Author Topic: Moving... sell house or keep and use it as rental property?  (Read 1488 times)

Lifestyle Deflation

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Moving... sell house or keep and use it as rental property?
« on: September 24, 2018, 12:50:59 AM »
My wife and I bought a house 3 years ago and have a low interest rate on the 30-year mortgage (3.5%), though it is for a relatively high amount (remaining around $430k).

We are relocating to a different state and have the house on the market, but our realtor is suggesting we drop the asking price by around $20,000. We have it listed at $625,000. Being realistic, if we drop the asking price to 605, we would probably get $580-590k after all is said and done. And then accounting for realtor fees and closing costs we would be out another 50k. Meaning we would "take home" around $100,000 from this sale.

On the other hand, if we keep it and rented it out -- the PITI on the house is around $2900 per month. I would contract the management out to a company, but I believe we could probably rent it out as a corporate or executive rental (it is a 4 bedroom suburban home in a top school district) for enough to at least cover that amount. Even if I lost a little money per month after management fees and repair bills, I would still be building equity in the house for a future sale for not too much out of pocket.

To me renting the house out seems like a no brainer, if we can't get what we want out of the sale. But it is a large expense, not the typical low-dollar rental that some have. And I would be concerned about getting a mortgage on a future house with this mortgage still on my books.

theoverlook

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Re: Moving... sell house or keep and use it as rental property?
« Reply #1 on: September 24, 2018, 07:56:40 AM »
I would sell it. There's no way you'll make money at it, and any appreciation or principal payoff over time is unlikely to equal the return in a good index fund.

waltworks

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Re: Moving... sell house or keep and use it as rental property?
« Reply #2 on: September 24, 2018, 07:58:46 AM »
You will take a bath renting it out. Sell it.

-W

Another Reader

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Re: Moving... sell house or keep and use it as rental property?
« Reply #3 on: September 24, 2018, 08:04:53 AM »
Look up the 1 percent/50 percent rules for rentals.  You can expect your expenses, including vacancy and collection loss, repairs, and capital improvements to average around 50 percent of your income.  This property will be an alligator.  In your shoes, I would sell it. 

Kl285528

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Re: Moving... sell house or keep and use it as rental property?
« Reply #4 on: September 24, 2018, 08:48:26 AM »
Sell it. Cost to fix it to sell it after it is a rental, high cost of carry when vacant, plus tax exempt gain on sale assuming you qualify. Would you buy this as a rental on the open market? If no, then don't make it one.

Car Jack

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Re: Moving... sell house or keep and use it as rental property?
« Reply #5 on: September 24, 2018, 09:18:57 AM »
Sell.

Immediate concerns:  The mortgage company can call the loan and make the entire balance immediately due, since it's no longer owner occupied residence.

If the above does not happen, homeowner insurance will double.  If you don't tell them it's a rental and something happens, when they investigate and notice you're not even living in the same state, they're going to pay you zero.  So if your house burns down, you're out of luck and on the hook to pay off the mortgage with zero insurance money.

Managers will reduce your involvement, but they do NOT eliminate it.  I rented out my house for the 2 years I went off the grad school on my company's dime.  Had I to do it over again, I'd sell the house.  I'd be more than happy to take a loss and be rid of it.

CowboyAndIndian

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Re: Moving... sell house or keep and use it as rental property?
« Reply #6 on: September 24, 2018, 09:25:16 AM »
Sell it.

Remember, the criteria one uses to buy a house to live in are a lot different than one to rent out! Learn about the 1% rule and see if you house meets the requirements for a rental.

Jon Bon

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Re: Moving... sell house or keep and use it as rental property?
« Reply #7 on: September 24, 2018, 10:16:06 AM »
Sell it yesterday.

Sure you might break even on cash flow. But....... You will be getting killed on opportunity cost.  Think about how much work that 100k would be doing for you in the stock market or even T-bills.

This is a very common mistake lots of people make when it comes to real estate. Drop by price as the realtor suggests and sell the house. Not to mention any gain you make on the sale will be tax free! That cannot be said about any rental income you come across.


