Author Topic: To Sell or Rent a house that is no longer a primary residence  (Read 2034 times)

Heroes821

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To Sell or Rent a house that is no longer a primary residence
« on: October 20, 2016, 07:43:58 AM »
So Mini case study I guess:

Amount owed $150,000.
Payments per month with escrow $1100.

Going rental price for a 4 bedroom house in my neighborhood in San Antonio Texas (no income taxes statewide but higher property taxes to make up for it) is $1400.

I have relocated to South Caronlina for 12 months on a job and I have only owned the house for 18 months so if I wait 6 more months to sell I can avoid capital gains if they occur.

The property managers that I've talked with charge a flat fee of $125 a month for each property they manage instead of a %.


So current plan is to look into selling after I've owned it for 2 years, but I am open to keeping it as a rental property as well. What would need to happen in that case is that it would need refinanced off of my VA loan if/when I got to purchase another house. Now I could funnel money away from savings into paying this off, but that feels counterproductive.  Now when it goes to rent in December my monthly payment should drop as the homeowners insurance changes to dwelling insurance, but I still won't be able to take 50% of each month's rent to keep towards maintenance and expenses.

The city is growing rapidly and the area it is built in will be consumed by the city (raising property taxes) in a few years. Historically this is how the city of SA operates.

J Boogie

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Re: To Sell or Rent a house that is no longer a primary residence
« Reply #1 on: October 20, 2016, 09:39:10 AM »
Well, you would need to give us an idea of how much you could sell it for.  Unless that number is 140 or below, it's not a very good rental.  It's not bad, but it's not worth keeping just as a rental.

I'll take a guess that you didn't pay much more than $155k for it since you haven't owned it more than 2 years and used a VA loan (no down payment).

Assuming you could sell it for $165k after fixing up a few things, I'd sell it unless you can make a strong case for rapid appreciation or your family loves it (I assume you have a family/roomates as you have a 4 bedroom house which would be preposterous to live in by yourself) and wants to move back in when your 12 months in South Carolina is up.






Drifterrider

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Re: To Sell or Rent a house that is no longer a primary residence
« Reply #2 on: October 20, 2016, 10:05:29 AM »
So Mini case study I guess:

Amount owed $150,000.
Payments per month with escrow $1100.

Going rental price for a 4 bedroom house in my neighborhood in San Antonio Texas (no income taxes statewide but higher property taxes to make up for it) is $1400.

I have relocated to South Caronlina for 12 months on a job and I have only owned the house for 18 months so if I wait 6 more months to sell I can avoid capital gains if they occur.  If you don't live in it the full two years you can still pro rate the capital gains exclusion

The property managers that I've talked with charge a flat fee of $125 a month for each property they manage instead of a %.


So current plan is to look into selling after I've owned it for 2 years, but I am open to keeping it as a rental property as well. What would need to happen in that case is that it would need refinanced off of my VA loan if/when I got to purchase another house. Now I could funnel money away from savings into paying this off, but that feels counterproductive.  Now when it goes to rent in December my monthly payment should drop as the homeowners insurance changes to dwelling insurance, but I still won't be able to take 50% of each month's rent to keep towards maintenance and expenses.

The city is growing rapidly and the area it is built in will be consumed by the city (raising property taxes) in a few years. Historically this is how the city of SA operates.

Why would you refinance to free up your VA availability?  You will have closing cost on the refi AND closing cost when you buy something else.  Why not just consider a new mortgage on a new house?

What is your Cash on Cash return if you rent (that is, how much money did you spend on the house to buy/improve it?  Money out of pocket not loan proceeds).  If you got into the house for little to no cash out of pocket, your cash on cash ROI is tremendous.  Then, you have to determine if it is flowing enough cash to make it worth your while.  Only you can answer that.

Based on your payments and listed value I'm guessing you are in a 15 year mortgage. 

1400 rent - 1100 payment - 125 fee = $175 per month cash flow.  Is that enough to be worth your time and financial risk?  For me is isn't and I look for $50,000 houses that rent for $800 per month.

lhamo

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Re: To Sell or Rent a house that is no longer a primary residence
« Reply #3 on: October 20, 2016, 10:13:08 AM »
Per comment in red above, here is the relevant language in Publication 523, on how the capital gains exclusion applies to a primary residence that was owned for less than two years but sold due to work-related move:

"Partial Exclusion May Be Available

If you don't meet the eligibility test, you may still qualify for partial exclusion if you moved because of work, health, or an unforeseeable event.

