Author Topic: Sell or Rent  (Read 607 times)

wildpink

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Sell or Rent
« on: October 11, 2018, 11:57:29 AM »
We have a 2 bed/1 bath condo that we could potentially keep and rent out if it made sense.  Our family will eventually be moving in the next year or so, looking for more space as children come along and grow up.  Have a nice interest rate on the mortgage that I would be sad to lose.  This is our first property we've ever owned, it is in a growing neighborhood right near downtown Milwaukee.  So potential for some more appreciation.

Info

Market Value: 225,000
Original Purchase price:  185,000
Original Mortgage Amount: 138,500
Interest Rate: 2.875%
Mortgage Term: 15
Term remaining: 12
Amount remaining on mortgage: 123,000
Gross Rents: $1800-2000
Principal and Interest: $948
Taxes and Insurance: $470
HOA costs: $276
Deferred maintenance notes: nothing really, pretty low maintenance condo.  We have lived here for over 4 years and have had no major maintenance costs.

So about $1700/month straight costs with income probably around $1900/month.  About $650 of the mortgage is payment is going towards principle right now. 

Thanks for your time!


Gary123

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Re: Sell or Rent
« Reply #1 on: October 11, 2018, 02:02:25 PM »
My advice would be to rent it provided you don’t move too far away.  The cost and your own personal time required to manage a rental property grows exponentially the farther away you move from the property.  In 2008, lots of the “investors” who went under were those buying properties in states where they didn’t live.  Even a healthy margin between your rental income and expenses is quickly destroyed by travel costs to and from the property if it’s too far.

Our rule of thumb is maybe no more than 10 minutes drive from your primary residence.  That way anytime you need to check on it, show the place, or fix something it doesn’t eat-up an entire day traveling to and from the property.

Papa bear

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Re: Sell or Rent
« Reply #2 on: October 12, 2018, 09:03:58 AM »
Do you want to be a landlord?  That’s the most important question here.  If you’re on the fence, sell it. 

It’s not my favorite for a rental, but you could do worse.  Do you expect rents to increase with the appreciation of the neighborhood?


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Jon Bon

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Re: Sell or Rent
« Reply #3 on: October 12, 2018, 09:05:13 AM »
So $200 a month in profit? That is a pretty tight margin.....

Let alone....
Replaced furnace
Tenant Vacancy
Special HOA assessments
Pet/Tenant Damage
New Appliances


The list goes on....

Also you are making 2400 a year on it, on 100k in equity, so 2.4% annual return. I am not investing guru but that sounds like a bad investment.

The entire above is irrelevant compared to this: If you sell now you keep the entire gain tax free. If you rent it out you get to pay tax on it.

Jon Bon

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Re: Sell or Rent
« Reply #4 on: October 12, 2018, 09:07:15 AM »
FWIW my answer would probably be different with no HOA dues, but if wishes were horses....


FINate

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Re: Sell or Rent
« Reply #5 on: October 12, 2018, 09:35:34 AM »
Don't buy or hold RE with the expectation of appreciation - this is nothing more than speculating. Investment properties are all about the yield and yours is low after expenses, not a great rental property. If the economy takes a turn for the worse you need to be ready to hold on to it for up to 10 years with potential negative cash flow, or even sell at a loss.

Real estate had a huge run up over the past few years so an increase from 185k to 225k is relatively low at a little less than 5% annually over the past 4 years. This strongly suggests an area with lots of new supply and/or relatively low demand, which are the types of areas that got clobbered the worst in the last housing slump.

Your current interest rate only matters in that it lowers your expense to own in this specific case. Even so, your profits are still thin. Increasing mortgage rates increase costs for new owners. In other words, this puts downward pressure on prices.

I would sell and take the exclusion on cap gains as this is your primary residence.

Cwadda

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Re: Sell or Rent
« Reply #6 on: October 12, 2018, 09:38:00 AM »
Don't buy or hold RE with the expectation of appreciation - this is nothing more than speculating. Investment properties are all about the yield and yours is low after expenses, not a great rental property. If the economy takes a turn for the worse you need to be ready to hold on to it for up to 10 years with potential negative cash flow, or even sell at a loss.

Real estate had a huge run up over the past few years so an increase from 185k to 225k is relatively low at a little less than 5% annually over the past 4 years. This strongly suggests an area with lots of new supply and/or relatively low demand, which are the types of areas that got clobbered the worst in the last housing slump.