AccidentalMiser

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Re: Moving... sell house or keep and use it as rental property?
« Reply #8 on: September 24, 2018, 10:33:25 AM »
Sell it yesterday.

Sure you might break even on cash flow. But....... You will be getting killed on opportunity cost.  Think about how much work that 100k would be doing for you in the stock market or even T-bills.

This is a very common mistake lots of people make when it comes to real estate. Drop by price as the realtor suggests and sell the house. Not to mention any gain you make on the sale will be tax free! That cannot be said about any rental income you come across.

This.  Sell immediately! 

Would you repurchase this home in its current location for the net amount youíll get for it if you didnít currently own it?  If so, keep it.  If not, sell immediately.  Youíll thank us later.

Dicey

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Re: Moving... sell house or keep and use it as rental property?
« Reply #9 on: September 24, 2018, 11:05:42 AM »
When I first read this thread there were no responses. There was crucial information missing, but I couldn't be arsed to ask for it. Still, my brain was screaming "SELL". Glad to pop back and see the chorus is in complete agreement. Sell it. Take your profits and binge read jlcollinsnh's Stock Series before escrow closes so you'll know what to do with it. Your future self will be so pleased that you did.

COlady

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Re: Moving... sell house or keep and use it as rental property?
« Reply #10 on: September 24, 2018, 11:30:54 AM »
No one mentioned...your gain on sale will be 100% tax free since it was a principle residence held for longer than 2 years.  If you rent the place out any gain you have will have to be pro-rated between personal/rental (assuming you sell it in the next few years).  Take your tax free money and run.

Lifestyle Deflation

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Re: Moving... sell house or keep and use it as rental property?
« Reply #11 on: November 03, 2018, 10:49:44 PM »
Thanks all -- I am still being stubborn on this house but the market is not being kind.

It's been on sale (at 625k) for 2 months and getting fewer and fewer looks (no showings in 3 weeks).

Me being stubborn, I am saying if no one is even looking then they wouldn't look at a slightly lower price either. Or if they looked and thought the price was too high, they could have made an offer, even if it was lowball.

Going to keep the house on the market, someone will buy it at some point. This is a pretty bad time to have it on the market (fall) so maybe it will pick up at the first of the year.

waltworks

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Re: Moving... sell house or keep and use it as rental property?
« Reply #12 on: November 03, 2018, 11:04:55 PM »
Should have listened to your realtor.

Drop the price by $50k tomorrow. Drop by another $25k in another week if no interest.

-W

Another Reader

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Re: Moving... sell house or keep and use it as rental property?
« Reply #13 on: November 04, 2018, 06:38:42 AM »
Drop it to $599k today and bring in the buyers whose upper search limit is $600k.  The market is telling you that your house is overpriced.  Don't make the mistake of following the market as it goes down. 

MSNinfo

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Re: Moving... sell house or keep and use it as rental property?
« Reply #14 on: November 04, 2018, 08:08:18 AM »
I'm from /r/financialindependence and just made an account because I felt the comments here were extremely, extremely poor quality.

There is absolutely no possible way we can tell you if it's worthwhile to sell your home or leave it WITHOUT more information. The information needed is how much $550-650k homes in your area rent for and what the vacancy is like on them. You can check all of this on realtor.com

From there (and I have no idea why anyone didn't mention this, is MMM kinda like Dave Ramsey where it's just beginners??) you take the assumed profit of selling ($100k) and compute average market gains ($100k x 7% = $7k). Then you take the $7k and divide it by the 12 months of the year and get $583. Then you take 10% of an approx (property management fee) rent amount. I'll guess $4000 rent with $400 in monthly management fees.

So $400 from property management fees and $583 from missed opportunity in index funds needs to be added to your PITA amount of $2900. This gives a required rent amount of $3900 approximately to "break even," so to speak. If you keep the home, you have to factor in vacancy and repairs so your rent amount needs to be higher than $3900. Remember you gain equity and the house will appreciate on top of the monthly cash flow. Because of the prior sentence, I'd be willing to bet investors would keep this home even if it rented at ~$3900 just because of the massive amount of equity you'd gain each month (I'm guessing $1000?)

