Author Topic: Landlords - rent or sell? - HCOL area, sell rental?  (Read 2672 times)

CalSaver

  • 5 O'Clock Shadow
  • *
  • Posts: 12
Landlords - rent or sell? - HCOL area, sell rental?
« on: July 07, 2017, 11:01:26 AM »
From just a investment property standpoint is this a sell or buy property? 

Market Value: $475,000
Original Purchase price: $269,000 - Cash - pooled some family money to buy in a competitive market.
Original Mortgage Amount: cash out re-fi ~$160,000 After 1 year of ownership (6 months?) did the cash out re-fi to pay back family. 
Interest Rate: 3.25%
Mortgage Term: 30
Term remaining: 23
Amount remaining on mortgage: $145,400
Gross Rents: $1800
Principal and Interest (the P&I of your PITI - should match with the above info): $701/m
Taxes and Insurance (the T&I of your PITI): Taxes ~ $4100/yr Insurance: $570/yr
HOA costs: $265

Deferred maintenance notes: Misc improvements recently, new water heater, relatively new paint, appliances in good shape...what else? 

Anything else special or unique in regards to the numbers of the property (not the property itself; things such as city assessments, back taxes, special costs due to unique features of the property, etc. etc.): Not that I'm aware of.  HOA is reasonably well managed, no assessments pending, HOA fees recently increased to provide larger reserve fund to avoid assessments. 

TL:DR: I know there are some rules of thumb that real estate investors use, but I wasn't quite sure how to apply them with our unusual financing situation and the pretty big change in home value.  Any input would be appreciated.

More detail:

It's a HCOL area, so we could probably get higher rent.  However we've had good landlord experiences by renting 2 pretty nice places (this one and one other) at slightly below market value, leading to so far zero vacancy, zero problems and minimal effort on our part on two units for four years. 

So, do we sell or keep renting?  I've run the numbers through a calculator I found on the forum, but I'm either doing it wrong or I don't understand the result.  I'm not sure the calculator is advanced enough to put in the cash purchase + refi, so I think that might be part of the problem. 

Further muddying the waters is what we would do with the profit, very tempting to pay off our house and pretty much call it a day and quit working, or mostly anyway.  We'd be able to go to part time fun work and get by totally fine.  But that is a topic for another post I think.
 

Cwadda

  • Handlebar Stache
  • *****
  • Posts: 1813
  • Age: 23
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #1 on: July 07, 2017, 11:49:29 AM »
Try this spreadsheet.

I'll have a hard time believing a property value of $475k vs. a rent of $1800 is making much money, if any. If it is, it probably isn't getting a cash-on-cash return that would exceed stock market returns. I'd sell, and if you're in a hot market, consider FSBO to save $28k.

CalSaver

  • 5 O'Clock Shadow
  • *
  • Posts: 12
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #2 on: July 07, 2017, 12:29:44 PM »
Try this spreadsheet.

I'll have a hard time believing a property value of $475k vs. a rent of $1800 is making much money, if any. If it is, it probably isn't getting a cash-on-cash return that would exceed stock market returns. I'd sell, and if you're in a hot market, consider FSBO to save $28k.

Thanks for the calculator.  I plugged everything in and if I'm doing it right it says cash-on-cash is -2.2%, but my own simple spreadsheet shows monthly positive cash flow of ~$290, but that doesn't include maintenance, though as it's a condo the HOA takes care of a portion of the maintenance costs. 

I guess I'm trying to reconcile those two things, i.e. negative coc, positive cash flow.  Admittedly I'm a rookie at this. 

Re: FSBO - yes, I think we could pull that off, or at least I have a real estate agent friend who offered to not charge his fee in exchange for some trade, so that is a good route too.  Selling seems good, but after taxes and fees that takes a huge chunk out of things. 

Cwadda

  • Handlebar Stache
  • *****
  • Posts: 1813
  • Age: 23
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #3 on: July 07, 2017, 12:37:46 PM »
Try this spreadsheet.

I'll have a hard time believing a property value of $475k vs. a rent of $1800 is making much money, if any. If it is, it probably isn't getting a cash-on-cash return that would exceed stock market returns. I'd sell, and if you're in a hot market, consider FSBO to save $28k.

Thanks for the calculator.  I plugged everything in and if I'm doing it right it says cash-on-cash is -2.2%, but my own simple spreadsheet shows monthly positive cash flow of ~$290, but that doesn't include maintenance, though as it's a condo the HOA takes care of a portion of the maintenance costs. 

I guess I'm trying to reconcile those two things, i.e. negative coc, positive cash flow.  Admittedly I'm a rookie at this. 

Re: FSBO - yes, I think we could pull that off, or at least I have a real estate agent friend who offered to not charge his fee in exchange for some trade, so that is a good route too.  Selling seems good, but after taxes and fees that takes a huge chunk out of things.

That seems about right, if you're not accounting for fees, vacancies, capital expenditures, etc. It's reasonable to assume it's not making much money, and could actually be losing money.

Even if you were cash flowing at $290 a month, that's $3500 annually and on a $95k investment (20% downpayment) it's only 3.6% return per year. That's the maximum. The higher your equity in it, the lower your return gets.

So my advice would be to sell ASAP. Take that $ and put it into the market generating a 7% compounded annual return.

CalSaver

  • 5 O'Clock Shadow
  • *
  • Posts: 12
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #4 on: July 07, 2017, 06:06:26 PM »
Try this spreadsheet.

