RE: Real Estate Podcast

Clint C. Galliano (00:00)
So you're moving. And somebody's already told you that the smart play is to keep the house and let a tenant pay your mortgage. They may be right, but there's six numbers and two phone calls between you and knowing that. And almost everybody skipped them all. Let's talk about it.

Ben Harang (00:35)
Hi everybody and welcome to another episode of the RE Real Estate Podcast. I'm Ben Harang and with me as usual is our co host, Clint Galliano. How you doing today, Clint?

Clint C. Galliano (00:49)
I'm doing wonderful, Ben. How you doing?

Ben Harang (00:53)
I'm doing terrific. life is lovely, is hot outside, and then it rains and it cools off and it gets real muggy. and it starts all over again. But life is good in South Louisiana. I said

Clint C. Galliano (01:10)
And such is life in August over here.

Ben Harang (01:15)
No doubt, no doubt. They keep saying, you know, it it's hot outside. I say, Well it's August outside.

Clint C. Galliano (01:21)
Hehehe

Ben Harang (01:23)
I don't know what else to tell people. Yeah, it's hot. so what what are we talking about today?

Clint C. Galliano (01:33)
Right, we're gonna talk about the house you're moving out of. Because whether you're taking a job up the road or two households are becoming one, or you're just outgrowing the place, at some point somebody tells you to keep it and rent it out and let a tenant pay you note. And Ben, I made that call on my own house.

Ben Harang (01:54)
Mm-hmm.

Clint C. Galliano (01:56)
didn't necessarily move out of it, but you know

trying to decide on whether to sell or whether to keep it and continue renting. And I'll tell you where this goes wrong. People decided in about 15 seconds at the kitchen table and they're not thinking about the repercussions or what's involved.

Ben Harang (02:17)
Uh-huh. And in in fifteen seconds is about right because everybody dr runs the same map. Here's the rent. Here's my mortgage payment. Subtract the mortgage payment from the rent. What's left over is mine to keep. I go to the casino with. It feels like a raise. That's not how it actually works.

Clint C. Galliano (02:39)
Nope. It's

Ben Harang (02:39)
Yeah.

Clint C. Galliano (02:40)
not it's not rent minus mortgage payment. That does not equal cash flow.

Ben Harang (02:47)
huh.

Clint C. Galliano (02:47)
that's the number of people quote right before they lose lose money three years in a row are are wondering why they're paying out more than they're taking in.

Ben Harang (02:57)
Mm-hmm. All right. Walk walk me through it. Tell me tell me what I'm supposed to be subtracting.

Clint C. Galliano (03:04)
All right, so there's kind of three big buckets of what you're looking at.

And you might want to write them down if you're listening to this. You have your fixed costs. So those are the things that d you know, month in, month out, things you have to pay. Then you've got your variable costs. Those things are, you know, if you're paying utilities or things like that. The fixed costs are kind of more like your your mortgage, your insurance,

Ben Harang (03:36)
Mm.

Clint C. Galliano (03:38)
taxes and escrow, things like that.

And then you've got your big ticket replacements. the fancy for word for that is CapEx or capital expenditure. This is like if your HVAC goes out and needs to be replaced, depending on the size of the house that could run from six thousand dollars to twenty five thousand dollars, and also depending on what provider you use.

Ben Harang (04:07)
Yeah.

Clint C. Galliano (04:08)
potentially a roof or

say you have a water heater that fails and floods your floor and your laminate flooring buckles up or starts to get moldy, then you're looking at a few thousand dollars to replace the floors. So those

Ben Harang (04:25)
Mm-hmm.

Clint C. Galliano (04:25)
are the things that you need to take into account. Now you you say, well how how can I do that? Maybe I'm getting ahead of myself, but we're going to talk about that as we go through this.

Ben Harang (04:36)
Yeah. So so put a number on it for me, Clint. The first year, no rental history on the property. How much should somebody hold back every month before they call this thing profit?

Clint C. Galliano (04:49)
Okay, so I'll give you three lines rather than one number. Because one number gets somebody in trouble.

Ben Harang (04:58)
Mm-hmm.

Clint C. Galliano (04:59)
Things you need to keep in mind and take into account when you're determining what you if your property's gonna cash flow or not is vacancy allowance. Because if you're doing a one year lease, you potentially will have a month that you don't collect rent in.

every year, every time you swap out a tenant. so that's one. Then you have a standing maintenance line, you know, so while maintenance doesn't need to be done every month, you need to put a little bit of money aside just in case something comes up. Maybe a heater light vent breaks or maybe you need to change the guts out in a toilet because the water's always running. Things like that.

then the separate replacement fund. So that'll be your CapEx accrual. And basically that's

Ben Harang (05:55)
Mm-hmm.

