Author Topic: Should I keep or sell rental (which was a primary residence - tax exemption)  (Read 913 times)

MoneyGoal

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Hi,

I have a primary residence converted to rental middle of last year.
Should I keep or sell the rental?

Purchase price: $400,000
Rental income: $3000
Current Market price: about $850,000

HOA: $160
Mortgage: About $2100, 10 more years.

I can rent out 1 more year and decide if to sell it next year and still take advantage of the tax exception on capital gain.
Inputs appreciated!

Thanks!

Jon Bon

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Is this even a serious post?

TELL ME WHERE ELSE YOU CAN MAKE 400k TAX FREE?!

Keeping this as a rental is a massive MASSIVE loser.

You net say 500 bucks a month? on ~ 500,000 in equity, so your return is 6,000/500,000 which is ~ 1% you could do better lending money to the federal government.

I am ignoring all the inconvenience of being a landlord. Holy cats man sell this place and count your money. Get the renter out throw a coat of paint on it and cash a fat check. Nice work! you won the appreciation game!




MoneyGoal

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It is not obvious to me.

Although return is low, I am building on equity. And after 10 years, once mortgage paid off, my return would be much higher.

bacchi

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In 10 years, you'll lose your exclusion.

Another Reader

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It is not obvious to me.

Although return is low, I am building on equity. And after 10 years, once mortgage paid off, my return would be much higher.

Show us the numbers.

Jon Bon

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So you pay off your mortgage which you stated is your goal. So now your return is 6000/850,000 Which is basically the same as a bank account, also means you have a worse rate of return then inflation!

You are losing a crap ton of money on this. Yes you are 'making' 6000-ish a year. However the money you have tied up in this house would be absolutely crushing your return in pretty much any other investment vehicle.  Not to mention that you lose the tax exemption. So you get to pay taxes ON THE ENTIRE GAIN.

So you can keep doing what your doing and lose money every week, and then when you sell you can lose another 100k in capital gains taxes. You made your money on appreciation, any attempt to rent this house out is going to cost you money.


I am not trying to be rude here, but please tell us how this is a good investment? Would you lend someone 850k at 1% return? Hell no you would not. Would you buy an 850k annuity at 1% return, hell no you would not.  If you were to have this house as an even half way decent rental rent would need to be north of $8,000 a month.

Sell this sucker, and enjoy that awesome gain (tax free!)









MoneyGoal

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Thank for the details.

The return of the rental would be around $22000 a year instead of $6000 a year.
($3000 (rental) - $ 800 (expenses, tax, HOA)) x 10 (assuming rented 10 months per year) = $22000/year
I am also hopping the price would appreciate.

I know this is a different topic, but how should I invest the money from the sale of the property, which should be around $500,000 (After paying realtor fee, mortgage)?

Thanks.
« Last Edit: February 28, 2019, 06:21:17 PM by MoneyGoal »

Jon Bon

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Ah you totally got me, huge brain fart on that one. Yeah your return would be much more then 6k a year, but probably less then 22k with maintenance of course. So for the sake of even numbers lets say 20k.

But 20/850 is still only around 2% which does not count any of your time and hassle dealing with a rental. Nor does it take in to account the tax effects of losing the gain on your personal residence.

In terms of investing. I mean you could jump dump it into mutual that usually gives a decent return but on some level it does feel that everything is a bit over valued (including the house maybe?) I am not really the guy for where to park large amounts of cash, I just can generally recognize when its not the best idea to convert primary residence to rental.

Long story short I would not keep the house unless you are already super rich and it holds some sentimental value for you.

Just so you know, the rule of thumb (at least when RE prices are normalish) is that a house should rent for 1% of its value. So if you were renting it for 3,000 a month, and it was still worth what you paid then it would not be nearly so bad. But your money has already been made on appreciation. You wont make much if any money on cash flow aka renting.





ender

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This doesn't feel like that great of investment to me and feels really high risk. In your best case scenario, after 10 years, you are getting 26.4/850 = ~3% a year in return. And that's after you paid off the mortgage. And no maintenance. And 12/months a year occupancy.

You literally could sell the place and put money in a high interest savings account and be breaking even compared to renting it out over the next 10 years (especially since that 3% only comes after you pay off the mortgage).