Your current interest rate only matters in that it lowers your expense to own in this specific case. Even so, your profits are still thin. Increasing mortgage rates increase costs for new owners. In other words, this puts downward pressure on prices.

I would sell and take the exclusion on cap gains as this is your primary residence.

Boom, nailed it.

wildpink

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Re: Sell or Rent
« Reply #7 on: October 12, 2018, 01:20:23 PM »
So $200 a month in profit? That is a pretty tight margin.....

Let alone....
Replaced furnace
Tenant Vacancy
Special HOA assessments
Pet/Tenant Damage
New Appliances


The list goes on....

Also you are making 2400 a year on it, on 100k in equity, so 2.4% annual return. I am not investing guru but that sounds like a bad investment.

The entire above is irrelevant compared to this: If you sell now you keep the entire gain tax free. If you rent it out you get to pay tax on it.

Would you include the principal that is paid down every month in the return?  This would add about $8,000/year so more like a 10% return is around where I was thinking.   

That is a good point about tenant vacancy/maintenance costs not being included though.  Thanks.

tralfamadorian

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Re: Sell or Rent
« Reply #8 on: October 13, 2018, 12:01:03 PM »
+2 FINate's post.

Sell. If it was a 30 year mortgage without the HOA, my answer would be different.

Gary123

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Re: Sell or Rent
« Reply #9 on: October 14, 2018, 07:24:20 AM »
Not trying to pick a fight but in our portfolio, we can retire relatively young due to properties in an HOA and on 15 year loans.

Who has 30 years to wait while you are paying mostly interest each year and very little equity?  If you can swing it, always 15 years because your cost of money is much cheaper not even considering the better interest.

As for the HOA, we bought four “attached” homes by KB Homes beginning in 2008 until around 2010.  While appreciation has been fantastic, our 15 year loans have already paid down most of the mortgages.  Properties I bought back in 2000 with 30 year loans still owe more and now I am having to dig deeper in my pockets for painting and roofs.

Local realtors who follow the phony “Rich Dad Poor Dad” all recommend not paying condo fees or HOA.  If that fee covers your homeowners insurance along with siding and roof repairs and replacement it is a great deal as long as your numbers come together.

tralfamadorian

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Re: Sell or Rent
« Reply #10 on: October 14, 2018, 02:36:36 PM »
Not trying to pick a fight but in our portfolio, we can retire relatively young due to properties in an HOA and on 15 year loans.

Who has 30 years to wait while you are paying mostly interest each year and very little equity?  If you can swing it, always 15 years because your cost of money is much cheaper not even considering the better interest.

As for the HOA, we bought four “attached” homes by KB Homes beginning in 2008 until around 2010.  While appreciation has been fantastic, our 15 year loans have already paid down most of the mortgages.  Properties I bought back in 2000 with 30 year loans still owe more and now I am having to dig deeper in my pockets for painting and roofs.

Local realtors who follow the phony “Rich Dad Poor Dad” all recommend not paying condo fees or HOA.  If that fee covers your homeowners insurance along with siding and roof repairs and replacement it is a great deal as long as your numbers come together.

I don't see it as picking a fight- just a difference of opinion/experience. I tagged the HOA and 15yr loan specifically for the OP because given his/her purchase price and rent, at a 30 year without the extra HOA costs, the property looked at first blush like it would cash flow. With the extra PI and HOA, it doesn't.

While I do have one property with a HOA, I prefer ones without because it's a risk that I, personally, am uncomfortable with. All it takes is a HOA member with lots of time and a grudge and there could be new HOA rules regarding the percentage of units in the complex that can be rented. Or on the other end of the pendulum, an indifferent incompetent HOA board could result in a series of special assessments for big ticket items whose eventually is predictable and should have been budgeted for.

I'm not sure I follow your reasoning for the preference for 15 year mortgages. For me, property cash flow >>> not easily accessible equity. You mentioned "who has 30 years to wait." What is one waiting for? Untapped equity is nice but while a mortgage is still in affect, your cash flow is the same while the equity is sitting dead, not making you a dime. Why not pull out extra monthly cash flow from the property (the delta between the 15yr and 30yr) and invest that in index funds or another property?