Author Topic: Reader Case Study – Sell or Rent out former residence  (Read 4412 times)

rundiego

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Reader Case Study – Sell or Rent out former residence
« on: December 17, 2013, 02:38:34 PM »
Specific question: 

Our question is about our former home.  The house was purchased in 1997 for $149,500.  We have put about $20,000 capital improvements into the property over the 16 years that we lived there. We could probably sell the house for $380,000, before expenses. Comparable rents in our area are $2,000 per month, and vacancy is low. 

On the one hand, our desire to avoid hoarding high maintenance assets motivates us sell the property.   Selling would reduce our hassle factor significantly, since we don't have any experience with real estate transactions and we wouldn’t have to worry about finding good renters or maintaining the property or dealing with evictions.  In addition, although price appreciation on real estate assets is typically above the national average in our area, price appreciation is not guaranteed.  We keep discussing the opportunity cost of investing in our former residence, versus just investing in a REIT index fund. 

On the other hand, our fixed costs for the property are low and the property is centrally located close to many employment opportunities and various universities.  It would have a positive carry – we likely wouldn’t lose money on the transaction unless the renters totally trashed the house.  We would likely have the renters put the natural gas and electricity in their name, maybe even the water bill.  We could even spring for a property management company to help if we lacked confidence in our abilities to manage the property.  Keeping the property is a good insurance policy for the future – when are we ever going to get such a low tax base again?  If we were to sell and repurchase the same house, the tax base would be over double due to property appreciation.  If something happens to us, we could always return to our very affordable former residence.   

What are we missing?  What analysis would you do to help us decide whether to keep/rent or to sell?

« Last Edit: April 29, 2015, 01:51:23 PM by rundiego »

lackofstache

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Re: Reader Case Study – Sell or Rent out former residence
« Reply #1 on: December 18, 2013, 10:35:08 AM »
~$380K vs. $2K/mo? I'd sell and invest that money. It'll take you nearly 16 years to make the $380K w/ rent and you'd have many expenses within that time. Less to deal with & more money.

gimp

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Re: Reader Case Study – Sell or Rent out former residence
« Reply #2 on: December 18, 2013, 10:51:34 AM »
If you were to assume no vacancy and no repairs, you'd be at 24k return on 380k value which is 5.2%.

After taxes, fees, maintenance, insurance, and vacancies, you'd dip well under 5%.

Financially speaking: sell it.

Emotionally speaking, you are probably attached to your home of 16 years, and you have enough assets that you could keep it as a rental property and not feel the sting of wanting that money to invest in something else. So you could keep it. I wouldn't but you could.

MissStache

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Re: Reader Case Study – Sell or Rent out former residence
« Reply #3 on: December 18, 2013, 11:24:33 AM »
Current expenses:

Donations - $3,150/month
Federal Income Tax - $7,400/month
State Income Tax - $2,500/month
Payroll Taxes - $1,795/month
Retirement savings - $2,917/month
Dental, vision insurance - $15/month
House Payment - $2,235/month
Home owners insurance plus umbrella policy - $50/month
Property taxes - $850/month
Telephone - $30/month
Internet - $19/month
Water & Sewer & Trash - $250/month
Gardner - $200/month
Car Insurance - $165/month
Gasoline - $600/month
Car repair - $50/month
Vehicle tags - $70/month
Electricity - $85/month
Natural Gas - $25/month
Groceries and other household items - $300/month
Eating out - $100/month
Travel and entertainment - $1,300/month
Hair care - $50/month
Clothing - $25/month
Gifts - $100/month


Man, when I started reading this I was SURE you were trolling us!  $1,300/month travel and entertainment! $500/month on gasoline!  $200/month on a gardener!?

But, you guys are clearly doing just fine, so I'll just give you a cheers on your charitable giving and be on my way!

