Author Topic: Case Study: Renewal lease with Perfect Tenant or Sell  (Read 1324 times)

TexxinMike

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Case Study: Renewal lease with Perfect Tenant or Sell
« on: June 17, 2017, 06:53:52 PM »
Hi Everyone, need some experienced advice.  We moved to a new house last year and kept our former residence as a rental.  The lease is up soon and DW and I disagree to whether to renewal the lease with the current tenant or put the house for sale.  The current tenant is a handyman by trade and maintained the house better than we did.  Complete painted rooms (with our permission) and fixed many small issues for free and kept the yard in great condition. I want to sell the house as soon as the lease term is up.  Renting is breaking even although equity is increasing.   My DW suggest we keep the house for couple more years to gain more equity  since the house is paying for itself and value is expected to continue to increase.

We are new at this, what do you guys think?

 Here are numbers:

Market Value: $250K    
Original Purchase price: $155K
Original Mortgage Amount: $120K
Interest Rate: 4%
Mortgage Term: 15 Years
Term remaining: 9 Years
Amount remaining on mortgage: $79K
Gross Rents: $1,650 Monthly
Principal and Interest:  $848.26 monthly
Taxes and Insurance (the T&I of your PITI): $466.66 ($4.8K Tax Yearly + $800 Insurance)
HOA costs: $360 yearly
Deferred maintenance notes:  House is low maintenance with $300 last year for AC repair and few parts the tenant needed
Anything else special or unique in regards to the numbers of the property:
  • House is in North Texas where property is high.
  • The local housing market is hot with supply continue to be low
  • House value has increased significantly and may still have room to grow next year
  • This was my primary resident till last year and can still sell the house with any tax impact
  • Mortgage is through family so the term can be ‘refinanced’ to extended to increase monthly cash flow but interest will remain the same.


waltworks

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Re: Case Study: Renewal lease with Perfect Tenant or Sell
« Reply #1 on: June 17, 2017, 10:18:20 PM »
I would sell purely to get out of being in debt to my family. I've had that one blow up in my face before and it sucks.

Otherwise, sound like you could go either way with it.

-W

former player

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Re: Case Study: Renewal lease with Perfect Tenant or Sell
« Reply #2 on: June 18, 2017, 02:01:55 AM »
Your equity is $170k: what would you do with that amount of money if you didn't keep the rental?  How diversified are your other investments?

I think you are doing better than just breaking even financially on this one: you are getting more than 1% a month in rent as against the original capital value, and capital appreciation as well.  Remember that with a 15 year mortgage a large part of your mortgage payments is savings (ie capital repayment of mortgage) rather than expenses.  The amount left on the mortgage is small enough in comparison to the equity that you would have to be very risk averse to worry about it being a future problem.  The 4% interest rate is at the level where it is a wash to either keep it or invest elsewherhe e.

If you are thinking of ever having another rental, you will realise that a good tenant (and yours sounds excellent) is worth everything.  Also, have you promised him a long term let?  He has done a lot in painting the place, and turfing him out after a year if he thought he was settled would be a bit mean, if you have no particular reason for doing so.  Unless he would be interested in buying?
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Linda_Norway

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Re: Case Study: Renewal lease with Perfect Tenant or Sell
« Reply #3 on: June 18, 2017, 02:23:24 AM »
Your equity is $170k: what would you do with that amount of money if you didn't keep the rental?  How diversified are your other investments?

I think you are doing better than just breaking even financially on this one: you are getting more than 1% a month in rent as against the original capital value, and capital appreciation as well.  Remember that with a 15 year mortgage a large part of your mortgage payments is savings (ie capital repayment of mortgage) rather than expenses.  The amount left on the mortgage is small enough in comparison to the equity that you would have to be very risk averse to worry about it being a future problem.  The 4% interest rate is at the level where it is a wash to either keep it or invest elsewherhe e.

If you are thinking of ever having another rental, you will realise that a good tenant (and yours sounds excellent) is worth everything.  Also, have you promised him a long term let?  He has done a lot in painting the place, and turfing him out after a year if he thought he was settled would be a bit mean, if you have no particular reason for doing so.  Unless he would be interested in buying?

