Author Topic: Should we sell our rental house?  (Read 3006 times)

Spicolli

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Should we sell our rental house?
« on: March 08, 2017, 04:18:15 PM »
We own a rental house in Southern California that was recently paid off in full. It is worth over $500K. We currently collect $1,800 per month ($21,600/yr) in rent and spend $8,300 in prop taxes/insurance/gardener/water...leaving about $13,300 in "profit" before maintenance costs, which have been almost nothing for the past 5 years...but that could change at anytime. Our renters are low maintenance and we hardly ever hear from them. We have given it some thought to move into the house when we retire in about 4 years. I know we could expect much better average returns if invested in stocks but feel the market is due for a correction sometime in those 4 years.  What would you do?

MattC

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Re: Should we sell our rental house?
« Reply #1 on: March 08, 2017, 07:44:44 PM »
I think the numbers are close.  Let's say property is increasing in value over the long run by about 2%/year; so that's another $10k a year gain for you.  Not knowing the house, maybe you ought to budget $4k a year for maintenance?  So you're effectively getting your $13,300 "profit" plus $10k appreciation minus $4k maintenance = $19,300 a year on a $500k investment, so just under 4%.  But it requires some work from you; collecting rent, accounting, getting tennants, contractors, etc..  You could figure the value of your time and back that out of the equation.  And you are somewhat at risk for a loss if a tenant trashes the place or you go vacant for a little while, the water heater leaks etc.

Maybe other folks would make different assumptions (appreciation, add in the value of the house's depreciation tax writeoff, etc), and I obviously don't know your market, but I'd evaluate it in that framework - what rate of return is the house getting, and will stocks do better than that in the long run.  Honestly, the risk of depreciation in the stock market is probably similar to the risk of depreciation in your house; i.e. if the stock market goes down 20%, your house probably will too. 

If you're really going to live there or somewhere exactly the same (and you're OK that your retirement housing is making you 20k-25k poorer per year) probably you should keep it since the transaction costs on that much real estate would be in the $25k-40k range (I think?) for the buy+sell.

But if there's a good chance you'll see the light and move someplace cheaper, I personally would sell and invest.  Long run, stocks are set it and forget it and should do a little better than the 4% anyway.  When rates of return are close, I'm a fan of applying Occham's razor to the investment decision; the simplest investment is the best one.  In this case, where the returns of real estate aren't obviously better than stocks, the simplest investment (stocks) is preferable. 
   

Goldielocks

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Re: Should we sell our rental house?
« Reply #2 on: March 08, 2017, 11:15:21 PM »
You have an investment returning approximately 2% per year, plus the real estate appreciation of maybe another 2% per year.


Can you beat 4% per year by putting the money to good use somewhere else?

Can you borrow against the property at a low rate, and invest some of the proceeds (increasing your return but also your risk).

Property tax does not seem ridiculously low, so I would not keep that in the consideration set.

OthalaFehu

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Re: Should we sell our rental house?
« Reply #3 on: March 09, 2017, 07:46:36 AM »
California real estate is likely to go up. What about a HELOC to free up some cash for investing while keeping the house for now.

historienne

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Re: Should we sell our rental house?
« Reply #4 on: March 09, 2017, 11:19:27 AM »


If you're really going to live there or somewhere exactly the same (and you're OK that your retirement housing is making you 20k-25k poorer per year) probably you should keep it since the transaction costs on that much real estate would be in the $25k-40k range (I think?) for the buy+sell.

But if there's a good chance you'll see the light and move someplace cheaper, I personally would sell and invest.

Agree with this.  Transaction costs plus the locked-in property tax rate would make me keep it *if* you are reasonably likely to move back in.  Otherwise, it's a mediocre return on a very illiquid, undiversified asset.

waltworks

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Re: Should we sell our rental house?
« Reply #5 on: March 09, 2017, 01:09:58 PM »
If you really think you want to live there in the near future, hold it.

If not, sell it, it's a terrible investment in basically all ways (low return, low liquidity, high risk).

-W

AccidentalMiser

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Re: Should we sell our rental house?
« Reply #6 on: March 09, 2017, 01:19:42 PM »
If you really think you want to live there in the near future, hold it.

If not, sell it, it's a terrible investment in basically all ways (low return, low liquidity, high risk).

-W

This + 100

Take it from a guy with 5 rental properties, which if 5 more than I want.  Unless you are certain you're going to move into it soon, Ditch it.