Clint C. Galliano (05:55)
just putting money aside every month, five, ten percent of your monthly rent, so that when that does come up, you've got that somewhere that you can just pull that money out of there instead of having to go out of pocket or make a loan and finance it. And Ben, here's a question nobody asked me.

The equity sitting in the house isn't resting. It's deployed.

Ben Harang (06:20)
Yes it is. Yes it is. So so let's look at the numbers.

And let's say let's say the numbers work and we're gonna do it. Then the first thing

Clint C. Galliano (06:31)
All right.

Ben Harang (06:32)
is a written lease every single time. And be honest with you, the ones I've watched go the worst are the ones with somebody we already know. Because that's exactly where a handshake takes place, takes the place of the paperwork. Is my wife's cousin's brother in law's sister's friend that everybody loves.

Clint C. Galliano (06:55)
Hate.

Ben Harang (06:56)
And we're gonna we're gonna just let her move in and she's gonna just pay me eighteen hundred dollars a month. she doesn't have a job. How's she gonna pay you? Well she's gonna figure it out. Well, that that's a recipe for disaster just on the front end.

Clint C. Galliano (07:13)
And and here here's the the big problem with that. And and we could talk more about leases in a minute, but the big problem with that is family is probably the worst people to rent to because if they have a problem coming up with their rent, they're gonna in their mind think, they love me. They're gonna let me slide, you know, no problem. That that's

Ben Harang (07:40)
Mm-hmm. Mm-hmm.

Clint C. Galliano (07:42)
You know, and they they are less worried about keeping up with their responsibilities because, that's a that's a relative. They'll they'll let me slide.

Ben Harang (07:54)
Mm-hmm. Mm-hmm.

Clint C. Galliano (07:57)
the other thing to watch out for is what's in the lease. And I think we may cover that a little bit. If not, I'm gonna bring it up again.

Ben Harang (08:05)
Okay.

Clint C. Galliano (08:06)
so the another thing to keep in mind too is that

If you're collecting a security b deposit, which I highly recommend you do, that deposit is not your money. Because most of the time, well, not most of the time, all of the time, it's not your money. It's a security deposit in the event that there's some damages to the property when the tenant moves out. And then that gives you a little bit of something to help cover those costs for repairs. Louisiana has a state statute.

On this. It's statute is RS 93251 and it covers the timeline for returning it and the itemized statement for anything that you keep. So that's after the tenant moves out. This was

Ben Harang (08:57)
Mm-hmm.

Clint C. Galliano (08:57)
recently extended in the past legislative session, but we're not gonna go into a whole lot of detail with it. If you want some more info on it, reach out. We'll cover that. but go ahead.

Ben Harang (09:09)
Yeah.

Well I was gonna say if it goes bad, y you need to know what you're signing up for. Getting somebody out of the house is a court process. It has steps, it has a calendar, and the rent isn't coming in while it runs. So if if you have to evict somebody, it you can look four, six, eight months of before they get out.

before you can get out of the house. You need to be able to withstand that.

Clint C. Galliano (09:45)
Yep. Reserves, reserves, reserves. So and here's here's another one that a lot of people only find out after they need it, and that's insurance.

Ben Harang (09:55)
Mm-hmm.

Clint C. Galliano (09:57)
people think, well, I've already got a policy on my house, you know, so that's what my cost is going to be. Your homeowner's policy is not a landlord policy. If something happens while a tenant's in the house and you go to make a claim,

There's a good chance it may get denied because you've got a homeowner's policy and not a landlord's policy. So

Ben Harang (10:19)
Mm-hmm.

Clint C. Galliano (10:20)
before you advertise for your first tenant, call your agent before that lease gets signed and get the right policy quoted and ask what happens about flood coverage too.

Ben Harang (10:37)
So two more things before you promise anybody a lease. Find out about your subdivision restrictions and by that the HOA, those things are getting tighter and tighter in South Louisiana. We used to not even that was n used to not even be a thought. but now those things are getting tighter and some of may say you can't lease it or you can't lease it if you have so many other rental properties or

or something to try to keep the neighborhood intact. And don't assume your lender will count the rent when they're qualifying you for the next home. So just make sure you can qualify without it in case it either goes bad or you you have to you have some vacancy in there or they don't count it.

You need to be able to qualify for both loans.

Clint C. Galliano (11:40)
Yep. and a special note if you bought the house with your VA benefit, a VA loan, this part is is crucial, is that if you keep that same mortgage on the property, that ties up part of your entitlement. So depending on the total amount of your entitlement, it could change how much you can spend to buy your next house.

Ben Harang (12:07)
Mm-hmm.