My initial thought without knowing all the pieces to this puzzle is I would keep this home if you are able to rent it for $4100+ but would sell if it rented for under $4000.

If the home is desirable, in a good area, you have no debt, homes at that price rent for about $4100, and you want an investment property then I would personally keep it. The market has appreciated nicely in a lot of areas over the past 3 years which is allowing for good cash flow opportunities. 

The important takeaway is selling this home gives $583 a month passive if invested in an index fund assuming you make $100k after realtor fees. So long as you break even on rent/repairs vs pita I'm willing to bet you'd make more in equity alone completely disregarding house inflation and cash flow.

Another Reader

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Re: Moving... sell house or keep and use it as rental property?
« Reply #15 on: November 04, 2018, 08:39:56 AM »
I'm from /r/financialindependence and just made an account because I felt the comments here were extremely, extremely poor quality.

There is absolutely no possible way we can tell you if it's worthwhile to sell your home or leave it WITHOUT more information. The information needed is how much $550-650k homes in your area rent for and what the vacancy is like on them. You can check all of this on realtor.com

From there (and I have no idea why anyone didn't mention this, is MMM kinda like Dave Ramsey where it's just beginners??) you take the assumed profit of selling ($100k) and compute average market gains ($100k x 7% = $7k). Then you take the $7k and divide it by the 12 months of the year and get $583. Then you take 10% of an approx (property management fee) rent amount. I'll guess $4000 rent with $400 in monthly management fees.

So $400 from property management fees and $583 from missed opportunity in index funds needs to be added to your PITA amount of $2900. This gives a required rent amount of $3900 approximately to "break even," so to speak. If you keep the home, you have to factor in vacancy and repairs so your rent amount needs to be higher than $3900. Remember you gain equity and the house will appreciate on top of the monthly cash flow. Because of the prior sentence, I'd be willing to bet investors would keep this home even if it rented at ~$3900 just because of the massive amount of equity you'd gain each month (I'm guessing $1000?)

My initial thought without knowing all the pieces to this puzzle is I would keep this home if you are able to rent it for $4100+ but would sell if it rented for under $4000.

If the home is desirable, in a good area, you have no debt, homes at that price rent for about $4100, and you want an investment property then I would personally keep it. The market has appreciated nicely in a lot of areas over the past 3 years which is allowing for good cash flow opportunities. 

The important takeaway is selling this home gives $583 a month passive if invested in an index fund assuming you make $100k after realtor fees. So long as you break even on rent/repairs vs pita I'm willing to bet you'd make more in equity alone completely disregarding house inflation and cash flow.

Obviously, you are NOT a real estate investor...

If you read the original post, OP said they might be able to get $2,900, IF they got top dollar by using it as an executive/short term rental.  The numbers don't work.

Your calculations are not helpful.  The 1 percent rule of thumb exists for a reason.  You have not specifically allowed for vacancy and collection loss, repairs, maintenance or other expenses, except for property management.  You used hand waving instead.  Appreciation is nice, but not guaranteed, especially in the current market, which is showing signs of having topped out in many areas. 

Your comment "The market has appreciated nicely in a lot of areas over the past 3 years which is allowing for good cash flow opportunities" makes no sense, unless you are saying rents went up.  If they went up more than the rate of inflation without some other reason the area was becoming more desirable, the rents will likely stabilize or fall at some point soon.

To cash flow, this $600k investment would need to generate close to $6,000 a month in rent in most areas.  I AM a real estate investor and would not consider buying this property today at $600k for one second.

ETA:  Let's remove appreciation from your "massive amount of equity" gain assumption.  We are likely at the end of a bull market in residential real estate fueled by historically low interest rates and full employment.  Looking at a mortgage amortization schedule and assuming they borrowed $445k three years ago, the current equity gain from mortgage pay down would be around $775 a month.  At $2900 rent and PITI, subtracting vacancy and collection loss, management, and repairs is going to make the property cash flow negative from the get go, probably the same or more than any gains from mortgage pay down.  Meantime, they have to dig this money out of their wallets every month.  At $4,100, it might make a tiny cash return, if there are no capital improvements to be made and no really bad tenants.