If you had the cash to buy it and didn't currently own it, would you draw the money out of your investments to make the purchase?  If not, sell it.

waltworks

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Re: Should we sell our rental house?
« Reply #7 on: March 09, 2017, 08:15:08 PM »
So. Much. Facepalm.

I don't even know where to start.

Your hypothetical $500k ($375k mortgaged @4%, $125k HELOC downpayment @4%) place that rents for $1800 is massively negative cash flowing. Just the P&I alone are $2387! Plus tax, plus insurance, plus management, vacancy, repairs, and CapEx... which if we're assuming are the same as the existing property, are $800 a month or so (not including the CapEx, really, but we'll let that slide).

So $3200 a month in expenses, times four houses (but one is "only" mortgaged for $375k, rather than $500k, so $600 less a month) - $12200. $1800 a month in rent times 4 houses, $5600. Hope you have that $6600 a month sitting around just to stay afloat...

Yes, sounds fantastic. Could I interest you in some real estate I recently acquired that spans a large body of water? It's definitely the opportunity of a lifetime, and I can make you a heck of a deal.

-W

Miss Growing Green

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Re: Should we sell our rental house?
« Reply #8 on: March 09, 2017, 08:52:12 PM »
waltworks-
yeah, I REALLY need to stop posting after long days.  My brain literally stops working :)  Thanks for reminding me about math :p

Spicolli

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Re: Should we sell our rental house?
« Reply #9 on: March 10, 2017, 06:47:14 AM »
Thanks for the replies. To add a bit of background, this was the house we originally bought when we first got married in 2005, we bought our current house in 2010 so instead of selling the old one at a loss, we rented it out. Considering the house has regained over $120k in potential price, that decision looks ok up to now. Going forward, our plan is to move back in 2 to 8 years with 4 being the most likely.

frugaliknowit

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Re: Should we sell our rental house?
« Reply #10 on: March 10, 2017, 11:44:22 AM »
I think it depends on how much and what other assets you have.  If it's a large percentage of your net worth (yielding, in my opinion 2-3%), I would dump it.  If you've got $3million in addition in a portfolio(s), you might keep it for diversification.

Cwadda

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Re: Should we sell our rental house?
« Reply #11 on: March 10, 2017, 11:59:33 AM »
Thanks for the replies. To add a bit of background, this was the house we originally bought when we first got married in 2005, we bought our current house in 2010 so instead of selling the old one at a loss, we rented it out. Considering the house has regained over $120k in potential price, that decision looks ok up to now. Going forward, our plan is to move back in 2 to 8 years with 4 being the most likely.

Have you lived in the house for at least 2 out of the last 5 years? If yes, you can sell the house without paying capital gains taxes. Also, if you sell it, consider not using a realtor and selling it yourself. You save 6% that way.

If you're planning on moving back into it for at least 2 years, then it might make sense to hold until then.
« Last Edit: March 10, 2017, 12:16:03 PM by Cwadda »

AlexK

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Re: Should we sell our rental house?
« Reply #12 on: March 10, 2017, 12:08:01 PM »
Thanks for the replies. To add a bit of background, this was the house we originally bought when we first got married in 2005, we bought our current house in 2010 so instead of selling the old one at a loss, we rented it out. Considering the house has regained over $120k in potential price, that decision looks ok up to now. Going forward, our plan is to move back in 2 to 8 years with 4 being the most likely.

The S&P 500 has returned 136% from March 2010 to March 2017 so if you had sold the house for $380k when you had moved out in 2010 and invested the proceeds you would have $896k, instead of the $500k it is worth now + $93k in rent profits (I didn't do the math to calculate the returns on invested rents but it would still be less than $896k).
« Last Edit: March 10, 2017, 12:10:31 PM by AlexK »

mastrr

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Re: Should we sell our rental house?
« Reply #13 on: March 10, 2017, 09:17:26 PM »
Assuming you only have two options to sell or to keep and we are talking pure mathematics, I would sell.  Your ROE (Return on equity) is low and the capital that you can receive from selling can be invested elsewhere to yield better returns. 

Hypothetically, with the $500k you could put 20% down on 5 separate $500,000 homes.

Seasoned investors that main goal is to maximize their gains never pay off their mortgages because they are always leveraging the equity that they build up to sink into more profitable investments.

Not familiar with your market but I also lean towards selling because of the high value of your home.