I'll have a hard time believing a property value of $475k vs. a rent of $1800 is making much money, if any. If it is, it probably isn't getting a cash-on-cash return that would exceed stock market returns. I'd sell, and if you're in a hot market, consider FSBO to save $28k.

Thanks for the calculator.  I plugged everything in and if I'm doing it right it says cash-on-cash is -2.2%, but my own simple spreadsheet shows monthly positive cash flow of ~$290, but that doesn't include maintenance, though as it's a condo the HOA takes care of a portion of the maintenance costs. 

I guess I'm trying to reconcile those two things, i.e. negative coc, positive cash flow.  Admittedly I'm a rookie at this. 

Re: FSBO - yes, I think we could pull that off, or at least I have a real estate agent friend who offered to not charge his fee in exchange for some trade, so that is a good route too.  Selling seems good, but after taxes and fees that takes a huge chunk out of things.

That seems about right, if you're not accounting for fees, vacancies, capital expenditures, etc. It's reasonable to assume it's not making much money, and could actually be losing money.

Even if you were cash flowing at $290 a month, that's $3500 annually and on a $95k investment (20% downpayment) it's only 3.6% return per year. That's the maximum. The higher your equity in it, the lower your return gets.

So my advice would be to sell ASAP. Take that $ and put it into the market generating a 7% compounded annual return.

Hmm...perhaps grimmer than I thought.  It was our primary residence for a while, but we bought a house a while back.  Certainly having ~$300k to put into a taxable account and/or pay off our current mortgage sure does sound nice!  Still, in the long haul it does seem nice to have a non market dependent stream of income if we paid off the mortgage on the condo. 

Thanks for the input, much appreciated.  If anyone else wants to chime in that's good too!

Cwadda

  • Handlebar Stache
  • *****
  • Posts: 1813
  • Age: 23
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #5 on: July 07, 2017, 07:04:32 PM »
Try this spreadsheet.

I'll have a hard time believing a property value of $475k vs. a rent of $1800 is making much money, if any. If it is, it probably isn't getting a cash-on-cash return that would exceed stock market returns. I'd sell, and if you're in a hot market, consider FSBO to save $28k.

Thanks for the calculator.  I plugged everything in and if I'm doing it right it says cash-on-cash is -2.2%, but my own simple spreadsheet shows monthly positive cash flow of ~$290, but that doesn't include maintenance, though as it's a condo the HOA takes care of a portion of the maintenance costs. 

I guess I'm trying to reconcile those two things, i.e. negative coc, positive cash flow.  Admittedly I'm a rookie at this. 

Re: FSBO - yes, I think we could pull that off, or at least I have a real estate agent friend who offered to not charge his fee in exchange for some trade, so that is a good route too.  Selling seems good, but after taxes and fees that takes a huge chunk out of things.

That seems about right, if you're not accounting for fees, vacancies, capital expenditures, etc. It's reasonable to assume it's not making much money, and could actually be losing money.

Even if you were cash flowing at $290 a month, that's $3500 annually and on a $95k investment (20% downpayment) it's only 3.6% return per year. That's the maximum. The higher your equity in it, the lower your return gets.

So my advice would be to sell ASAP. Take that $ and put it into the market generating a 7% compounded annual return.

Hmm...perhaps grimmer than I thought.  It was our primary residence for a while, but we bought a house a while back.  Certainly having ~$300k to put into a taxable account and/or pay off our current mortgage sure does sound nice!  Still, in the long haul it does seem nice to have a non market dependent stream of income if we paid off the mortgage on the condo. 

Thanks for the input, much appreciated.  If anyone else wants to chime in that's good too!

Did you live in it for 2 out of the last 5 years? If yes, you may be able to not pay capital gains on it if you sell.

waltworks

  • Handlebar Stache
  • *****
  • Posts: 2399
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #6 on: July 08, 2017, 12:00:32 PM »
You don't have a non-market dependent income stream, you have a non-market dependent pile of illiquid money that is costing you money to hold onto.

Sell immediately. The usual rule of thumb is that a property should rent for 1% of it's total cost per month. Even at your original purchase price, you're nowhere near that. At $475k, you should sell your place to someone and rent it yourself!

-W

CalSaver

  • 5 O'Clock Shadow
  • *
  • Posts: 12
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #7 on: July 08, 2017, 07:49:00 PM »
Try this spreadsheet.

I'll have a hard time believing a property value of $475k vs. a rent of $1800 is making much money, if any. If it is, it probably isn't getting a cash-on-cash return that would exceed stock market returns. I'd sell, and if you're in a hot market, consider FSBO to save $28k.

Thanks for the calculator.  I plugged everything in and if I'm doing it right it says cash-on-cash is -2.2%, but my own simple spreadsheet shows monthly positive cash flow of ~$290, but that doesn't include maintenance, though as it's a condo the HOA takes care of a portion of the maintenance costs. 

I guess I'm trying to reconcile those two things, i.e. negative coc, positive cash flow.  Admittedly I'm a rookie at this. 

Re: FSBO - yes, I think we could pull that off, or at least I have a real estate agent friend who offered to not charge his fee in exchange for some trade, so that is a good route too.  Selling seems good, but after taxes and fees that takes a huge chunk out of things.

That seems about right, if you're not accounting for fees, vacancies, capital expenditures, etc. It's reasonable to assume it's not making much money, and could actually be losing money.

