Author Topic: Another rent or sell  (Read 302 times)

mbk

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Another rent or sell
« on: July 08, 2018, 10:54:25 AM »
I bought a condo last year and now I am moving from west to east due to a new job. I am wondering which would be a best course of action for me, rent or sell. Could you guys please help out? Also could you guys please tell me how to get a fair price estimation.

The following are the numbers.

Current market price (Zillow): $165-170k
Market condition: Sellers market (hot)
Cost to sell: ~$1-2k (selling to acquaintance without RE agent)
Purchase price: $133k
Upgrades: $0
Mortgage balance remaining: $113k
Expected net cash after sale: ~$50k

Fixed Expenses of owning the property:
Monthly HOA: $150 (may be increased to $200 in a year)
Monthly Taxes & Insurance: $162
Latest mortgage interest (3.5%): $330
Total Expenses: $642

Mortgage payments + HOA: $1167 (15 year amortization)
Latest Principal repayment: $525

Rental numbers:
Monthly rent: $1295
Property manager's cut: $130
Net monthly rent: $1165
Vacancy at 4% (super hot rental market): $50
Maintenance Expenses (0.75%): $110
Expected net rent: 1000

Though the property is not expected to cash-flow, I believe that is solely because of me financing the property for 15 years . However, refinancing it to 30 years makes it cash-flow positive. Is it worth keeping it? I am inclined to sell because of the following numbers.

Potential savings if I sell and invest for 14 years: 50k*1.07^14 = ~$129k
Keep and incur $167 negative cash flow at the current numbers for 14 years: -$47k
Sell at the end of the 14 years  (no scientific basis to this number except for some inflation adjustment without accounting for any real gains): $ 150k
Net gains if I keep: $103k

Of course taxes, increases in rent and associated costs change these numbers. Are they cumulatively large enough to substantially affect the above numbers?

Am I thinking correctly?
« Last Edit: July 08, 2018, 11:00:25 AM by mbk »

waltworks

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Re: Another rent or sell
« Reply #1 on: July 08, 2018, 04:54:20 PM »
It's a mediocre rental at best but:
-You already own it and selling it will cost you quite a bit in taxes since you didn't live there long enough to get a capital gain exemption.
-It doesn't sound like you desperately need the money.
-Sounds like management is already lined up and it would be easy to rent.

I'd try it for a year and see how it goes. If cash flow is an issue, think about a refi before you move - that would free up roughly $300 a month. Still not going to be gushing free money, though.

-W

makinbutter

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Re: Another rent or sell
« Reply #2 on: July 08, 2018, 08:48:30 PM »
Your maintenance numbers look very, very light.  You're guessing roughly 1.3k per year in maintenance costs...??

This might be enough for regular maintenance (refridgerator going out, recarpeting, repainting, etc.), but have you included the eventual CapEx costs that will slam you for a few k at a time?

-- water heater
-- HVAC
-- roof

I'd guess you're easily closer to 2-3k per year in maintenance/CapEx combined, which makes this a much, much leaner deal.

lhamo

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Re: Another rent or sell
« Reply #3 on: July 08, 2018, 09:03:24 PM »
It's a mediocre rental at best but:
-You already own it and selling it will cost you quite a bit in taxes since you didn't live there long enough to get a capital gain exemption.

Since OP is moving cross country for a new job, the capital gains exclusion can be pro-rated for the period of ownership -- basically 1/2 of 250k because it was owned one year rather than the typically required two years.  You can get this pro-rated exclusion as long as you are taking a new job that is at least 50 miles farther away from your home than your previous work location was. 

Wording from Pub 523:

Work-Related Move

You meet the requirements for a partial exclusion if any of the following events occurred during your time of ownership and residence in the home.

    You took or were transferred to a new job in a work location at least 50 miles farther from the home than your old work location. For example, your old work location was 15 miles from the home and your new work location is 65 miles from the home.

    You had no previous work location and you began a new job at least 50 miles from the home.

    Either of the above is true of your spouse, a co-owner of the home, or anyone else for whom the home was his or her residence."

https://www.irs.gov/publications/p523#en_US_2017_publink100073097

Wherever you go, there you are

mbk

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Re: Another rent or sell
« Reply #4 on: July 08, 2018, 10:16:18 PM »
It's a mediocre rental at best but:
-You already own it and selling it will cost you quite a bit in taxes since you didn't live there long enough to get a capital gain exemption.
-It doesn't sound like you desperately need the money.
-Sounds like management is already lined up and it would be easy to rent.

I'd try it for a year and see how it goes. If cash flow is an issue, think about a refi before you move - that would free up roughly $300 a month. Still not going to be gushing free money, though.

-W

Thank you for the response.

As lhamo pointed out, I am not expecting to pay any taxes on capital gains. I am married, so the pro-rated amount of $500k or $250k is the exemption for us. The condo is in a high growth area with a stable economy (even in down times). And its very close to all the  major companies here with steady rental market. I feel I am renting it below market price (but thats subjective I guess without fully knowing rental prices  of comparable properties), with a significant potential for upping rents by couple hundred in 3-4 years.

I am not in desperate need of money, but I feel I can use that $50k (or whatever I can get) to score some deals (opportunity cost) in RE.

mbk

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Re: Another rent or sell
« Reply #5 on: July 08, 2018, 10:20:30 PM »
Your maintenance numbers look very, very light.  You're guessing roughly 1.3k per year in maintenance costs...??

This might be enough for regular maintenance (refridgerator going out, recarpeting, repainting, etc.), but have you included the eventual CapEx costs that will slam you for a few k at a time?

-- water heater
-- HVAC
-- roof

I'd guess you're easily closer to 2-3k per year in maintenance/CapEx combined, which makes this a much, much leaner deal.

Thanks for pointing it out. You are right, I am giving low figures for maintenance. The roof is taken care of the condo, but I have to foot the bill for water heater and HVAC. Even for roof, I may get new assessment. Thank you!