Author Topic: CASE STUDY: Sell or Rent??  (Read 612 times)

Sar29

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CASE STUDY: Sell or Rent??
« on: September 19, 2018, 12:12:11 PM »
Hello!  My husband and I need some help deciding what to do with our house when we move next year. 

Market Value: ~$420,000 (based on recent sales of comparable properties in the neighborhood
Original Purchase Price: $397,000
Original Mortgage Amount: $397,000
Interest Rate: 3.49%
Mortgage Term: 7/1 ARM
Term Remaining: 28 years; <5 years until adjustable rate begins
Amount Remaining on Mortgage: $378,700
Monthly Mortgage Payment: $2,512.83

Principal and Interest (the P&I of your PITI should match with above info):
Monthly Principal: $676.93
Monthly Interest: $1,103.56

Taxes and Insurance (the T&I of your PITI):
   Monthly taxes and insurance: $732.34

HOA Fee: $200/ month
Flood Insurance: $425/ year
Total Insurance (standard + flood) if we switched property to a rental: $3,307.00


Specific Question (s): 
Should we rent the house on current 7/1 ARM, refinance and then rent the house, or sell it before moving in July 2019?

Estimated rent for this property is $2500/ mo based on neighboring rentals, so we would likely lose about $200/ month.   This expensive house with no down payment is a relic from our ignorant pre-moustachian thinking 2 years ago.  From what I have seen on this blog, properties with negative cash flows each month are discouraged. 

On the other hand, we own property 3 blocks from downtown in Coconut Grove, which appears to be one of the most desirable locations in Miami and one that is undergoing significant development.  There is a lot of development in the neighborhood, and properties are being built including office buildings and a mall on the bay as well as rebuilding the town center.  We know (based on our neighbors) that there will be demand on the rental market for the house and we have an accurate assessment of the rent based on identical units in our small group of 6 townhouses.

Do we sell before we leave to avoid a rental with a loss per month, albeit one we can afford?  Or do we hold on to the house given the location and all of the development?  None of this factors into our FIRE calculations but we do have to make a decision before we leave town in 9 months and unlike yourselves we lack the knowledge to make the best decision.  Thank you for your time!

neo von retorch

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Re: CASE STUDY: Sell or Rent??
« Reply #1 on: September 19, 2018, 12:19:51 PM »
I'm pretty sure selling is the right move here. The alternative is taking a cash loss for a long period based purely on speculation of... well, I'm not sure exactly.

Do you expect to be able to sell later for a lot more? Rent to go way, way up? The 1% guideline means you need rent to rise to $4200/month to even consider keeping the property. (Some people go by 1.5% or even 2% as their guideline.)
« Last Edit: September 19, 2018, 12:37:03 PM by neo von retorch »

cchrissyy

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Re: CASE STUDY: Sell or Rent??
« Reply #2 on: September 19, 2018, 12:36:06 PM »
that sounds pretty bad for a rental property. honestly, you would never have bought it for that purpose.   I would sell it next year when you move out and count the whole thing as a lesson learned, just be glad you avoided losing money on the transaction costs.

Sar29

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Re: CASE STUDY: Sell or Rent??
« Reply #3 on: September 19, 2018, 12:59:33 PM »
Thank you both for the input!  Yes, the only reason we'd keep it is because in the next 5-10 years we're expecting the value to increase by a lot based on all the development right here in our neighborhood (from all sides).

tralfamadorian

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Re: CASE STUDY: Sell or Rent??
« Reply #4 on: September 19, 2018, 02:17:22 PM »
Estimated rent for this property is $2500/ mo based on neighboring rentals, so we would likely lose about $200/ month.   This expensive house with no down payment is a relic from our ignorant pre-moustachian thinking 2 years ago.  From what I have seen on this blog, properties with negative cash flows each month are discouraged. 

On the other hand, we own property 3 blocks from downtown in Coconut Grove, which appears to be one of the most desirable locations in Miami and one that is undergoing significant development.  There is a lot of development in the neighborhood, and properties are being built including office buildings and a mall on the bay as well as rebuilding the town center.  We know (based on our neighbors) that there will be demand on the rental market for the house and we have an accurate assessment of the rent based on identical units in our small group of 6 townhouses.

Cashflow neutral or negative properties are discouraged because you're paying for your money (equity) to be tied up and not growing the way it would in index funds.

And I presume your $200 loss per month would not be including management fees, vacancy, maintenance or capex? Your loss might be much more significant than you anticipate.

On speculation, are you confident that sea level rise will not have a depressive effect on Miami price appreciation overall and your property by association? Personally I would be concerned.

brian.ellwood

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Re: CASE STUDY: Sell or Rent??
« Reply #5 on: September 19, 2018, 05:56:31 PM »
You also need to factor in about a 10% loss in rents due to vacancies and repairs. Also, you'd have to manage it yourself (which is a crappy job), or pay another 10% for a property manager to do it (always recommended). So you'd lose more than $200/month.

The only reason to float that loss are if you are certain that the area is going to rapidly appreciate in the next few years, and you can benefit from the equity increase.

Also, you could consider doing short term rental on it (airbnb/VRBO). I have one of these that does twice as good as any other rental I have. It brings in over 3K a month and it's only a 2/1, 750SF!

Sar29

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Re: CASE STUDY: Sell or Rent??
« Reply #6 on: September 21, 2018, 11:58:30 AM »
Thank you everyone for your advice, it seems like its a 100% vote to SELL!

tralfamadorian, you're right, we didn't factor in property management fees and other related costs.  Coconut Grove is actually along the ridge so its at a higher elevation than the rest of the county, which is one reason there's so much development going on here right now, and it's a place people are moving to.  However, yes, I am certainly still concerned about sea level rise.

brian.ellwood, your short term rental is really impressive, its something to consider that might be able to make more than traditional renting.  Do you pay someone to clean the place/ prepare for the next guests?  We would certainly need to do that as we'd be out of state. 

Alanwatts

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Re: CASE STUDY: Sell or Rent??
« Reply #7 on: September 27, 2018, 03:37:29 AM »
It brings in over 3K a month and it's only a 2/1, 750SF!