It would be weird if this tennant was interested in buying something that he himself made worth more. Handy people usually buy fix-it-uppers, fix it and sell with profit.

sokoloff

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Re: Case Study: Renewal lease with Perfect Tenant or Sell
« Reply #4 on: June 18, 2017, 05:26:42 AM »
To exclude capital gains, you have more than another year (if I understand the situation correctly). You have to have lived in the house for 2 of the last 5 years and owned the house for 2 of the last 5 years (don't need to be the same 2 years).

The tenant sounds like a good one, and I'd be inclined to keep the current situation, raising the rent a modest amount (you need to do this every year, small for good tenants, large for poor tenants [or non-renew if feasible in your area]).

For me, with a good tenant, I'd keep the investment as long as you think the mid-term (10 years) outlook for the area is good. If it's all oil/gas, you're already in a bit of a pinch. If there are other long-term draws to the area, I'd re-up at least another year. With regards to the tenant's work on the place and being a good tenant, I'd try to give him a lot of heads-up if you're considering selling or non-renewing. No, of course you don't have to legally, but it's the nice thing to do and in this case, being nice (with respect to notice, not with respect to the decision you make) doesn't cost you much if anything.

TexxinMike

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Re: Case Study: Renewal lease with Perfect Tenant or Sell
« Reply #5 on: June 18, 2017, 04:29:34 PM »
Your equity is $170k: what would you do with that amount of money if you didn't keep the rental?  How diversified are your other investments?

I think you are doing better than just breaking even financially on this one: you are getting more than 1% a month in rent as against the original capital value, and capital appreciation as well.  Remember that with a 15 year mortgage a large part of your mortgage payments is savings (ie capital repayment of mortgage) rather than expenses.  The amount left on the mortgage is small enough in comparison to the equity that you would have to be very risk averse to worry about it being a future problem.  The 4% interest rate is at the level where it is a wash to either keep it or invest elsewherhe e.

If you are thinking of ever having another rental, you will realise that a good tenant (and yours sounds excellent) is worth everything.  Also, have you promised him a long term let?  He has done a lot in painting the place, and turfing him out after a year if he thought he was settled would be a bit mean, if you have no particular reason for doing so.  Unless he would be interested in buying?

We dont need the equity right away and have medium size portfolio following booglehead three-funds model.  Btw the ppl on boogleheads are anti-landlording and suggested sellling while the market is hot.  I agree with your points on the finances.   Never promised a long let, the tenant knows we're debating selling or renewing.  I do think he has interesting in buying but he is currently repairing his credit and will be unlikely to be approve for loan.

To exclude capital gains, you have more than another year (if I understand the situation correctly). You have to have lived in the house for 2 of the last 5 years and owned the house for 2 of the last 5 years (don't need to be the same 2 years).

The tenant sounds like a good one, and I'd be inclined to keep the current situation, raising the rent a modest amount (you need to do this every year, small for good tenants, large for poor tenants [or non-renew if feasible in your area]).

For me, with a good tenant, I'd keep the investment as long as you think the mid-term (10 years) outlook for the area is good. If it's all oil/gas, you're already in a bit of a pinch. If there are other long-term draws to the area, I'd re-up at least another year. With regards to the tenant's work on the place and being a good tenant, I'd try to give him a lot of heads-up if you're considering selling or non-renewing. No, of course you don't have to legally, but it's the nice thing to do and in this case, being nice (with respect to notice, not with respect to the decision you make) doesn't cost you much if anything.

Thanks.  I think we'll go ahead an renewal the lease and then reevaluate things next year or if circumstances change.  The rent is currently below market will take your advice and just raise it slightly.  btw what is considerate a good long "heads-up" ?  2 months ?

curler

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Re: Case Study: Renewal lease with Perfect Tenant or Sell
« Reply #6 on: June 19, 2017, 09:40:23 PM »

Thanks.  I think we'll go ahead an renewal the lease and then reevaluate things next year or if circumstances change.  The rent is currently below market will take your advice and just raise it slightly.  btw what is considerate a good long "heads-up" ?  2 months ?

