My Short Career as a Landlord

(Photo Details:  Secluded Napa Valley vacation rental)

This is a story about how I learned that I’m not going to start a little rental business in retirement.

Back when I was still working, Doug and I bought a vacation home in the Napa Valley.   We used it on the weekends to escape San Francisco’s dreary summers.  In less than two hours we could be 30 degrees warmer.  Seriously.

A few years later we ditched the fog of San Francisco for suburbia so I could be closer to work.  The upside was a 12-minute commute and a town whose motto is “Climate best by government test.”  But then we didn’t get up to Napa as often.  Our new house put us another 45 minutes away, and we already enjoyed warm temperatures just by staying put. 

Brilliant Idea #1

So after I retired I came up with Brilliant Idea Number One.  We had experienced a big boom in real estate prices over the years.  If we moved to Napa for two years, we could establish that house as our primary residence and avoid tax on the sale.  This tax savings would be a big boost to our retirement nest egg.  

We shuttled back and forth between houses, being careful to spend more time in Napa than at our suburban “vacation home.”  Being a former tax accountant and zealous rule follower--I was going to do this by the book.

Unfortunately, at the end of our two-year residency, the stock market, the economy, and most importantly the housing market, had tanked.  We could certainly sell the house at that point without paying tax on the gain because there was no gain anymore!

But as long as we sold it within the next three years the sale would still be tax-free.  As you already know, the real estate market did not climb back in the three years following the Great Recession.   So now, seven years later, we still own that house.  The good news is the value has finally recovered.  Oh, and it wasn’t damaged in that recent 6.1 earthquake—thanks for asking.   

The bad news is, despite jumping through hoops all those years ago, we will now owe tax on any sale.  We would have been better off selling the house years ago, paying the tax, and investing the proceeds in the stock market.  That’s why tax accountants are always advising clients never to make decisions based purely on tax consequences.

Brilliant Idea #2

Which leads me to Brilliant Idea Number Two.  Why not keep the house and continue to enjoy it when we can, use it as currency for home-exchanges, and make a little extra money out of it at the same time?  Why not start a little vacation rental business and make enough money to cover the carrying costs?  Heck, if we were successful, we could make enough to hire a gardener and housekeeper to take care of it for us.  If we were really successful, we could make enough to fund a couple of exotic vacations each year.  Visions of dollar signs danced in my head.  This was going to be so much fun!

Concern #1:  Insurance

This is about the point in this story when I started to worry about things.  Like what if a tree falls on the house and injures or even kills one of our guests.  What do you do when you start to worry about things like trees falling on people?  You talk to your lawyer friend.  He then gives you a laundry list of other things to worry about. 

He told us to make sure our umbrella policy was big enough to cover such worries.  What’s big enough?  Well that’s the problem.  Turns out if you get sued for a tree falling and killing the breadwinner of the family, they will sue for some multiple of his salary.  So you want a policy big enough to cover that.  But I don’t know how much that is--my renters are only theoretical at this point.  His advice:  up our umbrella coverage and don’t rent to people that make tons of money.  Which seems kind of counter-intuitive if you want to make money renting your house to people.

It turned out that our homeowner’s insurance didn’t cover any of these potential horror stories anyway because it didn’t cover rentals.  So we packed up our policies, switched carriers, upped the umbrella coverage, and even saved a little money in the transition.

Now I just had to worry about renting to people that could afford the rent, but not too easily.

Concern #2:  Local rental laws

Napa County prohibits unlicensed vacation rentals for stays shorter than 30-days.  Remember that part about being a rule follower?  I would of course be following this rule.  I shared this plan with another friend who is married to a lawyer--which is almost the same as talking to a lawyer, but maybe worse. 

She recounted a recent story that I had missed about the woman in Palm Springs who rented her house through Airbnb to a couple of guys for 44 days.   They stopped paying rent after 31 days and wouldn’t leave her house.  Turns out if someone rents your house in California for over 30 days, they now have rights as tenants.  You can’t just call up the sheriff to kick the squatters out of your house.  Now you have to go through a formal eviction process, which may cost thousands of dollars and months of your time.

So now I had to worry about finding a renter that wanted precisely 30 days, no more no less.  Oh, and remember, one that can’t be too rich.

This is about the point in the story where I started to lose sleep.

But I trudged on, posting beautiful photos with eloquent descriptions of the area and the amenities of our wine country bungalow on a vacation rental website.  I told myself to stop worrying and just see what happens.  Millions of people rent homes without trees falling or renters squatting.  It’s worth a try, right?  Think of the upside.

Concern #3:  The lease

Within a couple of days I started to receive rental inquiries.  The first two were for periods shorter than 30 days—see proclivity for rule following above.  But then, I got an inquiry from a guy--let’s call him Winston--because that was his name.  Winston wanted to rent the house for four months.  In four months, I could cover the carrying costs of the house for the entire year and then some. 