Even if you were cash flowing at $290 a month, that's $3500 annually and on a $95k investment (20% downpayment) it's only 3.6% return per year. That's the maximum. The higher your equity in it, the lower your return gets.

So my advice would be to sell ASAP. Take that $ and put it into the market generating a 7% compounded annual return.

Hmm...perhaps grimmer than I thought.  It was our primary residence for a while, but we bought a house a while back.  Certainly having ~$300k to put into a taxable account and/or pay off our current mortgage sure does sound nice!  Still, in the long haul it does seem nice to have a non market dependent stream of income if we paid off the mortgage on the condo. 

Thanks for the input, much appreciated.  If anyone else wants to chime in that's good too!

Did you live in it for 2 out of the last 5 years? If yes, you may be able to not pay capital gains on it if you sell.

Sadly no, missed that window a bit ago.  But, as you say a FSBO is an option. 

CalSaver

  • 5 O'Clock Shadow
  • *
  • Posts: 12
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #8 on: July 08, 2017, 07:51:15 PM »
You don't have a non-market dependent income stream, you have a non-market dependent pile of illiquid money that is costing you money to hold onto.

Sell immediately. The usual rule of thumb is that a property should rent for 1% of it's total cost per month. Even at your original purchase price, you're nowhere near that. At $475k, you should sell your place to someone and rent it yourself!

-W

Haha, the last part is funny.  But, this is such a competitive market that it's hard to wrap my head around selling something, but that is why I started to look into the math instead of just going with my gut.  Thanks for taking the time to reply.

tralfamadorian

  • Bristles
  • ***
  • Posts: 344
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #9 on: July 08, 2017, 08:20:23 PM »
Market Value: $475,000
Original Purchase price: $269,000 - Cash - pooled some family money to buy in a competitive market.
Original Mortgage Amount: cash out re-fi ~$160,000 After 1 year of ownership (6 months?) did the cash out re-fi to pay back family. 
Interest Rate: 3.25%
Mortgage Term: 30
Term remaining: 23
Amount remaining on mortgage: $145,400
Gross Rents: $1800
Principal and Interest (the P&I of your PITI - should match with the above info): $701/m
Taxes and Insurance (the T&I of your PITI): Taxes ~ $4100/yr Insurance: $570/yr
HOA costs: $265

Here is how I would run the numbers as a real estate investor:

Keep as rental-
Rent: $1800
PITI: $701
HOA: $265
Management: $180
Maintenance: $180
CapEx (dropping to 1/2 of normal since it is a condo): $90
Vacancy: $180
Net: $204/mo; $2448/yr

Sell-
Selling Price: $475,000
Selling Costs: $38,000
Mortgage: $145,400
Capital Gains: $30,900
Walk away w/ Cash: $260,700
7% Yearly Returns: $18,249

former player

  • Handlebar Stache
  • *****
  • Posts: 2444
  • Location: Avalon
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #10 on: July 09, 2017, 04:01:26 AM »
You have made an average of $25k a year over the last 8 years in capital appreciation, right?  And paid back $14k of the mortgage amount.

I've not gone into the spreadsheet details, but it seems to me that the advice you have been getting so far is all about income, and nothing about capital appreciation.  That seems to be the standard advice for the US market.  But if you are in a really HCOL area with a consistently strong economy and limited housing stock, the calculations on return need to include capital appreciation - for instance, there is a lot of rental stock in London on which landlords are consistently getting much less than the 1% capital value per month which is often used on this board as the yardstick for a good rental investment.  Somehow those landlords still make money and still end up rich.

So you need to factor capital appreciation over the last 8 years into your calculations as to whether this has been a good financial deal for you so far.

As to whether or not to keep it, that would also depend on your calculations as to future capital growth.  That's an unknown.  With a condo, I'd seriously factor in how well I thought the block was run: whether maintenance is on track and costs being kept reasonable.  In your situation, if you also own a family house in the same area there is also a question as to diversification, as you would have a lot of capital in one property market.  (Plus, California, so quake insurance, right?)

The final question is: do you like being a landlord, and are you comfortable with being a landlord in the long term?  The answer to that question can (and I think for a mustachian should) be prioritised when your financial life is on track.

Be frugal and industrious, and you will be free (Ben Franklin)

CalSaver

  • 5 O'Clock Shadow
  • *
  • Posts: 12
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #11 on: July 09, 2017, 09:27:30 AM »
You have made an average of $25k a year over the last 8 years in capital appreciation, right?  And paid back $14k of the mortgage amount.

I've not gone into the spreadsheet details, but it seems to me that the advice you have been getting so far is all about income, and nothing about capital appreciation.  That seems to be the standard advice for the US market.  But if you are in a really HCOL area with a consistently strong economy and limited housing stock, the calculations on return need to include capital appreciation - for instance, there is a lot of rental stock in London on which landlords are consistently getting much less than the 1% capital value per month which is often used on this board as the yardstick for a good rental investment.  Somehow those landlords still make money and still end up rich.

So you need to factor capital appreciation over the last 8 years into your calculations as to whether this has been a good financial deal for you so far.

As to whether or not to keep it, that would also depend on your calculations as to future capital growth.  That's an unknown.  With a condo, I'd seriously factor in how well I thought the block was run: whether maintenance is on track and costs being kept reasonable.  In your situation, if you also own a family house in the same area there is also a question as to diversification, as you would have a lot of capital in one property market.  (Plus, California, so quake insurance, right?)