You can qualify either by meeting a set of standard requirements (the “safe harbor” provisions) or by showing enough facts and circumstances to validate your claim.
Work-related move.   You meet the standard requirements if any of the following happened during the time you owned and lived in the home you sold:

    You took or were transferred to a new job in a work location at least 50 miles farther from home than your old work location.

    You had no previous work location and you began a new job at least 50 miles from home.

    Either of the above is true of your spouse, a co-owner of the home, or anyone else for whom the home was their residence."

https://www.irs.gov/publications/p523/ar02.html#en_US_2015_publink1000200611

No need to hang on as a rental -- you can sell now and exclude the pro-rated capital gains, which presumably will be well under the max limit.
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Heroes821

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Re: To Sell or Rent a house that is no longer a primary residence
« Reply #4 on: October 20, 2016, 11:40:55 AM »
Thanks Ihamo, that is really good to know, we are doubting that we will go back to Texas after this 12 month job, but it could happen so that is also a factor in holding onto it for a little longer.

Drift, very good point on just getting a new mortgage on a new house. The house was bought on a 30 year VA loan with zero cash down sale price before closing costs was $149k, after closing I think the loan was $154k.  When the fiancée and her children moved in we built a 4th bedroom into half of the massive upstairs living room, so that was around $4000.

I definitely agree with what you are saying on the low cash flow, I discovered MMM about 1 week AFTER I closed on this house, otherwise I would of made very different choices after moving to Texas from Colorado.  According to Zillow and whatever engine USAA/Mint use to determine potential sale value it is currently valued at $165k.

I guess my bigger question is now that I am shooting for FI, and I have such a low interest 3.25% if even if the ROI on rent is low now, is it worth holding onto for 30 years as a rental. If I sold now, and got the zestimate cost, it would probably put me about $7000 in pocket, then subtract the cost of making it a 4 bedroom and we're looking at $3000 in profit I guess.

ketchup

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Re: To Sell or Rent a house that is no longer a primary residence
« Reply #5 on: October 20, 2016, 12:00:39 PM »
According to Zillow and whatever engine USAA/Mint use to determine potential sale value it is currently valued at $165k.
Take Zillow and the like with a grain of salt.  The Zestimate on my house worth $100k is $140k, and the Zestimate on my house worth $25-30k is $130k.

Heroes821

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Re: To Sell or Rent a house that is no longer a primary residence
« Reply #6 on: October 20, 2016, 12:23:24 PM »
According to Zillow and whatever engine USAA/Mint use to determine potential sale value it is currently valued at $165k.
Take Zillow and the like with a grain of salt.  The Zestimate on my house worth $100k is $140k, and the Zestimate on my house worth $25-30k is $130k.

Yeah I definitely agree with that. When talking to the property manager I plan on using he let me know that with the 4th bedroom built, I'm now the only 4 bedroom in the neighborhood, but I'm not sure how that helps the price.

Drifterrider

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Re: To Sell or Rent a house that is no longer a primary residence
« Reply #7 on: October 20, 2016, 01:15:24 PM »
Heroes821.

Take your 2015 tax return and recalculate with a schedule E (rental property).  Do it with the numbers you could expect to get for a full year and find out how a potential rental affects your overall tax/income position.

You might only cash flow a little but benefit more by having a rental.  You might not.

Based on your numbers (and what you said about a 30 year mortgage), your real estate taxes must be murder!

Heroes821

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Re: To Sell or Rent a house that is no longer a primary residence
« Reply #8 on: October 20, 2016, 01:23:01 PM »
As a Texan transplant for only 18 months of my life I believe Murder is definitely the term used by almost everyone in that state regarding property taxes. I will try and figure out how to do that with last year's tax return, I use a CPA that uploads everything through intuit, but that sounds like a good way to get an estimate for the effect. The issue is as far as my tax income position this new job is now as an solo proprietor LLC with a pay 6 times higher than my highest taxable income previously. So looking at my...MAGI? and AGI? for 2016 and 2017 everything will be Extremely different from my previous taxes.

