentee landlord and most of the articles emphasized the need for a reliable property-manager. The Property manager would take care of the rental property, vetting prospective renters, collecting rent and would be responsible for day-to-day maintenance of the property. The articles indicated that even with a property manager, I would still be responsible for all the expenses and taxes, including HOA, property tax, insurance, etc.
However, most articles did not prepare me for the experience or the financial intricacies involved. Put simply, the property manager would collect his fee, and in addition, I would have to spend on all necessary maintenance and service expenses.
I had lived in the house with my wife and son for over 4 years and during the time, I had invested in a few upgrades including new stove and microwave, laminate flooring in the ground floor, and had the first-floor carpet changed. I also had the rear-door replaced since it had rotted during the rains in the years past.
I managed to fix a few small issues like loose door-knobs and changing air filters and light bulbs. Besides regular servicing of the AC and heater, I hadn’t called service folks much.
Here is my summary of experiences during the first year
- Search for a property manager (May 2016): I had decided to move out of the house by the end of May 2016 and began searching for a property manager before that. I talked to a few friends and decided to sign up with “B”-Property management, which was already managing other properties in my neighborhood (including that of my neighbor). They were also familiar with the operations of the HOA in my subdivision.
- Signing an agreement with the property manager (May 2016): Director of sales for B-Property management , Susan, spent some time with me describing the process, operating model and their fees. I asked if I would be eligible for a referral commission since I had referred myself to them. She politely declined, saying the NC law only allowed for registered brokers to refer clients. Susan emailed me a checklist to take care of a few basics including
- Change of insurance from owner to landlord and to have the policy endorsed to include their name for administrative convenience.
- An initial check for $1000 towards funding the escrow account and for incidental expenses that the property manager might incur
- Handover the keys (May 31 2016): We vacated the house before the end of the month and I stopped by Susan’s office to hand over the keys (including the keys to the house, mailbox, community swimming pool etc).
- Inspection and servicing (June 2016) : B-Property management sent their team to inspect the house and emailed me a rather detailed report with things to be fixed and serviced before the property could be “rental ready.” Most of them were small items like changing light-bulbs per code etc. The big-ticket item was an estimate on painting the walls - our toddler had extensively used his crayons, pencils and pens to leave his artistic impressions on the walls – and it would cost nearly $2500 to have the walls repainted. This was a bit of a shock which I wasn’t prepared. However, I asked them to move forward with the painting and repairs.
- Ready for rent (July 2016): By the end of June they sent me an email saying the house was ready for rent and they began ‘marketing’ it. The unit was successfully rented in a couple of weeks.
- Lease signed with Tenant (mid-July 2016): A tenant had signed the lease to start from mid-July and we were in business. My out of pocket expense thus far: Rent-ready expense + Marketing fee + Lease signup fee = About $4000+
- Service requests before rent (July 2016): The tenant moved in on 19th July and during the first week, opened a few service requests. I got the following update from the Property Manager for service of minor issues :
Service request: 1. Towel rack in master bath fell off. 2. Slow drain in both bathrooms - master and 2nd bedroom bathroom. Have used store bought chemicals, but no change. 3. Not a lot of hot water coming out of the master bathroom. It's more warm than hot. 4. Unable to operate the thermostat for Air. 5. Ice maker in the Refrigerator not working
Issues addressed: 1) Re-hung the towel holder in the master bath. 2) Cleared drains in both bathrooms, removing hair from the drain. Tested and is draining properly at this time. 3) Master bath - tub has a hot water safety stop, the set screw is stripped can could not remove the handle to change the safe hot water setting. Drilled out and replaced tub handle. The hot water is set to the highest temp available. 4) Guided tenant on use of thermostat. 5) Icemaker switch was turned off
Although these were minor issues that the service technician was able to address, each ‘service’ visit cost me $50-100. All this before I received the first rent check!
- Rent (August 2016): At the end of the month, the property manager sent me an email with a monthly statement. The rent for July (19th to 31st), and August was credited. However, after deducting their 10% fees and costs for service requests, my account was still negative.
- September 2016 onwards: Things seemed to stabilize a bit after August when the tenant settled in and began regular rent payments.
But there were occasional service requests that would cut into my net cashflow. With the season changing in October, the property manager sent in their service folks to check and service the central heating (again $$s). A similar exercise followed this spring while they prepared the house for summer.
It has been nearly a year since we started on this journey and my reaction has been mixed.
On the negative:
- The cash-flow is unstable and during the first year of renting. Financially, I am yet to get ahead of the game
- Being an absentee landlord still involves a lot of work - I’ve got to plan to pay the property tax, the HOA and save up for incidental expenses.
- It is great to have a property manager on call. However, even small issues for the renter become a ‘service call,’ costing me money. The property manager will send someone to inspect and service the request and you (the landlord) will be billed for it.
On the positive side:
- My asset continues to grow: The rent pays for my mortgage, although I continue to incur other incidental expenses.
- The property, has appreciated about 2-3% in the area
- I think I am contributing to the economy by employing some folks at the property manager
Bottomline: If you plan to become an absentee landlord, you should plan to engage a trusted property manager who operates in the local area. You should also plan for an expense of 15-20 % of rental income. You may not make a lot of money from rental income but should try to break-even. The gradual appreciation of property value along with the equity you build should give you a nice little nest-egg in the long term.
Other links and references:
Absentee Owner -An individual who owns a piece of real estate but does not live in it. An absentee owner may also be an entity such as a corporation or real estate investment trust (REIT).
Tips on Rental Real Estate Income, Deductions and Recordkeeping (IRS) - If you own rental real estate, you should be aware of your federal tax responsibilities. All rental income must be reported on your tax return, and in general the associated expenses can be deducted from your rental income. If you are a cash basis taxpayer, you report rental income on your return for the year you receive it, regardless of when it was earned. As a cash basis taxpayer you generally deduct your rental expenses in the year you pay them. If you use an accrual method, you generally report income when you earn it, rather than when you receive it and you deduct your expenses when you incur them, rather than when you pay them. Most individuals use the cash method of accounting.
Renting out your property (England and Wales): Paying tax ... - Gov.uk - When you rent out property you may have to pay tax.You don’t pay National Insurance if you’re not running a business - even if you do work like arranging repairs, advertising for tenants and arranging tenancy agreements.