I will pass on this headache, thanks anyway.
« Last Edit: November 04, 2018, 09:31:44 AM by Another Reader »

Goldielocks

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Re: Moving... sell house or keep and use it as rental property?
« Reply #16 on: November 04, 2018, 10:31:52 AM »
Corporate rentals are difficult.  When I looked into it, you need to be quite close to where the offices are, even for a family home.   Short term execs don't really value the ammenities of the far flung suburbs.   If you are within 30 minute drive (rush hour) and have an unusually lovely area for families with lots of restaurants, parks, "walk to's", the location could work.   Are there a lot of other corporate rentals in your area?  That is a sign that this could work... sometimes one company places all their employees corporate rentals in one neighborhood.

Next, the place needs to be furnished -- nicely, too.  It could be ikea, but no older than 18 months if using cheaper furniture like that.    Beds need to be quite nice, new towels / linens, etc.     


Next, you may want to consider weekly maid service (or every 2 weeks) and gardener for your coporate family rental.

Vacancy is higher, with only 1, 3, 6 and 1 year rentals on a full home.   

All in, suddenly a small 3 bedroom town house, near the office and parks, with very nice fit-out and furniture makes a lot more sense than a sprawling 4 bed in the suburbs for that corporate rental.


The reason you need to make $6k is because of the wear and tear and replacement of furnishings / soft items with a corporate rental.
If it was a regular rental, it could be rented lower, but $4500 or more should be the target for unfinished, no gardener, etc, or you will lose your shirt.  Gotta say, most homes can be bought easily for less than this, so it will be hard to get, I bet.

tralfamadorian

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Re: Moving... sell house or keep and use it as rental property?
« Reply #17 on: November 04, 2018, 07:46:33 PM »
It's been on sale (at 625k) for 2 months and getting fewer and fewer looks (no showings in 3 weeks).

Your listing is stale. Personally, I would pull it and start over again at $599k in the spring. Make sure the realtor resets the zillow/similar history so buyers will not see it's a leftover from last year and presume there's a problem.

theoverlook

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Re: Moving... sell house or keep and use it as rental property?
« Reply #18 on: November 05, 2018, 11:25:10 AM »
I'm from /r/financialindependence and just made an account because I felt the comments here were extremely, extremely poor quality.

I love it when a very poor quality comment claims the other comments are poor quality.

Dicey

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Re: Moving... sell house or keep and use it as rental property?
« Reply #19 on: November 10, 2018, 10:43:54 PM »
I'm from /r/financialindependence and just made an account because I felt the comments here were extremely, extremely poor quality.

I love it when a very poor quality comment claims the other comments are poor quality.
You said it more succinctly than I would have. Agree 100%

wild forest

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Re: Moving... sell house or keep and use it as rental property?
« Reply #20 on: November 13, 2018, 08:36:38 AM »

It's been on sale (at 625k) for 2 months and getting fewer and fewer looks (no showings in 3 weeks).


This is the kind of home that most average Americans cannot afford to buy. Which make the pool of buyers are much smaller than the ones in, say $250-350k. 
Reducing the price would be a loss to you. Because if people really like the home, it's don't matter if it $625k or 610k, they would get it.  Price for homes in this ranges are only fall into the hands wealthy people.

Best of luck on selling your home. 

SeattleCPA

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Re: Moving... sell house or keep and use it as rental property?
« Reply #21 on: November 13, 2018, 06:23:30 PM »
No one mentioned...your gain on sale will be 100% tax free since it was a principle residence held for longer than 2 years.  If you rent the place out any gain you have will have to be pro-rated between personal/rental (assuming you sell it in the next few years).  Take your tax free money and run.

+1

84Blazer909

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Re: Moving... sell house or keep and use it as rental property?
« Reply #22 on: November 15, 2018, 10:54:22 AM »
Just curious -  has no one asked where the house is located?  Sq. Ft.?

Is this $2900 estimate you think you could get from a "Corporate rental" from a knowledgeable source?   Who came up with that?  What are the estimates for AirBnB and a standard long term rental?

Just playing devils advocate  - homes like that can make good money depending on where they're at.  Suburbs in Boise and Huntington Beach are radically different.