The Money Mustache Community

Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: mrigney on April 08, 2014, 07:29:39 PM

Title: About to move -- rent or sell?
Post by: mrigney on April 08, 2014, 07:29:39 PM
I posted this in Real Estate, but thought it might get some eyes and input over here that it wouldn't over there. Basically, what would you do, and how much would you want to get per month in rent to rent instead of sell?

My wife and I are about to move across town (various have two kids; can get an extra bedroom and more land for less cost, escape an onerous HOA, be near our friends so we're not always driving, etc). We have lived in our current house for 4 of the last 5 years. For the year that we were gone (job related), we rented the house out. We have the choice to either rent our house out or sell when we move. I've wanted to get into some real estate holding to diversify (and wouldn't mind managing several properties long term). However, I'm doubtful that the numbers work on the house we currently own. In fact, I'm pretty sure no one would buy my house as a rental. But I'm not sure if already owning the house + associated numbers w/a sale change things. Anyway, I would appreciate advice. On to the numbers.

Neighborhood: New development (builder is still building). Currently about 250 homes built in the last 5 years, about 80 lots left to be built out. No vacant lots near us (we are in Phase I, they are now building in Phase IV). Rapidly growing area w/significant new commercial development in one of the top school districts in the state. New high school, hospital, Target shopping center, Wal-Mart w/in 4 miles. New interstate interchange going on the interstate 2 miles south of the house. E.g. to some extent I'm afraid I'm going to sell and miss out on significant appreciation in the next 5 years.
House: 3BR, 2BA, 1530 sq. feet, SS appliances, ceiling fans, trey ceilings, etc. Nafco in bath/kitchen, 30 year architectural shingles.
Value of house: if you go buy all 3BR/2BA houses in the development sold in the last year (by owner and by builder), avg. price is $105/sq. ft. If you just go buy what owner's have sold, value is $103/sq ft. That puts us somewhere in the $158-161k range if we were to sell (most recent construction has been averaging about $108/sq. foot for 3BR/2BA, but we can't compete w/brand new we'd have to undercut that).

Owed: $148k

So, if we were to sell, we would be looking at basically breaking even. After paying realtors + some closing costs (again, looking at comps from the last year in our neighborhood, we'd probably be paying about $3k in closing). So we could probably walk away without having to pay anything...but I doubt we'd make anything. And pyschologically, that's a little depressing.

Rental Income: $1200-1500/month. Yeah, obviously that's a big range. I'm getting the guy who managed the property last time out here to run some numbers. We rented for $1200 last time, but since we've been back, a neighbor rented for $1495. Other houses listed for rent in the area are $13-1400. Obviously it might make a huge difference being on the low or high end of that.
Mortgage + taxes + insurance + PMI (e.g. the devil): $973
So if we ran #s for a year

Gross Income (pick $1300/month for now) @ 90% occupancy: $14300
Mortgage Expense: $12276
Maintenance (Assuming 1% value of house): $1600
Misc. Expenses: $400

Net Profit: $24

So yeah, that sucks. If you bump the rent up to $1500, #s get a little bit better. Net profit is $2500.

Here's what makes me tempted to hold onto it (and tell me if I'm crazy). If I can hold it and break even for the next 3-4 years (shouldn't be any major--e.g. roofing and HVAC--repairs) and get rid of stupid PMI ($108/month). My mortgage goes down to $865/month. Then numbers would look like

Gross Income ($1300/month - $1500/month) = $14300 - $16200
Mortgage: $10380
Repairs: $2000
Net Profit: $2,000 - $4,000

If I can rent for $1500, I almost meet the 1% rule.

Am I crazy for even thinking about renting?
Title: Re: About to move -- rent or sell?
Post by: chasesfish on April 08, 2014, 07:36:08 PM
Rent it.

The property isn't bad, the thing that's making it suck from cash flow is you have PMI and a little too much debt.  Is your payment a 30 or a 15 year?  What about your rate?

Where are you getting the down payment for the new house if you haven't paid down the existing house enough to eliminate PMI?

I'm not trying to be a jerk, but I don't see how you're affording a new house if you've had to carry PMI for the last five years.  The implied interest rate on that insurance is so damn high it should be the first debt you pay down.
Title: Re: About to move -- rent or sell?
Post by: Thegoblinchief on April 08, 2014, 07:37:44 PM
The cash flow is neutral enough that it's not actively hurting you to hold onto it for appreciation, keeping in mind that appreciation is never a certain thing.

How fast are rentals getting snapped up? How many months could you sustain zero vacancy?

If you can handle at least six months of vacancy without getting destroyed financially, I'd probably hold onto it. I know people who are holding onto properties that are negative just on PITI alone, but hoping to make up the difference in time.
Title: Re: About to move -- rent or sell?
Post by: mrigney on April 08, 2014, 08:42:47 PM
@chasefish - We bought the house when we were young and naive (24 at the time) and only put 5% down even though we could've put down more (the rest of the cash got spent on stupid stuff like furniture:-)). We then refinanced 2.5 years ago when we rented it out for the year we were out of state. 30 year mortgage, 4.0% fixed. Appraised value at that point, though was down from when we bought. So we ended up having about the same equity in the house as when we  bought. PMI rates were higher, so PMI went from $70/month to the current $108. It lowered our monthly payment though b/c of the lower interest rate, so we went ahead and did it. As to how we can afford another house...I could pay off the PMI on this house w/in a few months. We've been sitting on some cash b/c of this very situation...we knew there was a good chance we would be moving, so I didn't want to throw a bunch of cash at the principle on this house until we figured things out. We don't have a ton socked away for a down payment on a new house, but enough that we could pretty comfortably put down 10% on houses we are looking at (alternatively, if we were not moving, I would throw that money at the current mortgage and wipe out PMI). But yeah, as I grow older, PMI is the bane of my existence. Stupid that I have to pay $108/month despite an 800+ credit score. Oh well.

@thegoblinchief - Analyzing the market right now. When we rented 2+ years ago, the market was hot, especially in this part of town. 3 applications in < 2 weeks (also makes me think we underpriced it). Suspect it's similar now, but waiting for some numbers to come back from a realtor. Not sure if we could handle 6 straight months of vacancy right now....3? Yeah, we could swing that w/o it destroying us, though we'd have to take some measures (would probably just have to cut all retirement contributions if it went on that long). Two mortgages together would be about 45% of my take home pay...I suppose some people swing that ratio on their single house. Can't imagine that...but yeah, we could swing an extended vacancy if needed. Just wouldn't be fun.

Also, I think I know someone who might be interested in signing an extended (2 year lease). Would getting a 2 year lease to start off with change the dynamics of things at all?
Title: Re: About to move -- rent or sell?
Post by: chasesfish on April 09, 2014, 04:47:01 AM
30 years at 4% with those numbers?  Its not a screaming rental property, but for a newer single family, I'd keep the thing forever as a rental.  I wish I could find those numbers where I'm living today.

How much cash do you have to come up with to get PMI removed?  Personally, I'd do that then move, but to each his own.  10% down still isn't a lot for a new house and you'll either have to get PMI again, or do a 80/10/10 if you can find a participating bank for the 10%.