The final question is: do you like being a landlord, and are you comfortable with being a landlord in the long term?  The answer to that question can (and I think for a mustachian should) be prioritised when your financial life is on track.

Yes, the appreciation question is sort of the crux of the problem, as holding on to this "unprofitable" rental these last few years has seen some pretty crazy appreciation.  And we're in an area where there is little room for infill of more housing and geographically no room for urban sprawl, so this is pretty much it.  So that on top of pretty good economy means prices are up.  Of course it seems now that holding for the period we did makes this a good time to sell vs a couple years ago, but it's not going to continue forever, thus me thinking it's getting close to time to pull the ripcord. 

Another resource I want to tap is another one of the owners is a real estate agent we know, so I'd like to ask her if she has plans to sell, as she should have a better feel for things and/or local factors that I haven't accounted for.  As you say, less than 1% might be acceptable, but right now I'm far less than that, and the walk away cash could be put to very good use. 

I'm new to this, but I feel like the 1% rule doesn't account for some factors that are easier to control for a single unit in a competitive market.  As an example, we have a pretty good local network of friends and colleagues, and thus finding good renters is not difficult, but our network is not big enough to find many renters if we had many units (which we don't, just a hypothetical).  Thus our vacancy is lower. 

Additionally, the rental market around here is SUPER competitive right now, and with the university expanding and town hemmed in by geography that doesn't appear to be changing anytime soon.  Thus again, low vacancy.  We do our own maintenance, which still costs money but rarely contractors.  Also no management fees to date, we're self managed.  In the longish term I'm totally fine with being a landlord, but we do have some plans to do some longer term travel overseas at some point, and if that happens we'll have to factor in management costs, so perhaps another tick mark in the sell column. 

My crystal ball is so foggy... can I borrow yours?
 

Cwadda

  • Handlebar Stache
  • *****
  • Posts: 1813
  • Age: 23
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #12 on: July 09, 2017, 04:09:17 PM »
I disagree with former player regarding the capital appreciation. In my opinion, appreciation does not "make" you anything. It's really a dice roll. It is not guaranteeing you money in your pocket each month I.e not cash flow. You can't simply predict how much appreciation will occur. Even if it was positive for the past 5 years, you can't simply say it'll be positive and better for the next 5.

Another Reader

  • Magnum Stache
  • ******
  • Posts: 4059
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #13 on: July 09, 2017, 04:52:56 PM »
Ask the people in the Phoenix area whose houses I bought for 60 to 70 percent less than the 2006 peak in 2009 to 2012 how that appreciation worked out for them.    Even here in Silly Valley, the house next door that was worth north of $1.1MM in late 2006, sold for $785k in a short sale in 2011.  A larger house on the next block sold for $835k, and it was $1.3MM in late 2006.

History shows the same cyclical pattern.  In 1989, when I closed on this house based on a new construction contract price set in late 1988, I was $150k ahead of the resale market and there were 2,500 names on the waiting list.  A year later, there were no names on the waiting list and there were a number of finished houses with no buyers.  Those houses sat vacant for several years.

There are stronger forces in coastal California driving up prices than in most places, but demand can evaporate, sometimes overnight.  Houses are illiquid, and it's difficult to salvage your profit when the market is going down.

Buying rentals for cash flow is creating or growing a business.  Buying a property for appreciation is speculation.


Car Jack

  • Bristles
  • ***
  • Posts: 383
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #14 on: July 09, 2017, 05:19:12 PM »
I once rented my house in a very hot market.  I was going away to grad school for 2 years.  We considered selling and the house had jumped 20% in 3 years with no end in sight.  Well, while we were away, the economy went into the toilet.  We moved back in and stayed for 2 more years, selling for our original purchase price.  You never know what's going to happen.  It's a gamble.

CalSaver

  • 5 O'Clock Shadow
  • *
  • Posts: 12
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #15 on: July 09, 2017, 11:33:01 PM »
Ah, indeed.  I don't mean to suggest that property speculation/market timing is the way to go.  Just that it has happened (via luck) to have worked out for me on this particular property at this particular time.  Definitely, waiting could see it all evaporate.  I don't think that will be part of my overall strategy, just that in this situation it has worked in my favor.

former player

  • Handlebar Stache
  • *****
  • Posts: 2444
  • Location: Avalon
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #16 on: July 10, 2017, 03:36:59 AM »
I think property investing, like investing in shares, is a "buy and hold" proposition.  Yes, you can find periods in which you would sell property at a loss, just as you will find periods in which you would sell an index fund at a loss.  The key with both is to be able to hold on through the periods of loss until you come out good again.  The real difference between index funds and property is that with index funds you are paying someone else to manage, and they are completely hands-off, whereas property you are either managing yourself or supervising someone who is managing, which means that you have to be comfortable with that role in the long term.  (There is also an issue of either being tied to a specific locality or being comfortable with managing property long-distance, which may or may not be a problem, depending on circumstances.)
Be frugal and industrious, and you will be free (Ben Franklin)

Cwadda

  • Handlebar Stache
  • *****
  • Posts: 1813
  • Age: 23
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #17 on: July 10, 2017, 07:33:25 AM »
Ah, indeed.  I don't mean to suggest that property speculation/market timing is the way to go.  Just that it has happened (via luck) to have worked out for me on this particular property at this particular time.  Definitely, waiting could see it all evaporate.  I don't think that will be part of my overall strategy, just that in this situation it has worked in my favor.