Rural

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Re: Reader Case Study – Sell or Rent out former residence
« Reply #4 on: December 18, 2013, 11:29:58 AM »
You will have to decide for yourselves, but in your situation I think Id go with the property management if I decided to rent. It sounds like your joint side job would cover a 10% property management fee all by itself.

dadof4

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Re: Reader Case Study – Sell or Rent out former residence
« Reply #5 on: December 18, 2013, 02:54:38 PM »
As others have mentioned, 2k rent for s 380k house isn't very good. If you're determined to be landlords, then do it on better yielding properties.

Another issue is taxes. If you sell it now (or in the next 3 years), you won't have to pay capital gains taxes (it was your primary residence for 2 of the past 5 years). If you hang on to it for longer, you may be liable for a huge check to uncle Sam.

marty998

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Re: Reader Case Study – Sell or Rent out former residence
« Reply #6 on: December 18, 2013, 03:42:08 PM »
As others have mentioned, 2k rent for s 380k house isn't very good. If you're determined to be landlords, then do it on better yielding properties.


Err umm....you are missing the point.....it's more than doubled in value. That is where the real money is being made. If it doubles in value again in the next 10-12 years and that's another $400,000. Buy 6 to 8 of those with borrowed money (not a stretch on the OP's income) and you could be looking at a $multi million asset base.

Latito

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Re: Reader Case Study – Sell or Rent out former residence
« Reply #7 on: December 18, 2013, 05:43:44 PM »
Based on the expenses you have listed for your former home ($360 monthly) against a $2k monthly rental income you'd be clearing $1640 per month on the property or just under 20k annually.  This amounts to a 5.2% return just in operating income.  Effectively, you'd need to see an investment return that beats housing price inflation by 5.2% for it to be worthwhile to sell - probably not a likely scenario.

Personally I would strongly challenge your cost assumptions about the former home.  These might be the current costs, but with renters you'll definitely have maintenance costs to consider and certainly the added effort of dealing with the tenants.  You mentioned likely getting a property manager to handle that (a good idea for you probably) but then there goes ~10% of the rental income.

One of the biggest reasons to sell I think comes from the tax implications of selling now while you can still claim it as a primary residence.  I'm not familiar with US taxes, but if what dadof4 said is true, I'd strongly consider selling within the next 3 years.  Here in Canada you get to pro-rate things based on years lived there so it wouldn't really matter when you sold.


All of this aside, you clearly are wealthy enough that the financial implications here probably aren't the most important.  You need to decide if you want to keep the house for security and sentimental reasons or sell the house for the hassle-free investment you'd purchase with the proceeds.

dadof4

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Re: Reader Case Study – Sell or Rent out former residence
« Reply #8 on: December 19, 2013, 01:13:49 AM »
Err umm....you are missing the point.....it's more than doubled in value. That is where the real money is being made. If it doubles in value again in the next 10-12 years and that's another $400,000.
The past decade or so has seen some unprecedented growth in real estate value, even after the 2008 collapse in many areas. The future is hard to predict. Historically, it will rise at a slower rate, usually around 3% annually. 

But even accounting for that growth, there are better real estate deals out there - that provide a better cash flow while also allowing for future growth.

Buy 6 to 8 of those with borrowed money (not a stretch on the OP's income) and you could be looking at a $multi million asset base.
Well, yes, as long as everything keeps going up. But buying 6-8 heavily leveraged properties also carries significant risk. If the market dips by 30%, they would not only lose their entire equity, they would owe money on all of those properties.

lackofstache

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Re: Reader Case Study – Sell or Rent out former residence
« Reply #9 on: December 20, 2013, 12:21:30 PM »
Err umm....you are missing the point.....it's more than doubled in value. That is where the real money is being made. If it doubles in value again in the next 10-12 years and that's another $400,000.

I'd get the equity out of this doubling and then use it on a less risky venture. They could sell this & then buy 6-8 cheaper properties outright if they wanna e landlords. There are many ways of leveraging money, but in this situation I wouldn't take the risk for the possibility of more equity.

 

Wow, a phone plan for fifteen bucks!