On the leases I have had (as a tenant), 2 months has been the minimum (i.e. they present me with the new lease and rent amount 2 months before the lease ends, I give them a signature or move out notice 30-45 days before lease ends).  So, I think 3-4 months at a minimum.  Or allowing  him to stay month-to month for a month or two after the lease ends would work too.

adamcollin

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Re: Case Study: Renewal lease with Perfect Tenant or Sell
« Reply #7 on: June 20, 2017, 03:43:17 AM »
I think you should renew the lease.
Lone Star Realty & Property Management, Inc

johnhenry

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Re: Case Study: Renewal lease with Perfect Tenant or Sell
« Reply #8 on: September 28, 2017, 12:29:13 PM »
Apologies... I don't get on the forum often and am guilty of reviving dormant threads.

If I were making this decision for myself, I'd have to consider some "big picture" variables you haven't provided.

Like:
How old... or at least how many years of traditional earning till retirement?
Is there any available tax deferred investment space for either you or spouse in employer 401k or tIRAs (or rIRA), or HSAs?

More specifically, would selling the home and unlocking it's equity allow you to max out those accounts?  If that $170K in equity was in a taxable account, you could draw on it to fund your living expenses to ensure you max those account during your working years.  You can still invest in RE when you don't have a 9-5 anymore, but every year you don't MAX tax deferred accounts is lost opportunity.

Don't get me wrong, RE income is preferable in many ways to earned income... and RE depreciation acts to defer income as well.  But on a $135K depreciable RE investment, the depreciated (deferred) amount is $4900 per year.  If selling the home would allow you to defer significantly more of your wages, I would sell.

The option to sell and pocket the capital gains with no tax would be a huge incentive for me to sell.  Unless you do a like-kind exchange or die with that house you will end up paying on that gain. That's not something you can avoid by doing after FIRE in a low income year. 

hoping2retire35

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Re: Case Study: Renewal lease with Perfect Tenant or Sell
« Reply #9 on: September 28, 2017, 12:35:58 PM »
Would you buy?

Absolutely not! It is horrible, even before it went up in value it was a bad deal. Charge more rent or sell. Even if it is pristine with a good tenant you should be getting the 1% rule money for it, ie; $2500 a month...in profit.

Sell that sucker yesterday.

tralfamadorian

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Re: Case Study: Renewal lease with Perfect Tenant or Sell
« Reply #10 on: September 28, 2017, 02:34:11 PM »
I would sell purely to get out of being in debt to my family.
+1

Personally, I would math out the options.

1) Stay the course.
Rent: 1650
Expenses:
P&I: 848.26
T&I: 466.66
HOA: 30
Management: 165
Vacancy: 165
Maintenance: 165
CapEx: 165

Net: -354.92/mo


2) Refi to a 30yr loan.
Rent: 1650
Expenses:
P&I: 360.28
T&I: 466.66
HOA: 30
Management: 165
Vacancy: 165
Maintenance: 165
CapEx: 165

Net: 133.06/mo


3) Sell and invest.
Selling price: $250k
Mortgage: 79k
Selling costs: 20k
Capital gains: 0k
Depreciation: ?k
Investable cash: 151k
Invest in VTSAX or similar at avg of 7%/yr

Net: 880.83/mo


Now, you can start goosing the numbers.  ie: I manage myself so cross off management (though you should set aside funds to pay yourself)
or I know this property well and am extremely confident that capex will not show up during the period of time I plan on holding it.


Cwadda

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Re: Case Study: Renewal lease with Perfect Tenant or Sell
« Reply #11 on: September 28, 2017, 02:36:55 PM »
Would you buy?

Absolutely not! It is horrible, even before it went up in value it was a bad deal. Charge more rent or sell. Even if it is pristine with a good tenant you should be getting the 1% rule money for it, ie; $2500 a month...in profit.

Sell that sucker yesterday.

What?  $2500/month in profit?  That's not what the 1% rule says. It says you should be getting 1% of the gross market value in rent, not profit.

marty998

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Re: Case Study: Renewal lease with Perfect Tenant or Sell
« Reply #12 on: September 28, 2017, 03:19:53 PM »
Would you buy?