The only reason you would want to keep this place is if you are willing to speculate on the appreciation. So it depends entirely on your risk tolerance.

For me, I would be very wary about having such a large percentage of net worth tied to a single factor - real estate in a single location. If your net worth is $4M that's a different story than only having this property.

Papa bear

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Is this even a serious post?

TELL ME WHERE ELSE YOU CAN MAKE 400k TAX FREE?!

Keeping this as a rental is a massive MASSIVE loser.

You net say 500 bucks a month? on ~ 500,000 in equity, so your return is 6,000/500,000 which is ~ 1% you could do better lending money to the federal government.

I am ignoring all the inconvenience of being a landlord. Holy cats man sell this place and count your money. Get the renter out throw a coat of paint on it and cash a fat check. Nice work! you won the appreciation game!

How do I quote this in the “best thing I heard on MMM this month” thread??

+1000000000. Sell this house.  Get those renters out now. List this place immediately. Take the win! Congrats!


Sent from my iPhone using Tapatalk

brooklynmoney

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Iím in a similar situation but I still live in my place. The thing is, if I ever sell my place I pretty much could never live affordably where I am again because the massive price appreciation. If you are in a similar situation thatís another factor to consider that people who are not in a hot market wouldnít think about.

Jon Bon

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Iím in a similar situation but I still live in my place. The thing is, if I ever sell my place I pretty much could never live affordably where I am again because the massive price appreciation. If you are in a similar situation thatís another factor to consider that people who are not in a hot market wouldnít think about.

I think this is the boat many of us are in. I too am sitting an north of 50% gain in the 4 years I have lived in my house. But to move would be hella expensive. I could of course move to a different area, but the attractiveness of my location (and I assume yours) lead to this gain in the first place. So moving is not a great option.

My only thought has been if (this is a huge if) I see a good investment opportunity is to take out a home equity loan to at least take advantage of some of the appreciation.  Unfortunately I dont see any investment in my area that excites me. The more I watch asset prices the more I am convinced of the existence of the "Everything Bubble".

Now the OP is no longer living in that home and presumably is happy in their new location. So the OP should absolutely sell and enjoy their tax free capital gain.






brooklynmoney

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Yes Jon Bon good point re: OP and what you described is exactly how I feel.

waltworks

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Sounds a lot like my house, except that I'd never rent it out in a million years.

People do, though, around here. You can literally rent a million dollar house for $3500 a month - and we're at a ski resort, where the UV and freeze/thaw and road salt just *destroy* houses over time. Renters are basically robbing landlords blind.

If I didn't have a house-hack running AND need to use the garage for welding, I'd have sold our place and started renting years ago.

So to answer your question, sell the house.

-W

MoneyGoal

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Thank you for all the insights.

Another question is wouldn't real estate "always" appreciate in the long run?
If that is the case, wouldn't it make sense to rent it out until money from selling the property is needed?

Thank you.

Another Reader

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Thank you for all the insights.

Another question is wouldn't real estate "always" appreciate in the long run?
If that is the case, wouldn't it make sense to rent it out until money from selling the property is needed?

Thank you.


In most areas, the values of residential properties increase with inflation.  Properly leveraged, with some help from tax advantages, you could improve on that.  If you really know what you are doing, and you are patient, you could get even better returns.  However, the stock market has shown the ability, with dividends invested, to grow in value in excess of 8 percent per year.  And anyone can do it, no special knowledge or leverage involved.

For most people, i.e. people that are not knowledgeable real estate investors, the stock market is the superior investment. 

Jon Bon

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Thank you for all the insights.

Another question is wouldn't real estate "always" appreciate in the long run?
If that is the case, wouldn't it make sense to rent it out until money from selling the property is needed?

Thank you.


$100,000 IN TAXES

If that is not a good enough reason to sell I don't think you can be convinced.

Yes RE generally will always go up (like inflation does). But only a few percentage points of gain per year are not worth it.

1. Your return is going to be terrible as discussed above.
2. Your house is going to deprecate (or appreciate less) due to it being a rental it is just nature of the business.
3. And 100k or more due to book deprecation in taxes. I dont know how else to put this.






MoneyGoal

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Thank you for your inputs!