You could easily continue to hold it, and weigh the risk of it continuing to appreciate or going back down. That's fine. But still, you are guaranteed to keep breaking even/losing money every single month. It's similar to putting your money into a CD that yields a negative 2% return. I'd be more comfortable putting the money into the stock market which has, since its inception, yielded an average 7% return even through major recessions.

srad

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #18 on: July 10, 2017, 09:48:37 AM »
Two options I haven't seen here yet.  If you do plan to sell and exit the rental business it would be well worth your time to move back into that property for two years and then sell.  The other option, 1031 exchange it into more cash flowing properties. Those properties could be in your area or move them into another city that is less cyclical.   Your rent to value is terrible are you sure you aren't way under market on your rent? 

As to the 7% return into the stock market, You are telling me if I put 260k into the market right now, in 10 years i'll  make 7% compounding annual returns?  And you think the housing market is overheated?   I just did the math on my best performing fund (funded it years ago and have not put any in or taken any out since so this is easy math).  Since Dec 1999 it has returned annually 5%, and yes its up 19% year to date.  My rental properties have crushed that 5% number, crushed it.. 

Cwadda

  • Handlebar Stache
  • *****
  • Posts: 1813
  • Age: 23
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #19 on: July 10, 2017, 11:28:56 AM »
Two options I haven't seen here yet.  If you do plan to sell and exit the rental business it would be well worth your time to move back into that property for two years and then sell.  The other option, 1031 exchange it into more cash flowing properties. Those properties could be in your area or move them into another city that is less cyclical.   Your rent to value is terrible are you sure you aren't way under market on your rent? 

As to the 7% return into the stock market, You are telling me if I put 260k into the market right now, in 10 years i'll  make 7% compounding annual returns?  And you think the housing market is overheated?   I just did the math on my best performing fund (funded it years ago and have not put any in or taken any out since so this is easy math).  Since Dec 1999 it has returned annually 5%, and yes its up 19% year to date.  My rental properties have crushed that 5% number, crushed it..

No, I'm not saying that and I'm not guaranteeing any returns. The advice all across MMM and the forums is to invest in low-cost index funds which represent the total market (see JL Collins' Stock Series) The market grows slowly over many, many years. It's a low risk, get rich slow wealth-building tool that is recommended by Warren Buffet himself.

The 1031 exchange is assuming the OP wants to buy additional properties in a hot market, and manage them. Do you, OP? If yes then we can give new advice. For this topic, I'm interpreting that the OP wants to evaluate selling vs. rental for THIS property, and I'm giving advice based on that. It's really up to the OP what he/she wants to do with the money afterward.

srad

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #20 on: July 10, 2017, 12:04:06 PM »
Cwadda - I know you are just pointing out that its an average return over a very long haul and its no guarantee. I always like real numbers and my example is very real.  Hitting that 7% number isn't that easy.  I've been in this market for almost 20 years and my returns have been pitiful compared to real estate.  Now, I don't own any low cost index funds (because they didn't really exist back when I was dutifully putting money in the market), I'd be curious to see if my 5% return for the last 18 years would be higher if they had those back when we initially invested.  Those management fee's funds charge are robbery!  The expression "Where are all the clients yachts" comes to mind...

Cwadda

  • Handlebar Stache
  • *****
  • Posts: 1813
  • Age: 23
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #21 on: July 10, 2017, 02:38:50 PM »
Cwadda - I know you are just pointing out that its an average return over a very long haul and its no guarantee. I always like real numbers and my example is very real.  Hitting that 7% number isn't that easy.  I've been in this market for almost 20 years and my returns have been pitiful compared to real estate.  Now, I don't own any low cost index funds (because they didn't really exist back when I was dutifully putting money in the market), I'd be curious to see if my 5% return for the last 18 years would be higher if they had those back when we initially invested.  Those management fee's funds charge are robbery!  The expression "Where are all the clients yachts" comes to mind...

Srad, the 7% is also an estimate. The real answer would involve using a crystal ball, because you'd have to predict for both inflation and return. Another fundamental difference is that real estate is illiquid. If the OP wanted to choose between investing the extra cash in the market vs. real estate, he/she would have to factor in liquidity.

For the record, I don't disagree with you about any of this. I'm heavily real estate invested ever since I started getting very large returns on my owner-occupied multi family property.

CalSaver

  • 5 O'Clock Shadow
  • *
  • Posts: 12
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #22 on: July 12, 2017, 06:47:41 PM »
Two options I haven't seen here yet.  If you do plan to sell and exit the rental business it would be well worth your time to move back into that property for two years and then sell.  The other option, 1031 exchange it into more cash flowing properties. Those properties could be in your area or move them into another city that is less cyclical.   Your rent to value is terrible are you sure you aren't way under market on your rent? 

As to the 7% return into the stock market, You are telling me if I put 260k into the market right now, in 10 years i'll  make 7% compounding annual returns?  And you think the housing market is overheated?   I just did the math on my best performing fund (funded it years ago and have not put any in or taken any out since so this is easy math).  Since Dec 1999 it has returned annually 5%, and yes its up 19% year to date.  My rental properties have crushed that 5% number, crushed it..

No, I'm not saying that and I'm not guaranteeing any returns. The advice all across MMM and the forums is to invest in low-cost index funds which represent the total market (see JL Collins' Stock Series) The market grows slowly over many, many years. It's a low risk, get rich slow wealth-building tool that is recommended by Warren Buffet himself.

