Author Topic: Sell or Continue to Rent?  (Read 425 times)

Suey13

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Sell or Continue to Rent?
« on: July 07, 2018, 12:33:21 AM »
Greetings all,

Two years ago I relocated states for a new job which would increase my income 300% within 5 years and allow me to retire with full pension after 20 years on the job.  I previously purchased my first house in 2012 when the market was quite low and I think it has valued nicely since.  However, I've been beginning to wonder if it would be worth selling it and purchasing in my new location, or to continue to rent it.  A home equal to, or a slightly upgrade at my current location would run between 250-280K for a fixer-upper or ~315k for move in ready.  Please let me know your opinions.  I'm currently renting a small apartment for $1.2k a month, charging renters at my old place $900 per month with 10% going to my property manager.

Prior Home
Market Value: $160,000-$179,000
Original Purchase price: $53,000
Original Mortgage Amount: $47,500
Interest Rate: 3%
Mortgage Term: 15 year fixed
Term remaining: 8 years
Monthly Mortgage payment: ~$480
Amount remaining on mortgage: $32,000
HOA costs: $120 per year
Property Tax: $1200 per year

Investments into the house: ~$10k, interior paint, new carpet, replaced all linoleum with tile, put in-ground sprinkler system and new lawn in back yard, all new appliances.

Thank you for your time and input.
 

waltworks

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Re: Sell or Continue to Rent?
« Reply #1 on: July 07, 2018, 02:39:47 AM »
Old house is a horrible rental. Sell it yesterday. But don't buy another house... because $1.2k in rent per month is a smoking deal compared to a $300k house in your new hood. Keep renting.

-W


Suey13

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Re: Sell or Continue to Rent?
« Reply #2 on: July 07, 2018, 02:47:00 AM »
Old house is a horrible rental. Sell it yesterday. But don't buy another house... because $1.2k in rent per month is a smoking deal compared to a $300k house in your new hood. Keep renting.

-W

What makes it such a horrible rental?  I'm not experienced in the monthly net rental income vs. equity from sale realm and am curious.  Just for clarity, the $1.2k per month in rent is for a small 1br/1ba apartment rather than the 3br/2ba house I'd be looking at.

midwesterner1982

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Re: Sell or Continue to Rent?
« Reply #3 on: July 07, 2018, 07:31:46 AM »
Congratulations, it sounds like you've put yourself in a good position.  I have a few ideas for you to think about and consult with your CPA, attorney, etc.
If you think you want to sell:
Google the primary residence capital gains exclusion.  In a nutshell, if the home was a primary residence for any 2 of the 5 most recent years, you can sell the property and avoid paying capital gains tax on the gains.

You could also protect gains from capital gains tax by doing a 1031 exchange.  Basically, you would roll the proceeds into a bigger RE deal within 6 months of closing.

Estimate your proceeds from the potential sale.  Sale price minus Remaining mortgage minus unpaid 2018 property taxes minus abstracting minus revenue stamps minus Realtor Fee minus seller settlement services minus termite inspection minus attorney fees minusseller paid closing costs (if needed) = Net Proceeds

If you decide to sell, I would challenge you to keep the proceeds on the investment side of your balance sheet.  If you roll it back into a personal residence then you no longer have an asset, you have a liability.  Your house is a liability not an asset because it costs you money and provides $0 revenue.  If you get this wrong you will kick yourself later!  As Walt mentioned, you're current rent is very cheap and I would continue that as long as possible.  Only consider buying if:
  • it's cheaper than renting (including maintenance/upkeep)
  • if you really want the homeowner lifestyle
  • and you can afford it (meaning your retirement and all other needs are met. Some would say only if you are financially independent.)
Jim Collins has some great insight into the rent/own discussion.

If you think you want to continue:
It sounds like you're an accidental real estate investor.  This is fine as it's how a lot of ppl get into the game.  But, now that you are a RE investor, you should learn to think like one if you choose to continue: check out Bigger Pockets, The Real Estate Guys Radio podcasts, etc.  Read Rich Dad Poor Dad if you haven't already.

Investing in anything always begs the question - As opposed to what?  Meaning if you don't invest in this what other more favorable options do you have?  Can you make better returns for less risk/headache elsewhere like other properties, property in other markets, stocks, bonds, etc.  How does real estate fit into your overall investment plan?

If you didn't already own the asset, would you buy it now?  It sounds like home prices have risen quickly in the area.  Are rents also rising?  Does the property meet the 1% rule at today's gross rent and sell price?  Are you getting market rent?  Are there big employers in the area, providing you lots of tenants to choose from, and is the community adding good jobs or losing them?  Know your market then do the math and the math will tell you what to do.

If you decide to keep the property, I would challenge you to consider going without property management.  I live overseas and still manage my properties myself as do many people on these forums.  How much value are you really getting from your PM?  They do a few hours of work to find the tenant but then they get to collect 10% from you ongoing.  That's a great deal for them and can be okay for you if you're already wealthy.  If you're still building your portfolio then that 10% is really expensive.

If you decide to keep the property, a true investor would refinance to take out that equity to put it to use in other investments.  This depends on your comfort with debt but there's risk in holding lots of equity too.  As the saying goes about equity, 'the market giveth and the market taketh away'.

That's probably enough to think about for now!

waltworks

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Re: Sell or Continue to Rent?
« Reply #4 on: July 07, 2018, 12:05:48 PM »
What makes it such a horrible rental?  I'm not experienced in the monthly net rental income vs. equity from sale realm and am curious.  Just for clarity, the $1.2k per month in rent is for a small 1br/1ba apartment rather than the 3br/2ba house I'd be looking at.

Spend a little time reading this forum and you'll quickly learn about the 1% and 50% rules.

But you don't need that information to realize that you're losing money here.

After property management, you're making $820 a month. Subtracting out HOA, property taxes, and mortgage payments of $700, you're at $120 a month. Even if you never have to do a single bit of maintenance, and there's never a vacant month when tenants move out, and the roof lasts the next 100 years, etc, etc - you are only making $1500 a year on $140k in equity!

Of course, you'll pay $2000-3000 a year for capex and maintenance, and you'll lose 5-10% to vacancy. So really, you're losing a few hundred dollars a month.

But even if you assume that away, you could literally earn that 1% in a CD with zero risk and zero hassle.

Your house is a horrible, horrible rental. Sell it.

-W

tralfamadorian

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Re: Sell or Continue to Rent?
« Reply #5 on: July 07, 2018, 12:50:20 PM »
I disagree that your property is a horrible rental. At the original purchase price vs. current rent, the numbers are good though the 30yr kills the cash flow. However, it has appreciated to the point that either you should sell or refi to a 30yr and pull out some equity.

But considering that you moved two years ago, I would recommend selling asap so that you can take that gain tax free.

Rough math:

Keep: (as is)
Rent: $900
PITI: $480
HOA: $10
Management: $90
Vacancy: $90
Maintenance: $90
CapEx: $90
Net: $50/mo, $600/yr

Sell:
Price: $170k
Realtor: $10.2k
Misc (2%): $3.4k
Mortgage: $32k
Net: $124.4k
(There will be some depreciation recapture from the two years it's been a rental but I'll leave that tax increase as part of the misc category.)
$124.4k * 7% avg stock market returns = $8,708/yr