Absolutely not! It is horrible, even before it went up in value it was a bad deal. Charge more rent or sell. Even if it is pristine with a good tenant you should be getting the 1% rule money for it, ie; $2500 a month...in profit.

Sell that sucker yesterday.

1% rule is ridiculous for anyone buying in a real estate market that isn't out in boondock land.

OP has done well out of capital growth, which is a perfectly valid strategy. Can't for the life of me understand why people here want to make $5k more (fully taxed) income a year and give up $20k capital (concessionally taxed) growth per year.

Mind boggled.

hoping2retire35

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Re: Case Study: Renewal lease with Perfect Tenant or Sell
« Reply #13 on: September 28, 2017, 03:24:59 PM »
Would you buy?

Absolutely not! It is horrible, even before it went up in value it was a bad deal. Charge more rent or sell. Even if it is pristine with a good tenant you should be getting the 1% rule money for it, ie; $2500 a month...in profit.

Sell that sucker yesterday.

1% rule is ridiculous for anyone buying in a real estate market that isn't out in boondock land.

OP has done well out of capital growth, which is a perfectly valid strategy. Can't for the life of me understand why people here want to make $5k more (fully taxed) income a year and give up $20k capital (concessionally taxed) growth per year.

Mind boggled.

Well actually it is the 2% rule for high growth portfolios but you can still do ok around 1% as long as it is well kept and you have good tenants. But less than that and you are practically losing money. See all the conversations about rent versus buy.

marty998

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Re: Case Study: Renewal lease with Perfect Tenant or Sell
« Reply #14 on: September 28, 2017, 03:40:15 PM »
Would you buy?

Absolutely not! It is horrible, even before it went up in value it was a bad deal. Charge more rent or sell. Even if it is pristine with a good tenant you should be getting the 1% rule money for it, ie; $2500 a month...in profit.

Sell that sucker yesterday.

1% rule is ridiculous for anyone buying in a real estate market that isn't out in boondock land.

OP has done well out of capital growth, which is a perfectly valid strategy. Can't for the life of me understand why people here want to make $5k more (fully taxed) income a year and give up $20k capital (concessionally taxed) growth per year.

Mind boggled.

Well actually it is the 2% rule for high growth portfolios but you can still do ok around 1% as long as it is well kept and you have good tenants. But less than that and you are practically losing money. See all the conversations about rent versus buy.

This is not a rent vs buy question.

Losing money? My god. Here's my own experience...

Bought a property for $450k (no equity, all borrowed funds) in July 2014 that was renting for $1600 a month. Slightly negative cash flow ($2k a year after tax and depreciation), but today I could sell it for $640k.

I'm glad I decided not to follow the 1% or 2% rules... would have missed out on $190k growth while I collected a small amount of taxable income...

I'm sorry, but the those ol ye faithful rules don't apply everywhere in all circumstances.

waltworks

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Re: Case Study: Renewal lease with Perfect Tenant or Sell
« Reply #15 on: September 28, 2017, 09:01:32 PM »
Marty, you got super lucky. That's great. But it doesn't mean you're an awesome RE investor or that you made a good choice at the time. You could make money buying *anything* in the last decade or so (I should know, I didn't know jack and still made out like a bandit).

The runup won't last forever, folks. The more Marty's you start hearing from, the farther away you should run. I'm getting out for a reason...

-W

jooniFLORisploo

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Re: Case Study: Renewal lease with Perfect Tenant or Sell
« Reply #16 on: September 28, 2017, 09:41:12 PM »
I would hate to kick out a perfect tenant (I was just on the receiving end of such action and it sucks every which way), but I also wouldn't situate my entire keep-or-sell decision on the perfect tenant. The perfect tenant can go, and you can get a less-than-perfect tenant subsequently. So if the only consideration for keeping was the having of a perfect tenant, or the whole decision was hinging on that, I would sell.