Now I had to scramble.  Winston wanted the house in a couple of weeks—he and his wife were moving to Napa for his work.  We arranged to talk on the phone in a couple days to go over details.

I hightailed it to the office of another friend, a real estate attorney--yes, I do know a lot of attorneys.  I needed a lease.  I needed to know what kind of information I should collect from Winston.  I needed to know the rules about being a landlord, and I needed to know what else I should be worrying about that I might not be worrying about already. 

This is the point in the story where I not only lost sleep, my face broke out, and my stomach hurt.  I was stressed.   This all started to feel very familiar.  It felt like tax season back when I was still working. 

When I retired, I gave up a steady paycheck to never have to feel this way again.  I gave up future earnings to eliminate future stress.  Now I was making that old bargain, taking on more stress to get more money.  I told Doug if this phone call with Winston does not put me at ease, we’re pulling the plug on this whole rental thing.

I’m sure you can guess what I did when Winston called and his name turned out not to be Winston.   And he turned out not to be a potential renter, but a sales rep trying to woo my listing away from my on-line vacation rental company to his rental company.  There was no wife, no move to Napa for work, no four-month rental. 

I hung up the phone and deleted my vacation listing.  That was last week.  This week my skin has cleared up, I’m sleeping soundly, and my stomach feels great.  Just like when I traded in that steady paycheck for retirement all those years ago.

Related Posts:

            How to Juice Up Your Retirement Returns

            Will I Ever Work Again?

            The (Half) Million Dollar Question

Can’t keep track of my non-existent posting schedule?  Subscribe—it’s free!  

Related articles

Retirement Is Just Like Real Life That Way

Comments

[Cindi]

If you look in a health care book for humans, you will see that human beings can get a lot of awful diseases and other calamities. But in reality, how many diseases does one human actually get, in the scale of things? Not much.
After many years of angst, I put my beach house up for rental BUT I used a high-powered rental agent-to-the celebrities to find me a tenant. Within two days I had THEE most perfect tenant I could have dreamed of. This couple has the most perfect lifestyle one can only envy. Much like a love worn paperback novel! Since my time line is I need to rent for five years, they wanted a five year lease. I'm only doing it one year at a time. Anyway, I was back last week because some work has to be done and my beach house looked BETTER than when I lived there for 9 years! UGH! My tenants planted, reseeded, mowed, howed, scrubbed, painted, interior designed and are as happy as two clams in a half-shell! In other words Syd, it worked out fine (despite my worries). We had 14 trees removed before they moved in. Now, we're putting in a new septic, new washer & dryer and boy oh boy do I love those nice rental checks coming in. It made it possible for DH to retire ahead of schedule!
Your best bet is to use a well regarded rental agent to rent out your property. Our insurance costs went down after we rented because insurance companies like when some human is living in the place full time. My tenants will be here in the summer and winter in St. Martins on and off. My tenants husband was born in Paris and is the most handsome man I have ever seen. Plus his accent! Ooh la la. They have a great life and they made my home a wonderful place to be! Plus, they are paying all my costs!
Everyone has advised me to never, never sell my beach house because it can never, never be replaced. And they are right. It took me a long time to make up my mind (a year) but now that it's done, I am happy with my decision.
You never know how life will be until you take a chance. A risk. Just like you do in the stock market.
Good luck!
PS: hire an agent and sleep at night. Put the deed under an incorporated business name and get on with it!

[Retired Syd]

Cindi: All very logical advice but I think I learned it's not for me. Maybe I'll come around five years from now like you did with the stock market.

[scott]

Being a landlord is easy until something goes wrong and something always goes wrong. Enjoy those good nights of sleep!

[Angela]

Sydney, you are too funny!
I've been pondering the old landlord scenario lately, myself. But I'm going to learn from your experiences and put that on the back burner as well.
Thanks for the great story! And thanks for saving me from a ton of stomach aches!

[Retired Syd]

Angela: Well like I said, millions of people rent homes every day without event (see Cindi above). But if you're a Nervous Nellie like me, maybe it's not the job for you either.

[Linda vaughn]

I love this blog! Im always delighted when a posting occurs...

[Retired Syd]

Linda: Well I'm always delighted when I get a comment like that!

[Barb]

Never Again! While we did not rent out home out as a vacation house, we did rent our home while we were overseas with the state department as we did not know if there would be a return to the DC area. Never, ever, ever again. Not just no, but no way, no how!

The thought makes my head hurt.

[Retired Syd]

Barb: Sounds like there's a story there. Now I'm curious . . .

