Thinking about renting out my condo - need a plan of action

[Taylor Caby]

Hey guys,
I'm in the most preliminary stages of considering renting out my condo. I'm in a unique situation so I'll just start explaining it. My real estate knowledge is basically what I learned in two real estate classes in college and from buying this house a year ago (not a whole lot, not clueless).

Here goes:

I bought a condo in jul '06 in Chicago. For those that know the area, it is in Wicker Park (formerly bad 5+ years ago, then artsy over the last few, now just starting to become "nice" - lots of rehabs, nice condos, tons of new restaurants/boutiques - very desireable place to live).

I split the condo with a friend. It is a 3BR, 2200ish sq ft duplex, built about 4 years ago. We paid 548k - he paid cash (family money), i paid 100k up front and took out a mortgage for the other 174k. We have been renting the 3rd bedroom out for 800/mo to a friend (we could/should be renting it for a lot more -- we furnished it and the place is very nice).

I have a 30 year, ARM that started at 7.99%. The rate changes in 2 years and I had a 1 year timeframe where I couldn't find a new loan or pay it off. I was planning on just paying off the loan in a year but some people have told me I should just refinance because now I am a very low risk candidate with my business income (high 6 figures not including poker money) and should be able to get a good rate (has this changed in the last month?).

My roommate who I own the place with just accepted a new job in LA. He is moving next summer and we are trying to figure out what we should do.

My renting roommate is likely to move out in a year. It's possible he will stick around but he is looking at some new jobs and might be buying a place himself.

This is VERY early in the process but I have a lot of time to plan this out. Here are my questions:

1. Should I try to get a new mortgage or just pay this off? What type of rate should I expect to be able to get?

2. My options in a year: A) buyout my roommate, B) sell the place or C) I move out and we try to rent the place to a family or 3 people looking to rent.

If I choose A), i'd rather move out and find people to rent (if the numbers work) because i don't think i'll be able to find 2 roommate friends that can afford to rent here that i'd want to live with.

I'm worried that selling at this time/in this market is a bad idea - so that's why I'm hesitant about B.

C) seems like it would be ideal as my roommate is going to be renting in LA no matter what and his share of the condo is completely paid off. the money was gifted to him and i'm not sure if we sold what exactly he could/would do with the money.

I'd just like to develop a thought process to get started in here so I can spend the next 4-6 months doing some research before I make a move. FWIW, I think I could EASILY get 2500/mo and probably closer to 3000 or 3500 for this place, but i just don't know (does anyone know how I can figure out what I could get)?

If someone could just help me get started with what I should be doing to explore my options, plus any experiences with doing something like this. I figure there should be some sort of analysis I should run on the situation as well -- if i rent this place out obviously i'm going to ahve to live somewhere else. I could buy another place but would honestly rather rent for now because owning this place turned out to be a lot more work than I thought and i have no idea where i will be living in 2-3 years. My rent would probably run between 1000-2000/mo, depending on how nice i wanted to go.

Any sort of help would be appreciated. If someone does a bang up job helping me out i'd be glad to talk poker for a little while or help out in any way i can (not sure if i can but i'd try!).

Thanks,
tc

[pig4bill]

[ QUOTE ]
I was planning on just paying off the loan in a year but some people have told me I should just refinance because now I am a very low risk candidate with my business income (high 6 figures not including poker money) and should be able to get a good rate (has this changed in the last month?).

[/ QUOTE ]

Err, yeah. You might be leveling, but this is front page news. Do some checking around. If you have a very high FICO score you can probably get a decent loan, since it would probably be a conforming loan. Go to a money center bank like Wells Fargo or B of A. As much as I hate those banks and hate recommending them, an independent mortgage company like Countrywide might not be able to do your loan, or worse, grant you a lock, take your application fee and whatnot, and go belly up before they can fund your loan.

[ QUOTE ]
2. My options in a year: A) buyout my roommate, B) sell the place or C) I move out and we try to rent the place to a family or 3 people looking to rent.

If I choose A), i'd rather move out and find people to rent (if the numbers work) because i don't think i'll be able to find 2 roommate friends that can afford to rent here that i'd want to live with.

I'm worried that selling at this time/in this market is a bad idea - so that's why I'm hesitant about B.

C) seems like it would be ideal as my roommate is going to be renting in LA no matter what and his share of the condo is completely paid off. the money was gifted to him and i'm not sure if we sold what exactly he could/would do with the money.

[/ QUOTE ]

If you do refi, which is a good idea if you can get a reasonable FIXED rate loan, be sure to do it while you still live there. Terms are much better on owner occupied than non-owner occupied.

[ QUOTE ]
I'd just like to develop a thought process to get started in here so I can spend the next 4-6 months doing some research before I make a move. FWIW, I think I could EASILY get 2500/mo and probably closer to 3000 or 3500 for this place, but i just don't know (does anyone know how I can figure out what I could get)?

[/ QUOTE ]

Since you're not an experienced landlord, I would hire a management company and pay them the 10% (typical) which a good management company will certainly earn. They can tell you what the market rent is for your place.

[ QUOTE ]
If someone could just help me get started with what I should be doing to explore my options, plus any experiences with doing something like this. I figure there should be some sort of analysis I should run on the situation as well -- if i rent this place out obviously i'm going to ahve to live somewhere else. I could buy another place but would honestly rather rent for now because owning this place turned out to be a lot more work than I thought and i have no idea where i will be living in 2-3 years. My rent would probably run between 1000-2000/mo, depending on how nice i wanted to go.

Any sort of help would be appreciated. If someone does a bang up job helping me out i'd be glad to talk poker for a little while or help out in any way i can (not sure if i can but i'd try!).

Thanks,
tc

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The other thing to consider are the tax implications to rental real estate. There are both good and bad implications. Talk to an accountant with EXPERIENCE in this area. The property management company also can probably go over the basics with you.

[slush fund]

i just refinanced my condo out of an arm into a fixed rate about a month ago. got 6 5/8% but from what i have heard the rates have pulled back even more than that. if you aren't going to pay it off i think you should at least talk to a broker about locking in a fixed rate. just dont get killed by their fees which can be ridiculous. its good to know someone in the business who won't take advantage of you

[RicoTubbs]

[ QUOTE ]
I'd just like to develop a thought process to get started in here so I can spend the next 4-6 months doing some research before I make a move. FWIW, I think I could EASILY get 2500/mo and probably closer to 3000 or 3500 for this place, but i just don't know (does anyone know how I can figure out what I could get)?

[/ QUOTE ]

I think you're aiming too high in your rental estimates. The Chicago market has really experienced tremendous growth in housing supply, which has translated into a soft rental market. Take a look at craigslist to get an idea of what 3 bedrooms are renting for. It will also give you a sense for how many individuals are looking to rent out their newly purchased condos. My sense is that there are a ton of people who bought places without ever intending to live in them, instead hoping for a quick flip.

Search results from Craigslist, 3 bedrooms in wicker park

Unless you truly want to be landlord, I don't think it's a good decision to rent out this place. Between the vacancy periods, management fees, and generally soft market (with inventory building and building), I wouldn't want to be a landlord in the Chicago market unless I had a truly unique property with a well-defined pool of renters.

[Ryno]

"owning this place turned out to be a lot more work than I thought "

Being a landlord is a business decision. It might be good, but you might find better uses for your time and money. Even if keeping your place and renting it is a good decision, it might not be the best decision...if that makes sense.