I am a part of several military-related social groups, and I have over 20 years experience as a long-distance landlord. When the conversation turns to renting out a house, my ears perk up. Over and over again, I hear the same statement come from potential landlords, “As long as we can cover the mortgage.”
On the surface, this sounds like a perfectly reasonable statement. Get a tenant in your house, receive rent that is more than the mortgage, and let someone else build equity in your property.
If only it were so simple.
Invariably, the people making this statement have never been landlords before. Once you’ve been a landlord for a year or two, you realize that there are so many financial obligations beyond the mortgage, including small repairs, ongoing maintenance, management fees (if you choose), major maintenance, regular turnover costs, vacancy expenses, travel expenses, and times when a tenant has done more damage than will be covered by their security deposit.
Taking Care of The Property
When it comes to taking care of a property, landlords are expected to keep the property in good repair. Often, this means fixing little things that you would work around if you lived in the house. Tenants have the right to a property in good repair, and shouldn’t be asked to deal with a stove that has a trick to lighting or a toilet that requires three flushes to clear completely. Unless you are local and handy, or have an amazing maintenance person, each little repair will require that you find the right trades person and then cover the cost of the repair.
Then, of course, there are the major systems that require replacement periodically. Heating and air conditioning systems have an average lifespan of 15-20 years. Standard shingle roofs should last for 15-30 years, depending on the type of shingle used.
The decision to use a property manager is very personal, and there are good arguments for and against hiring a professional. Whether you pay someone to manage your property for you, or manage it yourself, there will be costs. Property management fees vary dramatically from market to market and house to house, so be sure you understand all the fees before making a decision.
Average professional property management can be as little as 5% per month, or as high as 10% per month plus one month’s rent every lease renewal (typically once a year.) Depending on your market, the availability of tenants, the price of your home, and your personal situation, these costs might be a wise choice.
If you self-manage, you will need to periodically travel to the property. While this expense is tax-deductible, that doesn’t make it free. You will bear the costs of advertising. Be sure to account for the value of your time. Even an “easy” tenant turnover can take 10 to 20 hours of paperwork and organizing.
It is sad, but true: it’s not uncommon for tenants to do a significant amount of damage to a home, well beyond the amount of their security deposit. (Side note: these are often the same tenants who can’t be bothered to pay the last month’s rent, so the security deposit might already be gone.)
Whether it’s “just” having to replace the kitchen counters destroyed by improper care, or having to rip out all the floors and subfloors and wall-board because they were running a puppy mill, tenant damages can quickly run into the tens of thousands of dollars. In addition to having to fix your property, it can’t be rented while the repairs are being done.
While, thankfully, most tenants won’t trash your house, there are regular things that need to be maintained when you have a tenant turnover. They are often expenses that you wouldn’t notice when you lived in the house, because you were doing them over time instead of in a big chunk. These include regular painting (every 3-5 years) and flooring replacement (depends on type of floor.
Vacancy Is Expensive
Having a vacant property is part of being a landlord. The industry standard is to plan for a property to be vacant 5-10% of the time. As a military landlord, you may have two special considerations if your house is rented primarily to military tenants: unexpected lease terminations and the vagueries of the Basic Allowance for Housing (BAH) system.
If you rent to military folks, always keep in mind that they can terminate their lease with as little as 31 days notice under the provisions of the Servicemember’s Civil Relief Act. Unfortunately, these surprise lease terminations often come during the rental off-season, making it harder to find a new tenant quickly. In some markets, a February move-out means that your house will probably not find a new tenant until July, and you need to be prepared for that.
If your market is primarily military, your rent is going to be largely dictated by the amount of BAH being paid for your location and the population looking at your house. Unfortunately, BAH doesn’t always stay the same and it doesn’t always go up. No matter how beautiful your house is, you’re not going to find a lot of potential renters if your rent is above the housing allowance. Obviously, this is very dependent on how much of your market is military – it’s not problem in Washington, DC the way it is a problem in Killeen, Texas.
In addition, vacant houses cost more to insure. If you want to maintain the same coverage, you should plan for your premiums to increase $50 to $100 per month.
If you’re considering purchasing a house with renting as an exit strategy, or if you’re trying to decide whether to sell or rent, be sure you’ve considered all these items in your calculations. You’ll be glad that you did.