Memphis Mustache

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Re: To Sell or Rent a house that is no longer a primary residence
« Reply #9 on: October 21, 2016, 08:01:04 AM »
So Mini case study I guess:

Amount owed $150,000.
Payments per month with escrow $1100.

Going rental price for a 4 bedroom house in my neighborhood in San Antonio Texas (no income taxes statewide but higher property taxes to make up for it) is $1400.

I have relocated to South Caronlina for 12 months on a job and I have only owned the house for 18 months so if I wait 6 more months to sell I can avoid capital gains if they occur.  If you don't live in it the full two years you can still pro rate the capital gains exclusion

The property managers that I've talked with charge a flat fee of $125 a month for each property they manage instead of a %.


So current plan is to look into selling after I've owned it for 2 years, but I am open to keeping it as a rental property as well. What would need to happen in that case is that it would need refinanced off of my VA loan if/when I got to purchase another house. Now I could funnel money away from savings into paying this off, but that feels counterproductive.  Now when it goes to rent in December my monthly payment should drop as the homeowners insurance changes to dwelling insurance, but I still won't be able to take 50% of each month's rent to keep towards maintenance and expenses.

The city is growing rapidly and the area it is built in will be consumed by the city (raising property taxes) in a few years. Historically this is how the city of SA operates.

Why would you refinance to free up your VA availability?  You will have closing cost on the refi AND closing cost when you buy something else.  Why not just consider a new mortgage on a new house?

What is your Cash on Cash return if you rent (that is, how much money did you spend on the house to buy/improve it?  Money out of pocket not loan proceeds).  If you got into the house for little to no cash out of pocket, your cash on cash ROI is tremendous.  Then, you have to determine if it is flowing enough cash to make it worth your while.  Only you can answer that.

Based on your payments and listed value I'm guessing you are in a 15 year mortgage. 

1400 rent - 1100 payment - 125 fee = $175 per month cash flow.  Is that enough to be worth your time and financial risk?  For me is isn't and I look for $50,000 houses that rent for $800 per month.


Not to get off-topic but you mention that when looking for prospective investment properties, you look for 50k houses that you think might be able to rent for $800. While that sounds like a great return, at that price point ($50k) aren't you really getting into some pretty questionable neighborhoods? I had always thought that buying houses in quality neighborhoods (or at least decent neighborhoods) was one of the keys to successful rentals.

zephyr911

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Re: To Sell or Rent a house that is no longer a primary residence
« Reply #10 on: October 21, 2016, 11:49:34 AM »
SELL.

If nothing goes wrong, you get $175/mo. If it's vacant one month, and needs even some tiny repairs, there goes a whole year's cash flow! What if it's vacant for several? Then you get a tenant, but your AC unit breaks. 4-5 years' proceeds, gone. You get the idea. And these things happen. These things, and far worse, have happened to me, and everyone here who's done rentals for long enough. If you hold this property long enough you'll own it free and clear, that's great. But you'll end up sinking a lot more cash into it to get there.


I would never buy this home as a rental investment, and as MMM says, if you wouldn't buy it, you should probably sell it. Sell it, and put any proceeds into an asset you're confident about earning good long-term returns from. Don't hold it just because you're already in it.
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Heroes821

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Re: To Sell or Rent a house that is no longer a primary residence
« Reply #11 on: October 21, 2016, 12:21:37 PM »
SELL.

If nothing goes wrong, you get $175/mo. If it's vacant one month, and needs even some tiny repairs, there goes a whole year's cash flow! What if it's vacant for several? Then you get a tenant, but your AC unit breaks. 4-5 years' proceeds, gone. You get the idea. And these things happen. These things, and far worse, have happened to me, and everyone here who's done rentals for long enough. If you hold this property long enough you'll own it free and clear, that's great. But you'll end up sinking a lot more cash into it to get there.


I would never buy this home as a rental investment, and as MMM says, if you wouldn't buy it, you should probably sell it. Sell it, and put any proceeds into an asset you're confident about earning good long-term returns from. Don't hold it just because you're already in it.