The 1031 exchange is assuming the OP wants to buy additional properties in a hot market, and manage them. Do you, OP? If yes then we can give new advice. For this topic, I'm interpreting that the OP wants to evaluate selling vs. rental for THIS property, and I'm giving advice based on that. It's really up to the OP what he/she wants to do with the money afterward.

Both great points.  We have considered moving back in for two years, to manage selling costs.  I'm not really interested in a 1031 at this point.  According to two friends that own/manage several multi unit properties in the area and my own observations there are zero properties that pencil out to more cash flowing properties (or at least in my price range), the market here is just too hot. 

Which leads to your next point, that we are under market on rent.  I knew we were somewhat under market on rent, but after doing quite a bit of research this last week, digging around on the forum, spreadsheets and this thread I'm learning that perhaps it was more than I realized.  Interestingly the realtor that helped us buy our current residence has a rental unit in the same condo complex that we're thinking of selling, so I'm going to meet with her and ask her about hers. 

Although I have no issue managing a local property I'm not interested in a 1031 to a more distant property that I would have to pay a manager, so I'm more of a small potatoes guy in the land lording business.  I do like the diversification of real estate + index funds, but I'll probably just go all in on the index investing if we sell.

Thanks all, awesome stuff!

Cwadda

  • Handlebar Stache
  • *****
  • Posts: 1813
  • Age: 23
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #23 on: July 13, 2017, 07:27:59 AM »
Two options I haven't seen here yet.  If you do plan to sell and exit the rental business it would be well worth your time to move back into that property for two years and then sell.  The other option, 1031 exchange it into more cash flowing properties. Those properties could be in your area or move them into another city that is less cyclical.   Your rent to value is terrible are you sure you aren't way under market on your rent? 

As to the 7% return into the stock market, You are telling me if I put 260k into the market right now, in 10 years i'll  make 7% compounding annual returns?  And you think the housing market is overheated?   I just did the math on my best performing fund (funded it years ago and have not put any in or taken any out since so this is easy math).  Since Dec 1999 it has returned annually 5%, and yes its up 19% year to date.  My rental properties have crushed that 5% number, crushed it..

No, I'm not saying that and I'm not guaranteeing any returns. The advice all across MMM and the forums is to invest in low-cost index funds which represent the total market (see JL Collins' Stock Series) The market grows slowly over many, many years. It's a low risk, get rich slow wealth-building tool that is recommended by Warren Buffet himself.

The 1031 exchange is assuming the OP wants to buy additional properties in a hot market, and manage them. Do you, OP? If yes then we can give new advice. For this topic, I'm interpreting that the OP wants to evaluate selling vs. rental for THIS property, and I'm giving advice based on that. It's really up to the OP what he/she wants to do with the money afterward.

Both great points.  We have considered moving back in for two years, to manage selling costs.  I'm not really interested in a 1031 at this point.  According to two friends that own/manage several multi unit properties in the area and my own observations there are zero properties that pencil out to more cash flowing properties (or at least in my price range), the market here is just too hot. 

Which leads to your next point, that we are under market on rent.  I knew we were somewhat under market on rent, but after doing quite a bit of research this last week, digging around on the forum, spreadsheets and this thread I'm learning that perhaps it was more than I realized.  Interestingly the realtor that helped us buy our current residence has a rental unit in the same condo complex that we're thinking of selling, so I'm going to meet with her and ask her about hers. 

Although I have no issue managing a local property I'm not interested in a 1031 to a more distant property that I would have to pay a manager, so I'm more of a small potatoes guy in the land lording business.  I do like the diversification of real estate + index funds, but I'll probably just go all in on the index investing if we sell.

Thanks all, awesome stuff!

If it's worth $475k and you can get $4,750 each month, definitely keep it.

Don't forget you can also invest in real estate ETFs if you like RE diversification.

srad

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #24 on: July 13, 2017, 07:56:54 AM »
This property sounds like its a Class A property, I'm guessing the market rent will be closer to 2500.  I find rent to value is usually around .5% in hot markets.  But yes, if you are anywhere near the 1% rule, its a no brainer, you keep it, honestly if this is a class A property and you can get a .7 keeping it is still a good option...  I"ll take a little less cash flow for a better shot at appreciation, especially if you only want two or three rentals.

tralfamadorian

  • Bristles
  • ***
  • Posts: 344
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #25 on: July 13, 2017, 10:28:46 AM »
...You are telling me if I put 260k into the market right now, in 10 years i'll  make 7% compounding annual returns?...I just did the math on my best performing fund (funded it years ago and have not put any in or taken any out since so this is easy math).  Since Dec 1999 it has returned annually 5%, and yes its up 19% year to date.

From https://dqydj.com/sp-500-historical-return-calculator/

S&P 500 average returns from December 1999 to the end of June 2017 were 9.208% with reinvested dividends.  I'm sorry that your funds didn't return that well during that time period but your experience is a data point, not aggregate data. 

This property sounds like its a Class A property, I'm guessing the market rent will be closer to 2500.  I find rent to value is usually around .5% in hot markets.

I started to get all worked up to run around and grab a bunch of examples of how untrue this is but decided that it's not worth my time.  I'll just leave it at this- this is complete and utter bullshit.  Rents are determined by market demand.  Purchase price is determined by market demand.  There is some overlap between the groups of people who rent and the groups of people who buy but as we all know, the overlap is nowhere near complete.  So rents and purchase price do not move in lock step.  I don't know where CalSaver lives but I personally know of two HCOL A class markets where rents/purchase are currently 0.20-0.25%. 

dougules

  • Pencil Stache
  • ****
  • Posts: 859
  • Location: AL
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #26 on: July 13, 2017, 11:11:57 AM »
If I'm doing my math right, you're getting 2.5%-ish return before thinking about maintenance and vacancies.  I think you could do way better.