[Dominic]

Syd
I have an appliance business I'm Phila and we
Emailed a couple of times. I have over 30 rental
units, none are which my home or shore home.
I have a realtor do all my credit checks and total
screening of the new tenants. I never have any
problems. My advice is never rent anything that
you live in . My wife or I would never want others
sleeping in our beds or using our house .
This is why I buy rental properties for the purpose
of not worrying about me having to live there
after they move out. Although I have higher end
units and these folks really take care of them.
I'm gonna retire and live off these buildings.
And by the way I'm at the point where I have
people do all the repairs.
Very easy business if done properly.
Dominic

[Retired Syd]

Dominic: There is definitely something more unsettling about renting out your own residence. But you'd think with all the home-exchanging I do that wouldn't be a problem for me. Somehow that doesn't feel the same as renting it out to total strangers--home exchangers kind of feel like they are your friends. And we never hesitate to lend our house to friends. But I think you're right, if you're not emotionally attached to the property it's an easier proposition.

[JF]

From one ex-landlord to another, congratulations. I had similar reactions and issues. The sale of my rental was a great day even though the cash flow was pretty good over the rental life (positive). The psychic cost was too high.

[retireby40]

Oh wow, that's too much stress for you. At least you know now and you can get rid of the place. :)
We're still have a couple of rental properties. It's a little stressful, but I can handle it for now. I think once we're more financially secure, we'll probably get rid of everything. Being a landlord is a lot of work and it's stressful.
My wife definitely doesn't like it.

[Sandy Qusiepen]

Hi Syd, I enjoyed reading your blog and I have been following you for awhile! I live in expensive Singapore and I am an early retiree. I do have a small apartment which I rent out here, and though our tax laws are different, I can identify with your issues. Funding retirement lifestyle with investments is what I do. Warm regards, Sandy.

[fred doe]

Syd: Glad to hear those earthquakes did not effect you. You are always thoughtful when things happen to other people in regions as with Sandy sorry I did not e-mail. As far as landlords go I thing if your going to be one maybe it should be commercial property. That's just my opinion. You are a young 50 something but in 10 years would you sell the house your in and settle in the Napa location? The picture looks charming.

[Juhli]

I would be the same way but am happy to be the airbnb renter! Never said I had perfect internal consistency. We just came home after renting a house in Pasadenda for a week through airbnb. I talked quite a bit to the lovely landlady and she did mention that airbnb was covering the entire cost of those renters who wouldn't leave and had great insurance for landlords. Some people can roll with uncertainty better than others.

[Retired Syd]

Juhli: Yes, Airbnb did step up and cover the cost of those renters and all the legal fees, but that was after the landlord went to the SF Chronicle and got some public pressure put on them. Originally they said she was on her own. Not sure I would have thought to go to the papers--good for her!

[Financial Samurai]

Syd,

You're such a good writer. Thanks for sharing your story. So are you basically leaving the home empty now? Maybe you should just keep it for a long time, as I just had a nice convo w/ a tech CEO who said that ALL his friends are buying in Napa. "The new Hamptons of SF" he said!

Makes a lot of sense. RWC is quite warm, and I would think there's no need to drive 2 hours to feel warm weather any longer. I go down there once a month for my consulting gig. Love iDumplings near the station!

My rental is in Tahoe, with a management company. Man, the commission is a lot, but I feel good not having to worry about finding tenants.

Cheers,

Sam

[Retired Syd]

Sam:

Even though we don't use the house that much, it is never empty for long. Friends and family use it often and we also use it for home-exchanges. So it is used--just not enough by us to really justify the expenses.

I'm not so sure Napa is the new Hamptons though--the market still seems pretty slow up there. But I hope he's right!

You are right to use a management company despite the cost--Tahoe's a little far to manage that easily yourself.

Thanks for your comment--I'll have to try iDumplings.

[Sunny]

We ended up renting this summer in Glen Ellen (since you couldn't houseswap in Mexico City :) It was a hippy commune sort of place, growing marijuana on the premises, hot tub, everything you would want in such a place. ha ha $800 for 3 nights. Perhaps the rules are not readily enforced or they are different for Sonoma county? You should also try the restaurant Yeti - very good Indian/Nepalese food!

[Retired Syd]

Sunny: Actually you can do it legally in Sonoma if you get a permit, which isn't that hard to do. They are more enlightened in Sonoma I guess.

[Bob Lowry]

My wife and I owned four rental homes in the Phoenix area for several years about 12 years ago. We sold them all after two of the four had tenants from hell (all carefully screened and vetted ahead of time) that left thousands of dollars in damage each.

Like you I had just retired and found the stress and hassle even worse than during my working years. We pocketed the money, learned from the experience, and will never be landlords again.

[Retired Syd]

Bob: Thanks for that and welcome home!

[Rin Porter]

Loved your story about almost being a landlord. I've just discovered your blog and I know I'll enjoy it. I am a one-house landlord with a place in Mesa that has never made enough money to pay the expenses. Sigh.

Please visit my retirement blog when you get a chance. www.thingscouldbeworse.org.

[Diane C]

This comment has nothing to do with being a landlord, although I am one if that counts.

It's just that my brain keeps asking me how you're doing and wondering what you've been up to lately and I don't know what to tell it. So if you're wondering if you might put up a new blog post one of these days, our vote is yes, please!