Author Topic: Case Study: Sell Or Rent?  (Read 551 times)

pladd

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Case Study: Sell Or Rent?
« on: February 05, 2018, 12:16:45 PM »
Numbers first:

Market Value: $235,000 to $245,000 (recent list estimate from our realtor)
Original Purchase price:$177,000
Original Mortgage Amount: $168,150
Interest Rate: 3.5%
Mortgage Term:15 years
Term remaining:12 years, 7 months
Mortgage Remaining:$147,123.21
Gross Rents: ~$1,500/month
Principal and Interest: $1,202.07
Taxes and Insurance:$567.22 ($69 of this is PMI, and will go away around October 2018)
HOA costs:N/A
Deferred maintenance notes: AC/heater are new. Patio needs work in the next 5-10 years. Roof will last another 10 years
Other notes:This home is in Austin, Texas, in case that makes a difference.

Now, the story:

DW and I (currently 25 and 28) bought this house from a friend. She was in school, I was working full-time with a $50k+ salaried position. The house has four bedrooms, and we spent a while as live-in landlords, making $900-$1100 per month in rent and netting us a very cheap "rental" payment of $500-$700 per month, plus utilities.

Then our situation changed dramatically. Our monthly payment jumped by over $100 due to property taxes; we moved to a new state, and our net monthly property expenses (rental home in new state + mortgage - rental income) have increased by around $600 per month.

I tried to re-finance into a 30-year loan to get a positive cashflow from the property (the monthly payment would have gone down to ~$1,300), but was denied; the last two years of income show my wife and I at a 52% debt-to-income ratio, which was 2% too much for the bank. Those years included a lot of repair expenditures (A/C and heater, primarily), which cancelled out the rental income.

Is it worth hanging on to this house? We can afford the payments, but it's putting a significant dent in our ability to make progress on savings. If I hold out, I'm going to keep trying to re-finance so that this property isn't a constant drain on our budget.

I know we could probably make a lot of immediate cash if we sold the house now, but the prospect of a steady rental income in the future is really hard to let go of. Should we sell and invest the profits? Should we refinance and take a smaller passive income? Or should we endure the big monthly payments for another 10-12 years to get the big passive income benefits in our 40s?

Thanks!
« Last Edit: February 05, 2018, 12:26:09 PM by pladd »

Nate79

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Re: Case Study: Sell Or Rent?
« Reply #1 on: February 05, 2018, 10:22:44 PM »
Numbers first:

Market Value: $235,000 to $245,000 (recent list estimate from our realtor)
Original Purchase price:$177,000
Original Mortgage Amount: $168,150
Interest Rate: 3.5%
Mortgage Term:15 years
Term remaining:12 years, 7 months
Mortgage Remaining:$147,123.21
Gross Rents: ~$1,500/month
Principal and Interest: $1,202.07
Taxes and Insurance:$567.22 ($69 of this is PMI, and will go away around October 2018)
HOA costs:N/A
Deferred maintenance notes: AC/heater are new. Patio needs work in the next 5-10 years. Roof will last another 10 years
Other notes:This home is in Austin, Texas, in case that makes a difference.

Now, the story:

DW and I (currently 25 and 28) bought this house from a friend. She was in school, I was working full-time with a $50k+ salaried position. The house has four bedrooms, and we spent a while as live-in landlords, making $900-$1100 per month in rent and netting us a very cheap "rental" payment of $500-$700 per month, plus utilities.

Then our situation changed dramatically. Our monthly payment jumped by over $100 due to property taxes; we moved to a new state, and our net monthly property expenses (rental home in new state + mortgage - rental income) have increased by around $600 per month.

I tried to re-finance into a 30-year loan to get a positive cashflow from the property (the monthly payment would have gone down to ~$1,300), but was denied; the last two years of income show my wife and I at a 52% debt-to-income ratio, which was 2% too much for the bank. Those years included a lot of repair expenditures (A/C and heater, primarily), which cancelled out the rental income.

Is it worth hanging on to this house? We can afford the payments, but it's putting a significant dent in our ability to make progress on savings. If I hold out, I'm going to keep trying to re-finance so that this property isn't a constant drain on our budget.

I know we could probably make a lot of immediate cash if we sold the house now, but the prospect of a steady rental income in the future is really hard to let go of. Should we sell and invest the profits? Should we refinance and take a smaller passive income? Or should we endure the big monthly payments for another 10-12 years to get the big passive income benefits in our 40s?

Thanks!
If the amount you would get from the sale of this home was sitting on your kitchen table, would you buy it today?

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Evildunk99

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Re: Case Study: Sell Or Rent?
« Reply #2 on: February 07, 2018, 02:22:11 PM »
The margin is simply too thin to make it worthwhile as a rental, especially when you add in the cost of maintenance.  This is simply based on the amount you put down and the 15 year mortgage you opted for.  Had you put more money down, or opted for a 30Y fixed, your monthly payment would have been lower from the start, and renting it out would be a feasible option. 

Re-financing for the sake of renting it out isn't worth the fees you'll pay to do it.  I'd sell it and potentially use that money on a new real estate endeavor in your new state (or invest it elsewhere). 

Reading you post, it was eerie how similar the numbers were to my place.  I bought in 2015 for $176k, and approximate value is $230k today.  I put 15% down and a 30Y fixed to keep the monthly payment low with the intent to rent it out ($890 PIMI vs. $1,600 rent).

Ryan

tralfamadorian

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Re: Case Study: Sell Or Rent?
« Reply #3 on: February 08, 2018, 08:42:17 AM »
No brainer- sell.

pladd

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Re: Case Study: Sell Or Rent?
« Reply #4 on: February 08, 2018, 10:26:23 AM »
Thanks for the reality check, y'all. We're going to sell the house and enjoy the net increase in income and peace of mind.

LFKmike

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Re: Case Study: Sell Or Rent?
« Reply #5 on: February 08, 2018, 12:14:58 PM »
If you are breaking even (or even coming out ahead a few thousand w/ mortgage paydown) on the houses I would suggest holding on to it for a year or two just incase Amazon locates HQ2 in Austin.  Espcially if the property is located near the potential location of said HQ2.  Properties will appreciate out of control and you are in the position to potentially profit from this.  Just look at Seattle housing prices, wow.