What are comparable rents with other similar rentals around yours?  If you can't get the number up to 4%-ish percent, then I don't think keeping the place is worth it.  And what property values are going to do in the future is just speculation.  Go on what your returns are right now. 

Also, what is your interest rate where you live now?  If it's higher than (rent-expenses)/sales price, I think selling the rental is a no-brainer. 


srad

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #27 on: July 17, 2017, 01:07:00 PM »
...You are telling me if I put 260k into the market right now, in 10 years i'll  make 7% compounding annual returns?...I just did the math on my best performing fund (funded it years ago and have not put any in or taken any out since so this is easy math).  Since Dec 1999 it has returned annually 5%, and yes its up 19% year to date.

From https://dqydj.com/sp-500-historical-return-calculator/

S&P 500 average returns from December 1999 to the end of June 2017 were 9.208% with reinvested dividends.  I'm sorry that your funds didn't return that well during that time period but your experience is a data point, not aggregate data. 

This property sounds like its a Class A property, I'm guessing the market rent will be closer to 2500.  I find rent to value is usually around .5% in hot markets.

I started to get all worked up to run around and grab a bunch of examples of how untrue this is but decided that it's not worth my time.  I'll just leave it at this- this is complete and utter bullshit.  Rents are determined by market demand.  Purchase price is determined by market demand.  There is some overlap between the groups of people who rent and the groups of people who buy but as we all know, the overlap is nowhere near complete.  So rents and purchase price do not move in lock step.  I don't know where CalSaver lives but I personally know of two HCOL A class markets where rents/purchase are currently 0.20-0.25%.

Glad you didn't get all worked up over this,  I was merely putting a guess out there as to what their market rent was.  Again, it was only a guess...  areas like SF, NYC  will be much, much lower than .5%


Cwadda

  • Handlebar Stache
  • *****
  • Posts: 1813
  • Age: 23
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #28 on: July 17, 2017, 01:10:15 PM »
...You are telling me if I put 260k into the market right now, in 10 years i'll  make 7% compounding annual returns?...I just did the math on my best performing fund (funded it years ago and have not put any in or taken any out since so this is easy math).  Since Dec 1999 it has returned annually 5%, and yes its up 19% year to date.

From https://dqydj.com/sp-500-historical-return-calculator/

S&P 500 average returns from December 1999 to the end of June 2017 were 9.208% with reinvested dividends.  I'm sorry that your funds didn't return that well during that time period but your experience is a data point, not aggregate data. 

This property sounds like its a Class A property, I'm guessing the market rent will be closer to 2500.  I find rent to value is usually around .5% in hot markets.

I started to get all worked up to run around and grab a bunch of examples of how untrue this is but decided that it's not worth my time.  I'll just leave it at this- this is complete and utter bullshit.  Rents are determined by market demand.  Purchase price is determined by market demand.  There is some overlap between the groups of people who rent and the groups of people who buy but as we all know, the overlap is nowhere near complete.  So rents and purchase price do not move in lock step.  I don't know where CalSaver lives but I personally know of two HCOL A class markets where rents/purchase are currently 0.20-0.25%.

Glad you didn't get all worked up over this,  I was merely putting a guess out there as to what their market rent was.  Again, it was only a guess...  areas like SF, NYC  will be much, much lower than .5%

I have trouble comprehending why someone would entertain the idea of buying an investment property with anything lower than a 0.5% rent/purchase. I don't see how one could profit from that.

Another Reader

  • Magnum Stache
  • ******
  • Posts: 4059
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #29 on: July 17, 2017, 01:38:15 PM »
Speculation on appreciation.  That's what drives investors in HCOL markets.

Cwadda

  • Handlebar Stache
  • *****
  • Posts: 1813
  • Age: 23
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #30 on: July 17, 2017, 03:17:23 PM »
Speculation on appreciation.  That's what drives investors in HCOL markets.

So, basically gambling. I'll never understand why someone would want to purchase a liability (negative cashflow from day 1). But hey, they're a hell of a lot wealthier than me, so they must be doing it right?

srad

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #31 on: July 17, 2017, 04:07:28 PM »
From https://dqydj.com/sp-500-historical-return-calculator/

S&P 500 average returns from December 1999 to the end of June 2017 were 9.208% with reinvested dividends.  I'm sorry that your funds didn't return that well during that time period but your experience is a data point, not aggregate data. 


Ouch, I just had some time to look at this calculator...  If I plug in a 9% return to my fund, my balance would be a LOT better.  I can almost start to see how someone could retire with their money being solely invested in funds.  Now you know where my hostility towards Wall Street comes from.  There's a lot of people are getting paid from with my money before they send any returns back to me.  As stated its an account from 1999, that was way before sites such as Mr MoneyM were around to let us know there are other ways.  Time for a heart to heart with our "financial advisor".  But still, even with the 9% return, my older real estate deals have performed better. Time will tell on my more recent acquisitions, so far they are behind, the stock markets are crushing it right now!

dandarc

  • Magnum Stache
  • ******
  • Posts: 2801
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #32 on: July 17, 2017, 04:26:49 PM »
Time for a heart to heart with our "financial advisor".
Don't bother talking to the financial advisor - that just gives him a chance to sell you on the crap funds again - call Vanguard or Fidelity or Schwab, tell em what you want to do "I want to get out of this garbage and into a 3-fund portfolio", and with any luck, you never have to speak to the "advisor" again.
Link to my journal, so I can find it quickly - http://forum.mrmoneymustache.com/journals/dandarc's-journal/

CalSaver

  • 5 O'Clock Shadow
  • *
  • Posts: 12
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #33 on: August 03, 2017, 08:13:57 AM »
Just in case anyone wants to know how things ended up...