That being said, I don't feel that there is a bad option. 



cchrissyy

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Re: Should we sell our rental house?
« Reply #14 on: March 10, 2017, 09:49:03 PM »
wow, that rent is terribly low compared to the money you have tied up!

unless that truly will be your forever home, you are far better off to sell it and invest the equity elsewhere. diversify!

Dicey

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Re: Should we sell our rental house?
« Reply #15 on: March 11, 2017, 11:07:52 AM »
Thanks for the replies. To add a bit of background, this was the house we originally bought when we first got married in 2005, we bought our current house in 2010 so instead of selling the old one at a loss, we rented it out. Considering the house has regained over $120k in potential price, that decision looks ok up to now. Going forward, our plan is to move back in 2 to 8 years with 4 being the most likely.

Have you lived in the house for at least 2 out of the last 5 years? If yes, you can sell the house without paying capital gains taxes. Also, if you sell it, consider not using a realtor and selling it yourself. You save 6% that way.

If you're planning on moving back into it for at least 2 years, then it might make sense to hold until then.
My thinking aligns with cwaddas. Do you have any other investments?

Dicey

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Re: Should we sell our rental house?
« Reply #16 on: March 11, 2017, 11:16:40 AM »
Thanks for the replies. To add a bit of background, this was the house we originally bought when we first got married in 2005, we bought our current house in 2010 so instead of selling the old one at a loss, we rented it out. Considering the house has regained over $120k in potential price, that decision looks ok up to now. Going forward, our plan is to move back in 2 to 8 years with 4 being the most likely.

The S&P 500 has returned 136% from March 2010 to March 2017 so if you had sold the house for $380k when you had moved out in 2010 and invested the proceeds you would have $896k, instead of the $500k it is worth now + $93k in rent profits (I didn't do the math to calculate the returns on invested rents but it would still be less than $896k).
The problem with this comment is that it involves a crystal ball and magical powers. You are making a point with the hindsight of history. There is no way the OP could have known what the market was going to do.

I'm okay with hanging on to the house, especially in SoCal. After taxes, it could still prove to be a sound decision rather than taking the loss.

If you think you really will move into it, check the ramifications of making it your primary again for two years and then selling it to avoid Cap. Gains taxes. I'm not sure how that works when it's been a rental for a significant amount of time, but it could save you a bunch of taxes if you play your cards right.

ChpBstrd

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Re: Should we sell our rental house?
« Reply #17 on: March 11, 2017, 12:36:12 PM »
Unless you're a billionaire, half a million dollars is a lot to be tied up in one house. Sell it for diversification reasons.

Other posters said it's likely to keep going up because it's in California. How exactly will that work when renters can only afford $1,800/mo for such properties? Also, if we said such a thing in relation to stocks, someone would correct us and say past performance.... you know the rest.

waltworks

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Re: Should we sell our rental house?
« Reply #18 on: March 11, 2017, 01:30:52 PM »
The problem with this comment is that it involves a crystal ball and magical powers. You are making a point with the hindsight of history. There is no way the OP could have known what the market was going to do.

This is true whether you're investing in a house, stocks, bonds, or beanie babies. The difference between stocks and houses, though, is that stocks have appreciated about 7% a year after accounting for inflation (in the US) and houses have appreciated... (wait for it) around zero after accounting for inflation.

In the right place at the right time, you can do great. In the wrong place, you can lose your shirt. Most likely you just don't make any gains but don't lose anything either. You tell me if that describes a good investment.

-W

ClovisKid

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Re: Should we sell our rental house?
« Reply #19 on: March 11, 2017, 03:11:22 PM »
I am also in Southern California and I am having a hard time wrapping my head around getting only $1,800/month rent on a $500K house.  SoCal is a huge area with a big variety of housing stock, neighborhoods and prices, but my little 1,200s sq. ft. 2bd/2ba condo in shitty North Hollywood, valued at $380K, could easily rent for $2,200.  Maybe you are under-priced?  That may be why you don't hear from the tenants much... they may know that they are getting a good deal and don't want to he high maintenance (pun intended).  Check the latest rental prices in that neighborhood online to see if you are way under market.

I agree with some of the others, if you really are going to move into the house in 2-3 years, just keep it.  The transaction costs of selling this current property (standard cost is 7-8% in the area - with 6% commission plus 1-2% closing costs, plus taxes on the capital gain as it is not your primary residence).  Transaction costs savings would give you a 7-8% 'return' right there.  The benefit from tax avoidance - unknown as I don't know your current income and situation.  Add the rent, less expenses, the tax benefit of depreciation for two years, and the appreciation of the property (the nominal rate which would be 3-4% per year in the current market), and I think it's a keeper -- again, ONLY if you are really going to move into it.  On top of that, it's a property that you are familiar with and probably doesn't have any unknown/hidden issues that would not have already exposed themselves. 