Yeah I definitely think that is a good idea after all the comments here, I will probably hold on for 6-8 months because by then I should know if I have another job offer elsewhere.  The only reason to hold it that long is in case we move back to Texas.

zephyr911

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Re: To Sell or Rent a house that is no longer a primary residence
« Reply #12 on: October 21, 2016, 12:32:39 PM »
Not to get off-topic but you mention that when looking for prospective investment properties, you look for 50k houses that you think might be able to rent for $800. While that sounds like a great return, at that price point ($50k) aren't you really getting into some pretty questionable neighborhoods? I had always thought that buying houses in quality neighborhoods (or at least decent neighborhoods) was one of the keys to successful rentals.
You really just want neighborhoods where your tenants can afford the rent and won't generally wreck your shit. They can be poor and still meet those criteria.
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J Boogie

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Re: To Sell or Rent a house that is no longer a primary residence
« Reply #13 on: October 21, 2016, 02:32:01 PM »
SELL.

If nothing goes wrong, you get $175/mo. If it's vacant one month, and needs even some tiny repairs, there goes a whole year's cash flow! What if it's vacant for several? Then you get a tenant, but your AC unit breaks. 4-5 years' proceeds, gone. You get the idea. And these things happen. These things, and far worse, have happened to me, and everyone here who's done rentals for long enough. If you hold this property long enough you'll own it free and clear, that's great. But you'll end up sinking a lot more cash into it to get there.


I would never buy this home as a rental investment, and as MMM says, if you wouldn't buy it, you should probably sell it. Sell it, and put any proceeds into an asset you're confident about earning good long-term returns from. Don't hold it just because you're already in it.

Yeah I definitely think that is a good idea after all the comments here, I will probably hold on for 6-8 months because by then I should know if I have another job offer elsewhere.  The only reason to hold it that long is in case we move back to Texas.

And that's not a bad reason to hold it.  If you like the place, it's worth holding onto until you know where you're going when your 12 months are up. 

It's just worth noting that it's not a good rental.  But it could make financial sense to keep it for a little while if you plan to move back in.  Quite a few fees (not to mention time & energy) involved in the process.  I agree with the MMM advice that you should sell it if you wouldn't buy it, but the fees & hassle of a real estate transaction call for patience & clarity in making these decisions.

zephyr911

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Re: To Sell or Rent a house that is no longer a primary residence
« Reply #14 on: October 21, 2016, 02:49:49 PM »
Yeah I definitely think that is a good idea after all the comments here, I will probably hold on for 6-8 months because by then I should know if I have another job offer elsewhere.  The only reason to hold it that long is in case we move back to Texas.
And that's not a bad reason to hold it.  If you like the place, it's worth holding onto until you know where you're going when your 12 months are up. 

It's just worth noting that it's not a good rental.  But it could make financial sense to keep it for a little while if you plan to move back in.  Quite a few fees (not to mention time & energy) involved in the process.  I agree with the MMM advice that you should sell it if you wouldn't buy it, but the fees & hassle of a real estate transaction call for patience & clarity in making these decisions.
Agreed, the transactional costs are a valid consideration, and if there's a possibility you'll want to move back in, holding for a few months isn't a terrible idea.
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Drifterrider

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Re: To Sell or Rent a house that is no longer a primary residence
« Reply #15 on: October 24, 2016, 04:43:49 AM »
Not to get off-topic but you mention that when looking for prospective investment properties, you look for 50k houses that you think might be able to rent for $800. While that sounds like a great return, at that price point ($50k) aren't you really getting into some pretty questionable neighborhoods? I had always thought that buying houses in quality neighborhoods (or at least decent neighborhoods) was one of the keys to successful rentals.

Not really.  Eastern North Carolina (military town).  The median rent for a SFR is $800 per month.  My family still owns rentals in the neighborhood where I spent my childhood (many, many years ago).  A decent town house apartment 3/2 routinely goes for $800-1200 per month (but some amenities are included).  I believe the median income for that county is still below $40,000.

One of the houses I lived in  was my father's first house which he bought in 1956.  My mother still owns it.  We lived in it for two years and it has been a rental for the other 58.  In 2014 we renovated the kitchen and bathroom (all new) and put in new windows.  It is on the end of its third roof and six years into its third HVAC.  The last tenant (before the reno) lived there 14 years. 

