One Room Challenge: Week 2
Grace
October 10, 2019
Menu
Taking on the Florida house project led us to make a decision on what to do with our Houston house: sell or rent?
In short, we haven’t seen this house through. We haven’t seen this property appreciate enough. We’ve put in the sweat equity and made substantial improvements, but they wouldn’t really pay off if we were to sell now.
Our neighborhood is changing. There is no shortage of articles calling the near-east side of Houston the next hot market. I’m sure as people are priced out of Montrose, Greater Heights, and East Downtown (like we were in 2018) they will look to Eastwood (our neighborhood), Near North, 2nd Ward and 3rd Ward. Our bet is that it will continue to be valuable to be <15 minutes away from downtown, the Texas Medical Center, University of Houston, and the Houston Ship Channel.
There were four other houses on our street for sale while we were looking for a tenant. . Supply and demand would indicate that we would not get as much benefit in selling right now. Yes, the housing market is hot for sellers right now, but we have not seen that on our street.
We have extremely cheap debt backed by a solid asset. We refinanced in September 2020 to what I expect to be the lowest rates I will see in my lifetime. The expected revenue for this property is more than enough to cover the increased costs (insurance, loss of homestead exemption, and maintenance), so we can continue to build equity.
We passed the 6 month requirement for us to keep this property as a primary residence, so we can convert this property into a rental. This is a pretty typical requirement that you agree to during the mortgage closing, but this means that the rate we have on our mortgage now is much much cheaper than would be for a traditional investment property. The property will yield more or we’ll have the pricing power to accept lower rents to keep the property rented for a higher proportion of time.
We decided to rent out our house furnished for one reason: we didn’t want to move or try to sell our furniture. This is a much more aesthetic question than not, as we buy pieces to fit the particular home and serve to augment its function, so moving our existing furniture to a place where it might not “fit in” was a no-go for us. The tenants we signed already had some furniture and requested that we get rid of some of it, but the majority of the furnishings are staying.
An important step in selling a house is finding the right comparable properties (“comps”). It is no different for rentals. I scoured listings for furnished and unfurnished single family homes, apartments, and condos to estimate what we could rent our house out for.
Something to watch out for, especially for apartments that are marketed towards university students, is that the listing price is often times a “per-person” rent, so a two bedroom listed for $1330/person is really much more like $2660/month.
You’ll want to keep it local as well – don’t find a matching property that is across town. We kept our search within a 3 mile radius.
Also, don’t price at the very top of the market, even if your property has one more bathroom than the highest other listing. People want the impression that they are getting a deal and making the comparison to a slightly “worse” property for $100/month less is going to be very attractive, and you’ll lease your rental quicker.
We listed our house for rent on apartments.com and used the premium features that cost $100 for a 30-day “boost.” I suppose it was well worth it considering we rented our house in two weeks, but we also didn’t get our tenant through a lead generated on apartments.com, but rather a leasing agent that may have seen it on apartments.com or one of its sister sites.
I found a lease template by googling “lease agreement template texas,” which should work pretty well for most areas. Much like a sales contract, nearly everything can be negotiable or changed within reason (you still have to follow the law). For example: I asked my tenant if he wanted to take care of yard maintenance or pay an extra fee for a regular service and modified the contract to their preference.
There are two parts to this: income taxes and property taxes. For income taxes it’s pretty simple (especially since we’re moving to another state with no income tax), we just have to keep track of our rental expenses (mortgage interest, property taxes, advertising, maintenance, etc.) and our rental revenue to fill out Schedule E and file with our other tax documents every April 15th.
As for property taxes, most, if not all Texas counties offer homeowners in their primary residence a tax break on their appraised property value against which taxes are levied by the county and city and cap the rate at which their appraised value can rise each year (you’re also not obligated to tell the county how much you initially paid for your house, even if they ask). Buying a new primary residence nullifies these benefits, so we’ll end up paying ~$1,000/year more in property taxes (remember this is now a rental expense that can be written off against rental revenue), and we won’t be protected by a value increase cap.
This post was written for the Collected Eclectic blog.
Collected Eclectic was a passion project focused on recording the process as Grace and Michael van Meurer transformed their builder grade home in to something special.
124 blog posts were published between 2018 and 2021. Explore the complete Collected Eclectic archive here.
Learn more about the project here.