Clint C. Galliano (12:07)
so always keep that in mind.

And a quick note on all of that, neither one of us is an attorney or a CPA. Nothing in here is legal

Ben Harang (12:17)
Take the words out of my mouth.

Clint C. Galliano (12:18)
or tax advice. And the two phone calls we're gonna recommend to you that you make at the end of this are not optional.

Ben Harang (12:28)
Right.

Ab absolutely call them.

Clint C. Galliano (12:31)
Yeah.

The so I wanted to mention leases. A lot of people will go find a lease on the internet.

Ben Harang (12:41)
Mm.

Clint C. Galliano (12:43)
That is just about the worst thing you can do because it may not be a Louisiana specific lease. It may be just a generic lease. there's a little guy that had a house and he just he had bad luck all the way through. He bought the house and it got to where it was too expensive for him to live in. So he moved in with family and figured he would rent it out.

Ben Harang (13:13)
Mm-hmm.

Clint C. Galliano (13:14)
he bought it at the height of the interest rates and couldn't afford to keep paying the note. I think his insurance jacked up also right around that same time. so this was post-Ida.

Ben Harang (13:28)
Mm-hmm.

Clint C. Galliano (13:28)
And on top of that, he put bad tenants in place and he used a boilerplate lease that he got from his real estate agent. that said, here's a lease you can use.

without having a clue about what was involved and it while it had some protections, it didn't have a whole lot.

Ben Harang (13:54)
Uh-huh.

Clint C. Galliano (13:55)
My recommendation, and again, going back to an attorney, get with an attorney and have them to review your lease before you get it signed to make sure that you're covering yourself and protecting yourself so that you don't run into issues later. This poor kid had

Tenants that weren't paying four and five months at a time and he couldn't figure out how to evict them. and he'd let pay partial payments, so that was paying on what was owed, so it it made it harder to evict going forward. So

Ben Harang (14:28)
Mm-hmm. Mm-hmm.

Clint C. Galliano (14:30)
get with an attorney and get him to review your lease to make sure that your lease applies to your situation.

Ben Harang (14:37)
Right, right. And I understand what you're getting into when you sign the lease, what you're agreeing to, not just what they're agreeing agreeing to pay you. so

Clint C. Galliano (14:47)
Correct.

Ben Harang (14:48)
so now there's a there's a tax clock on all of this too, because that's a part that I don't think anybody sees coming.

Clint C. Galliano (14:58)
That's right. So current law in the US allows you to if you've lived in your house for two of the last five years, then you decide to sell it, then you don't necess you don't have to pay any capital gains taxes.

up to two hundred and fifty thousand dollars for an individual or five hundred thousand dollars for a married couple. they're right now they're trying to get that increase just because it's been like that for 30 years or something like that. but if you lived in the house and rented out for three years and you go outside of that three year

mark, then you wind up having to pay capital gains on it if you decide to sell at that point. So that's something

Ben Harang (16:00)
Mm-hmm.

Clint C. Galliano (16:01)
to keep in mind. So it's probably the most expensive thing people learn late. That windows tied to when you live in it. And I pretty much explained it. So talk to your CPA about it. I'm not going to give num well I did give numbers.

Ben Harang (16:18)
Yeah.

Clint C. Galliano (16:20)
so so much for following the guide I wrote.

Ben Harang (16:23)
Yeah.

Clint C. Galliano (16:26)
I'm just I'm passionate about it, man. but

Ben Harang (16:28)
I see that. I see that.

Clint C. Galliano (16:31)
talk to your CPA. Your CPA will give you the IRS guidelines and and make sure you stay on the straight and narrow.

Ben Harang (16:40)
Yeah. So whenever you do decide to sell a house that you leased, understand it's a different sale than the one you you might be picturing right now when you're living in the house. All of a sudden you have somebody else living in the house. So now you're trying to sell a house with a family living in it or somebody living in it to somebody that wants to move into it. And the tenants are not going to be real happy that you want to sell it.

Because they don't want to move. And I I told I used to tell people that I was one hundred percent unsuccessful in selling rental property with tenants in the house because they the showings never work. They trash the house to the buyers. They do everything they can to sabotage anybody wanting to buy it. So just know that that's something you need to deal with when you go to sell it, if you sell it with somebody.

In the house.

Clint C. Galliano (17:41)
Yeah, and and I I guess the the main difference is is if you're trying to sell it as an investment property or as something to for the owner new owners to occupy.

Ben Harang (17:49)
Mm-hmm.

Clint C. Galliano (17:51)
But ultimately while tenants are living in the house, you like you said, it's it's scheduling around their schedule to for showings, having to wait twenty four hours before somebody can go look at it, because of what's, you know.

