Author Topic: Real Estate Case Study: Sell or Rent?  (Read 1055 times)

Ticopowell

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Real Estate Case Study: Sell or Rent?
« on: October 20, 2017, 10:22:03 AM »
Hi all,
I'd like your opinions on my situation. I bought this house in April 2013 with my ex wife, the plan was to sell it in 2015 when we divorced but we would have had to pay out of pocket in order to sell it at the market price so we decided to rent it. In the divorce she agreed to sign the house completely over to me so she is no longer a factor in most of the decision making. She is still on the mortgage and has asked for me to refinance the house multiple times to remove her name, I'm not sure why though, whenever I ask why she doesn't respond. Besides that the house has been rented since November of 2014 so I lived in it for just about a year and a half.  I moved because the military moved me across the country.
My question is if I should sell the house or continue to rent it. I was 100% sure I wanted to sell, so I listed it but due to the current tenants cats tearing up the carpet and smelling like cat litter nobody has been interested. They move out on November 1st, so the idea was to let them move out, and either fix or replace the carpets while making sure to give the place a good cleaning to remove any lingering smells. The property manager is a realtor so she has been handling everything very nicely and keeping me in the loop. She charges 8% of the rent while the house is rented, and nothing while the house is vacant. I originally rented for $1300 a month, this most recent tenant has been paying $1400 a month, and I will probably raise it to at least $1500 to $1600 a month if I rented it again.
Here is my data.

Market Value: $285,000
Original Purchase price: $204,000
Original Mortgage Amount: $204,000 VA loan
Interest Rate: 3.5%
Mortgage Term: 360 months
Term remaining: 305 months
Amount remaining on mortgage: $187,500
Gross Rents: 16800
Principal and Interest (the P&I of your PITI - should match with the above info): 925.31
Taxes and Insurance (the T&I of your PITI): $385.23
HOA costs: $0
Deferred maintenance notes: House was brand new when I bought it, I have had to pay $0 maintenance costs since purchase due to builders warranty and nothing else breaking. The builder's warranty covered the shower head's piping coming off the 2x4 and the whole thing falling through the wall.
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 am aware of.

I have plugged all this info into a rent vs sell calculator I found here http://renterswarehouse.com/rent-vs-sell-calculator/ and it says renting will always be better, but based on the 50% and 2% rules I've read about from MMM the house doesn't make much sense as an investment property. I do admit that I am more biased towards selling, partially because of the $68000 I could make (minus taxes) which I could use towards my next house as a down payment (I'm moving this spring, I don't know where to or when yet, but my new wife and I will likely buy a house there) and also I would like to remove my ex's name from the mortgage and the only way that would make sense financially is to sell the house, refinancing costs and a higher interest rate means I would pay a lot of money to remove her name and she isn't worth that to me.

My other finances are not quite mustachian yet, I'm slowly but surely getting rid of the crap in my life, and it's been an uphill battle since the divorce but I'm getting there.

Last thing is that I would have to stop investing temporarily if the house didn't have a tenant. I have about $9000 saved up at the moment for that (I know, it's not enough, and my IRA needs more but it's maxed out this year already. TSP is increasing and govt matching next year will help) but based on current income I can afford to keep that and pay off both house payments every month. Having a second income (getting married tomorrow) will help as well, I plan on saving as much of her income as possible and living on mine, but we will see how that goes after a few months.

If I missed something or you have more questions please ask, I look forward to everyone's feedback!
Thanks!
Caleb

Cwadda

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Re: Real Estate Case Study: Sell or Rent?
« Reply #1 on: October 20, 2017, 11:31:19 AM »
According to my calculations (see attached) using the data you've provided, you're operating at approximately at a loss of $190/month, or -5.6% annually.  In addition, you have approximately $120k in equity. 

Transitioning from -5.6% return to an estimated 7% stock market return yields a net change of 12.6% in your favor.

Therefore my recommendation would be to sell.

Ticopowell

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Re: Real Estate Case Study: Sell or Rent?
« Reply #2 on: October 20, 2017, 11:50:13 AM »
That spreadsheet is pretty awesome, Thanks for sharing!
It has a few values that are incorrect, but the changes that I made make it a worse cash flow issue than your estimate. I didn't do a down payment because I used a VA loan, and taxes in the area over the next year are about $4200. Insurance is about $45 a month so that helps, but not much. Total cash flow is now negative $300 a month. I'd likely sell it for closer to $265-270k, the $285k was zillow's estimate, I had it listed for $273k.
I really appreciate the spreadsheet and your advice. I'm welcome to more input if anyone else feels like giving their advice.
Thanks!
Caleb
« Last Edit: October 22, 2017, 09:12:41 AM by Ticopowell »