Cwadda

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Re: Case Study: Renewal lease with Perfect Tenant or Sell
« Reply #17 on: September 29, 2017, 07:15:43 AM »
Quote
1% rule is ridiculous for anyone buying in a real estate market that isn't out in boondock land.

OP has done well out of capital growth, which is a perfectly valid strategy. Can't for the life of me understand why people here want to make $5k more (fully taxed) income a year and give up $20k capital (concessionally taxed) growth per year.

Mind boggled.

Quote
This is not a rent vs buy question.

Losing money? My god. Here's my own experience...

Bought a property for $450k (no equity, all borrowed funds) in July 2014 that was renting for $1600 a month. Slightly negative cash flow ($2k a year after tax and depreciation), but today I could sell it for $640k.

I'm glad I decided not to follow the 1% or 2% rules... would have missed out on $190k growth while I collected a small amount of taxable income...

I'm sorry, but the those ol ye faithful rules don't apply everywhere in all circumstances.

It's easy to say that in hindsight, lol.  IMO, if you purchase a house with negative cash flow, you are buying a liability. It's very little different than the crystal ball effect in market timing.  I bought my property (at a record high price, no less) because it yields a 54% annual return after all repairs, CapEx, taxes, insurance, mortgage, vacancy, everything. Doesn't matter what the property value itself does.  Wouldn't you rather buy an asset that cash flows from day 1 and yields you a return no matter the circumstances?

Kayad

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Re: Case Study: Renewal lease with Perfect Tenant or Sell
« Reply #18 on: September 29, 2017, 05:10:53 PM »
I would sell purely to get out of being in debt to my family.
+1

Personally, I would math out the options.

1) Stay the course.
Rent: 1650
Expenses:
P&I: 848.26
T&I: 466.66
HOA: 30
Management: 165
Vacancy: 165
Maintenance: 165
CapEx: 165

Net: -354.92/mo


2) Refi to a 30yr loan.
Rent: 1650
Expenses:
P&I: 360.28
T&I: 466.66
HOA: 30
Management: 165
Vacancy: 165
Maintenance: 165
CapEx: 165

Net: 133.06/mo


3) Sell and invest.
Selling price: $250k
Mortgage: 79k
Selling costs: 20k
Capital gains: 0k
Depreciation: ?k
Investable cash: 151k
Invest in VTSAX or similar at avg of 7%/yr

Net: 880.83/mo


Now, you can start goosing the numbers.  ie: I manage myself so cross off management (though you should set aside funds to pay yourself)
or I know this property well and am extremely confident that capex will not show up during the period of time I plan on holding it.

A good approach, but missing from these maths (and the original post) is the annual mortgage pay down amount.  It ain't cash flow, but it does amount to an increase in your net worth.

Also missing appreciation, if you feel that is likely enough to factor in (and I do, at least in my market).

I'm in a comparable situation, and I'm holding onto my former residence for at least a couple years.  As a rental it is probably cash flow neutral, or maybe a little negative, but my mortgage pay down is 8k a year, my assessed value has gone up ~10% for the past two years (inland nw market that is drafting a few years behind the coastal markets), and there is no difficulty finding quality tenants.   So we'll rent for two years, and then reassess before we lose the cap gains advantage from having lived there.

tralfamadorian

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Re: Case Study: Renewal lease with Perfect Tenant or Sell
« Reply #19 on: September 29, 2017, 06:02:32 PM »
A good approach, but missing from these maths (and the original post) is the annual mortgage pay down amount.  It ain't cash flow, but it does amount to an increase in your net worth.

Also missing appreciation, if you feel that is likely enough to factor in (and I do, at least in my market).

I internationally left out both.  For investment property, equity is a tied up until released via cash out refi or sale.  While I don't think it should be ignored, I disagree that it should be included in a monthly cash flow numbers for investment real estate.  Personally, I also leave out projected appreciation as it's (possibly well founded and researched) speculation. 

My reasoning for both- increased equity via appreciation and/or debt paydown cannot be captured on a illiquid asset such as real estate as easily as a liquid asset such as stocks.  Does that make the comparison not apples to apples?  Yes.  But while we're at it, we also leaving out tax benefits so there's that too. 

YMMV.