Yeah, they're entitled to a peaceful enjoyment because they're leasing the property.

Ben Harang (18:14)
Mm-hmm.

Clint C. Galliano (18:16)
so those are all things to to keep in mind. Ultimately, if you are going to sell after renting it, it's usually better to put it up for sale after the tenants have vacated it. That way it gives you a chance to get the property back in shape, maybe put some paint up, repair any

anything that needs to be repaired and present a better face on the property for anybody that's interested in purchasing it.

Ben Harang (18:47)
Mm.

Clint C. Galliano (18:48)
So here's a version I'd actually recommend to somebody that's on the fence. Rent it for a defined term. Put the exit date in writing and set a decision, review on your calendar before that lease comes up for renewal.

And then

Ben Harang (19:05)
Good idea.

Clint C. Galliano (19:06)
look at how much trouble it was for you to rent it out. What did you have to

Ben Harang (19:10)
Mm-hmm.

Clint C. Galliano (19:10)
deal with? Is this something you wanted to keep on doing? Rerun your numbers, recheck your insurance, check market rent, see if you know you're you're charging market rent for the property. See if you actually made any money or if you lost money.

Ben Harang (19:28)
Mm-hmm.

Clint C. Galliano (19:30)
And ultimately the there's arguments all day long. One says, you need to focus on just cash flow. If it doesn't cash flow, it's not worth it. There's other arguments that say, well, depending on where you are, if you've got, you know, fairly decent appreciation for your market, then that may be a reason to keep at breaking even or maybe even losing a little bit of money if there's

Ben Harang (19:56)
Mm-hmm.

Clint C. Galliano (19:57)
a really good chance that your house may

increase at ten percent due to appreciation or your house value. So those are all things to consider.

Ben Harang (20:09)
Okay, so as we as we wind this down, if you're sitting at your kitchen table tonight, you have three questions to ask yourself. One, does it cash flow with real reserves in it, not the rent minus the mortgage? The second question is can you cover a bad quarter of vacancy re the vacancy and a major repair without touching your household?

budget. that's a tough one for a lot of people. And three, do you want to own this house on purpose? Do you do do you really want to own it or are you doing this because you don't think you could get enough for it if you sell it? Don't don't just let it happen. Make the decision to keep it or to sell it. Make that make a conscious decision one way or the other.

Clint C. Galliano (21:07)
Yeah, so anything less than three yes points towards selling. both answers are respectable when the numbers back Don't resolve it as always rent or always sell

You know, it it's it's just after you do that deep introspection and how you feel about it and what the numbers look like, then that's that's when you can make that decision on if you want to continue doing it or not.

Ben Harang (21:39)
Mm-hmm.

Clint C. Galliano (21:41)
All right. Guess what time it is?

Ben Harang (21:44)
I'm not doing it. I'm not gonna do it.

Nope. Nope. Not me.

Clint C. Galliano (21:50)
All right, your homework for this week. It's one page and two phone calls. On the page, write down your real monthly number. So that's principal, interest, taxes, landlord insurance quote, the flood quote if you need that, dues if you have to pay any dues, like HOA dues or anything like that, and your reserve lines for vacancy.

Typically 10% vacancy, between five and ten percent vacancy, depending on what your market is, is what you ought to factor in. Don't forget maintenance and replacement. So your capex accrual. Put a realistic market rent at the top. And if the bottom line isn't positive with all of that in it, you already have your answer. Next.

Make two phone calls. One to your insurance agent, or maybe you ought to call your insurance agent first, for what that policy actually costs once it's a rental, and your CPA for what the timing does to your tax picture. Both calls are short and both of them change the math.

And if you want help pricing on the rent side or you want somebody to walk that number sheet through with you, give me a holler. got my contact information in the show notes, phone, email, social media, all that fun stuff.

Ben Harang (23:26)
All right. So if this one if this one helped you, like it, share it with somebody you know who's about to move, and subscribe wherever you get the podcast so you don't miss the next one. Every episode plus the whole archive lives at RE Real Estate Podcast dot com.

Clint C. Galliano (23:47)
Where's that at?

Ben Harang (23:48)
I think it's Aury Real Estate Podcast dot com. I might have to check on that.

Clint C. Galliano (23:53)
Sounds like it's rerealestatepodcast.com

Ben Harang (23:57)
That's it. That's it.

and you can you can watch and subscribe on a YouTube channel. All that's on RE Real Estate Podcast dot com. So whether you want to listen to it or or watch two guys with faces for radio, it's up to you. It's all right there. So all right, Clint. I think that one's in the cans, huh?

Clint C. Galliano (24:19)
Yes indeed. All right, Ben. Have a good one.

Ben Harang (24:22)
You too. Thanks, Clint