Added.  Since I know the area and neighborhood I'm comfortable buying there.  However (because there is always a however) prior to looking at any property (other than on line since I don't live where my property is), I ask my property manager about the prospective area.  I also have her look at any prospective property (as in: goes inside and looks at the house) to tell me how much rent I could get and what I would have to do to get it (paint, flooring, etc?).

Sometimes she had told me to "look elsewhere".  I rely on her expertise.
« Last Edit: October 24, 2016, 12:22:19 PM by Drifterrider »

Heroes821

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Re: To Sell or Rent a house that is no longer a primary residence
« Reply #16 on: August 15, 2017, 09:48:51 AM »
I am bumping this for an update.  We decided to sell after our Renters asked to be let out early to purchase a home, and I am much happier selling.

The house has been on the market between 45-50 days and in that time the "zestimate" for what that is worth has jumped about $10,000 which now shows my house about 9k lower priced than Zillow think's it's worth.  Remaining Mortgage is around $148,000 with Monthly payments of $1100. 

We've had probably over 10 showings, but zero offers. The most recent showings disliked the driveway (1 car up a hill) which is understandable.  We are the only 4 bedroom for sale in the neighborhood, and doing a search for houses with the same stats as mine show very limited number in the San Antonio area and all more expensive.

My realtor is alright, but I'm on the other side of the country.  The house is currently empty.

  Any advice on what can be done to improve the sale time?
How long should I wait before lowing the price?

Breaking even is ok, but still has to account for broker fees.

zephyr911

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Re: To Sell or Rent a house that is no longer a primary residence
« Reply #17 on: September 14, 2017, 10:11:11 AM »
Other than keeping it clean and maybe staging a few things, all you can really do is wait or drop the price. Without local knowledge, I can't say when or how much.
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Heroes821

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Re: To Sell or Rent a house that is no longer a primary residence
« Reply #18 on: October 12, 2017, 12:24:10 PM »
Just throwing out an update.

Looks like we'll be under contract this evening the buyer's agent said she'd get the contract to the title company before COB today.

Coming in at full asking price of $164,900.  According to the "estimated breakdown" of my realtor my end balance after the sale will be like $10 over what is still owed on the house. 

Purchased in 2015 for $149,500.  Initial Loan: $154,443.00

Current owed: $147,089.28.

We'll see how it goes.

Unless I can guarantee I won't be moving for 5+ years, I think I'm done buying houses for a little while.


GrayGhost

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Re: To Sell or Rent a house that is no longer a primary residence
« Reply #19 on: October 12, 2017, 09:01:19 PM »
As a fellow military guy, I'm with you. Buying a house is one of the aspects of the American religion that MMM and the community seem to have bought hook, line and sinker. Don't get me wrong, there are people for whom home ownership is right. But there are a few caveats.

Owning HAS to be a better financial deal than renting (after accounting for expenses, taxes, etc)
You HAVE to plan to live there for at least five years
Your lifestyle HAS to demand a house rather than apartment

My boss is set to close on a house he rented out in Washington for a couple years. From what I gather, the difference in closing costs between buying and selling was like $60k. On top of that, he banked a few hundred a month in rent vs. mortgage/taxes/insurance.

Here's the problem. It took him a few months to sell the house and with a monthly mortgage of $1800... you do the math.

They say that you throw your money away when you rent rather than buy. Well, when you rent, you buy flexibility and versatility, and a peace of mind that a homeowner simply doesn't have. If you own and the AC goes bust, get ready to shell out cash; if you rent, you call the landlord/management and if they make trouble, you follow the legal process for withholding rent until they perform the fix.

I may own a house again someday. Hell, maybe I will buy one as an investment if/when the market tanks again. But for the immediate future, I will be renting and loving it.
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Heroes821

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Re: To Sell or Rent a house that is no longer a primary residence
« Reply #20 on: October 13, 2017, 06:39:31 AM »
Thanks Gray,

I definitely hear you there.  My first house was a 2011 buyer's market purchase that sold in an amazing fashion 4 years later, so my mentality with the house above was to rinse and repeat!