robartsd

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Re: Real Estate Case Study: Sell or Rent?
« Reply #3 on: October 20, 2017, 12:05:04 PM »
That spreadsheet is pretty awesome, Thanks for sharing!
It has a few values that are incorrect, but the changes that I made make it a worse cash flow issue than your estimate. I didn't do a down payment because I used a VA loan, and taxes in the area over the next year are about $4200. Insurance is about $45 a month so that helps, but not much. Total cash flow now is over $300 a month. I'd likely sell it for closer to $265-270k, the $285k was zillow's estimate, I had it listed for $273k.
I really appreciate the spreadsheet and your advice. I'm welcome to more input if anyone else feels like giving their advice.
Thanks!
Caleb
The rent value was also your previous rent ($1400), not your expected rent ($1500-1600). Not sure about the trash and snow/yard expenses ($20 and $100/month). Removing those and setting rent to $1600 makes you almost break even. Still, continuing to rent out the house is no better than a bet that it will appreciate at a rate greater than market returns.

Cwadda

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Re: Real Estate Case Study: Sell or Rent?
« Reply #4 on: October 20, 2017, 01:14:49 PM »
Quote
but the changes that I made make it a worse cash flow issue than your estimate.

Quote
Total cash flow now is over $300 a month

I'm assuming you mean negative cash flow per month?  If yes, then even more reason to sell and be done with it for good.

Cwadda

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Re: Real Estate Case Study: Sell or Rent?
« Reply #5 on: October 20, 2017, 01:16:51 PM »
That spreadsheet is pretty awesome, Thanks for sharing!
It has a few values that are incorrect, but the changes that I made make it a worse cash flow issue than your estimate. I didn't do a down payment because I used a VA loan, and taxes in the area over the next year are about $4200. Insurance is about $45 a month so that helps, but not much. Total cash flow now is over $300 a month. I'd likely sell it for closer to $265-270k, the $285k was zillow's estimate, I had it listed for $273k.
I really appreciate the spreadsheet and your advice. I'm welcome to more input if anyone else feels like giving their advice.
Thanks!
Caleb
The rent value was also your previous rent ($1400), not your expected rent ($1500-1600). Not sure about the trash and snow/yard expenses ($20 and $100/month). Removing those and setting rent to $1600 makes you almost break even. Still, continuing to rent out the house is no better than a bet that it will appreciate at a rate greater than market returns.

Breaking even is still a poor investment, in my opinion. It's making no money every month, plus you have to deal with vacancies, maintenance and repairs that come up. Or evictions, in the worst case scenario.

That money in the stock market would be returning around $7k/yr plus dividends, with no property maintenance to worry about. I think it's a no-brainer.

Ticopowell

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Re: Real Estate Case Study: Sell or Rent?
« Reply #6 on: October 20, 2017, 01:42:19 PM »
Quote
but the changes that I made make it a worse cash flow issue than your estimate.

Quote
Total cash flow now is over $300 a month

I'm assuming you mean negative cash flow per month?  If yes, then even more reason to sell and be done with it for good.
Yes that's negative cash flow.

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makinbutter

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Re: Real Estate Case Study: Sell or Rent?
« Reply #7 on: October 20, 2017, 03:04:03 PM »
Sell, bro, sellllllllllllllllll, if only to finally cut ties with your ex-wife.  Even if this were a good rental - and as discussed above, it is probably not - if I were you I would probably err on the side of paying a little extra to close that chapter in my life.

Cut yourself free, take that sweet equity, and move on.  Best of luck.

Ticopowell

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Re: Real Estate Case Study: Sell or Rent?
« Reply #8 on: February 02, 2018, 07:09:18 AM »
I figured I'd give an update to everyone that helped me so here goes.
Selling the house has been a headache but I think it's almost over. I listed it at $273k and there were a few walk-throughs butt nobody was really interested in it with the tenant as their pets still there. I decided to un-list the house for a few weeks, replace the carpet ($2000ish) and then list it again. A week or two after listing I got an offer at $270k and good terms, but after the inspection they backed out because a few windows had condensation between the panes. They didn't want them replaced, they thought it was an indicator of poor build quality. I re-listed the house and got another offer for $270k a few weeks later, after a week they backed out because the guy received military orders unexpectedly. After Christmas I received an offer for $265k with a 2.75% buyer's credit that I didn't accept, then a week later they offered $271200 with a $6200 credit (essentially an offer of $265k) and I accepted it. So far everything has been going well and the appraisal matched their offer and my ex did all the paperwork that was required of her (the escrow company wanted her to sign something saying she had no interest in the house, even though she had signed the house over to me.  All that is left is waiting on my end until closing in the middle of this month.
I'll let you guys know when it sells, my plan is to pay off debt and then invest the rest, about $30k. If I buy another house at my next duty station I might use that for a down payment if I have to, but I hope to keep it invested if possible.
Thanks for all the responses!

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