We are near the SF Bay Area, so getting up to 1% of purchase price is a challenge, but since we bought near the bottom in 2009 we have a better chance than most.  Thus for the time being we're going to start raising the rent to get up to around $2200-$2400/month, which gets us to around 2.6-4.8% cash on cash return, which seems a lot better.  We were just naive and way under charging. 

I think we could do better in the market, but the diversification is worth something to use and with us working on cutting back on normal employment the cash flow will be up a bit and we'll have time if anything that comes up with the rental.

Cwadda

  • Handlebar Stache
  • *****
  • Posts: 1813
  • Age: 23
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #34 on: August 03, 2017, 08:22:23 AM »
Just in case anyone wants to know how things ended up...

We are near the SF Bay Area, so getting up to 1% of purchase price is a challenge, but since we bought near the bottom in 2009 we have a better chance than most.  Thus for the time being we're going to start raising the rent to get up to around $2200-$2400/month, which gets us to around 2.6-4.8% cash on cash return, which seems a lot better.  We were just naive and way under charging. 

I think we could do better in the market, but the diversification is worth something to use and with us working on cutting back on normal employment the cash flow will be up a bit and we'll have time if anything that comes up with the rental.

One thing I will challenge you to think about. Does your CoC return factor in the repairs and capital expenditures for the house? You could end up on the losing money side.

You don't have to answer this question, but I hope it helps to at least think about.

hucktard

  • 5 O'Clock Shadow
  • *
  • Posts: 73
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #35 on: August 03, 2017, 12:11:26 PM »
Just in case anyone wants to know how things ended up...

We are near the SF Bay Area, so getting up to 1% of purchase price is a challenge, but since we bought near the bottom in 2009 we have a better chance than most.  Thus for the time being we're going to start raising the rent to get up to around $2200-$2400/month, which gets us to around 2.6-4.8% cash on cash return, which seems a lot better.  We were just naive and way under charging. 

I think we could do better in the market, but the diversification is worth something to use and with us working on cutting back on normal employment the cash flow will be up a bit and we'll have time if anything that comes up with the rental.

You shouldn't be using your purchase price as a metric to determine if you should keep this property. Especially since it was purchased years ago, at a much cheaper price, the purchase price is irrelevant at this point. What you should be considering is your return on EQUITY in the property. You want to figure out your return on equity, and then compare that to your possible return on equity/capital should you sell this property and invest in something else. Again, your original purchase price is completely irrelevant in determining if you should keep this property. The past is in the past. Determine if this is a good investment based on the equity that you have in the property NOW. From all the info you have given I would say your return on equity is quite low, and you would be better off selling this and investing in something else.

zoro

  • 5 O'Clock Shadow
  • *
  • Posts: 23
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #36 on: August 05, 2017, 06:29:29 PM »
This is a sell for me. The number I look at is rent per month vs market value.  I like to buy them at 100x monthly rent max. I will keep one at 150 x monthly rent. At 200 or greater  I will sell asap.
You can express this as a cap rate etc but I like it as I can do it in my head as people are telling me the price and rent etc.

undercover

  • Pencil Stache
  • ****
  • Posts: 585
Re: Landlords - rent or sell? - HCOL area, sell rental?
« Reply #37 on: August 08, 2017, 06:06:37 AM »
I'm new to this, but I feel like the 1% rule doesn't account for some factors that are easier to control for a single unit in a competitive market.  As an example, we have a pretty good local network of friends and colleagues, and thus finding good renters is not difficult, but our network is not big enough to find many renters if we had many units (which we don't, just a hypothetical).  Thus our vacancy is lower. 

That's what security deposits and property managers are for. 1% generally gives you enough leeway to pay for a property manager if you want. In your case, you're no where close to saving nearly as much money per month by not factoring in a property manager that would warrant the discrepancy between your current rent/market value and the ideal 1%.

Don't get me wrong, no one's saying it's going to be easy to find a rental these days that meets or exceeds the 1% rule with little amounts of risk. Most markets have recovered and housing prices are rising faster than rents as well.

Again, your original purchase price is completely irrelevant in determining if you should keep this property.

Yes, this. You (OP) can't use today's rent and calculate returns based on what you paid 8 years ago.

You need to look at the facts.

The first fact is that your current return is under 2%. What you have to ask yourself is whether or not you'd accept a ~1.7% return BEFORE vacancies and maintenance (that's assuming $2,400/mo in rent - even at $3k it doesn't make sense).

The second fact is that the market has been kind to you. You've gotten lucky and received a windfall of $25k/year (give or take less inflation) over the past eight years on paper. The only way to actually accept this gracious offer that Mr. Windfall has given you is to sell and better appropriate your funds. You're lucky as of now but you have zero idea on whether you'll be lucky a year from now.

If you keep the property, your cash flow and returns are abysmal. If you really think you can't do better than 2% in this environment, then by all means keep it.
Every solution has a problem