With the real estate market in recovery, many homeowners moving from small homes, townhouses or condominiums may consider holding on to their first property as a rental investment while purchasing a new property.
Blakeslee Crumbliss and her husband, John, for example, purchased their Adams Morgan rowhouse in July 2007. However, with a baby born recently, “the place was so small, and we were really packed in there,” Blakeslee Crumbliss said.
They were able to purchase a new house and are getting their rowhouse ready to rent. “We’re going to try to manage it ourselves,” she said. “The idea was totally daunting at first. It’s taken us awhile to warm up to it.”
Crumbliss is learning as she goes. After analyzing her and her husband’s cash flow and researching comparable rents in the neighborhood, “We think we can break even,” she said. They’ll consider selling it once it has appreciated and they can make money on it.
She’s talked to former neighbors who are now landlords of their Adams Morgan properties and researched requirements online and in print. “I tried to find the smallest, most comprehensive book I could” on how to be a landlord, Crumbliss said. She’s learned a lot about D.C. landlord and tenant laws, insurance and other requirements. “We’re trying to do everything by the book, but it’s kind of hard to find the information,” she said.
Some of the things she says she’s learned: In the District, you can’t charge more than one month’s rent as a deposit and you must have a fire insurance policy on the property (and can include appliances in the coverage). She plans to set aside some of the monthly rent to cover maintenance, and she’s considering hiring a tenant finder to handle the background check, credit check and leasing paperwork.
Even after learning whether they can qualify for a new loan while keeping their first mortgage, owners must then decide whether they have the means to maintain a new home as well as a rental property.
Figure out the cash flow
The first thing accountant Ken Anderson advises clients pondering whether to become landlords is to consider cash flow. “Will you have a positive or negative cash flow?” he said. On the plus side, count rent as well as estimated income tax savings from the loss claimed on your income tax return. Then subtract costs such as mortgage principal and interest, real estate taxes, maintenance and repairs, homeowners’ or condo fees, insurance, and depreciation.
“You usually wind up with a negative figure,” which is written off as a loss on income tax returns, Anderson said. “If the property is paid for or if you have a high income, you might have a profit,” he said. In those cases, “you may have to carry the loss forward. If you sell it, you can deduct the loss at that time.”