I am not a fan of owning real estate outside of a primary residence, and even that is an emotional decision rather than a financial one.  But, if you insist on owning and not renting, and you are going to move into the rental house in two years, keep it.  Otherwise, sell it and invest the money or raise the rent and cross your fingers that you can get a good return.  Right now it's the equivalent of having cash in the mattress with the associated risks and worry.

AlexK

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Re: Should we sell our rental house?
« Reply #20 on: March 11, 2017, 05:47:46 PM »
Thanks for the replies. To add a bit of background, this was the house we originally bought when we first got married in 2005, we bought our current house in 2010 so instead of selling the old one at a loss, we rented it out. Considering the house has regained over $120k in potential price, that decision looks ok up to now. Going forward, our plan is to move back in 2 to 8 years with 4 being the most likely.

The S&P 500 has returned 136% from March 2010 to March 2017 so if you had sold the house for $380k when you had moved out in 2010 and invested the proceeds you would have $896k, instead of the $500k it is worth now + $93k in rent profits (I didn't do the math to calculate the returns on invested rents but it would still be less than $896k).
The problem with this comment is that it involves a crystal ball and magical powers. You are making a point with the hindsight of history. There is no way the OP could have known what the market was going to do.

I'm okay with hanging on to the house, especially in SoCal. After taxes, it could still prove to be a sound decision rather than taking the loss.

If you think you really will move into it, check the ramifications of making it your primary again for two years and then selling it to avoid Cap. Gains taxes. I'm not sure how that works when it's been a rental for a significant amount of time, but it could save you a bunch of taxes if you play your cards right.

I was referring to the bolded statement above. I don't think it was a good decision to keep the house then or now, even without the benefit of hindsight. I like Dave Ramsey's answer to the question. He asks if you would sell mutual fund investments to buy that same house. If not, sell it.

They got rid of that tax loophole to avoid cap gains taxes on a rental sale by living in it for two years. You will pay taxes on the appreciation that happened while it was a rental. And regular income tax rate on the depreciation recapture. Otherwise I would have moved back into the rental property I just sold for two years. Now I have to write a $12k check to the IRS but at least I don't have that turd of an asset any more.

Dicey

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Re: Should we sell our rental house?
« Reply #21 on: March 12, 2017, 03:09:17 AM »
The problem with this comment is that it involves a crystal ball and magical powers. You are making a point with the hindsight of history. There is no way the OP could have known what the market was going to do.

This is true whether you're investing in a house, stocks, bonds, or beanie babies. The difference between stocks and houses, though, is that stocks have appreciated about 7% a year after accounting for inflation (in the US) and houses have appreciated... (wait for it) around zero after accounting for inflation.

In the right place at the right time, you can do great. In the wrong place, you can lose your shirt. Most likely you just don't make any gains but don't lose anything either. You tell me if that describes a good investment.

-W
Re Bold #1: "7% is the average return over a long period of time". It doesn't average that every year, nor do real estate gains follow a smooth appreciation path. In the crazy-ass California Real Estate market, prices frequently average well above inflation. Insanely, fucking nuts above appreciation. For example, I offer this, which just came on the market in my neighborhood. This piece of shit is asking $910 per square foot and will probably go over asking.

http://www.estately.com/listings/info/2496-larkey-lane

Re Bold #2, Yeah, I'd say it was a good investment. For the seller, anyway.




Villanelle

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Re: Should we sell our rental house?
« Reply #22 on: March 12, 2017, 03:51:59 AM »
I am also in Southern California and I am having a hard time wrapping my head around getting only $1,800/month rent on a $500K house.  SoCal is a huge area with a big variety of housing stock, neighborhoods and prices, but my little 1,200s sq. ft. 2bd/2ba condo in shitty North Hollywood, valued at $380K, could easily rent for $2,200.  Maybe you are under-priced?  That may be why you don't hear from the tenants much... they may know that they are getting a good deal and don't want to he high maintenance (pun intended).  Check the latest rental prices in that neighborhood online to see if you are way under market.

I agree with some of the others, if you really are going to move into the house in 2-3 years, just keep it.  The transaction costs of selling this current property (standard cost is 7-8% in the area - with 6% commission plus 1-2% closing costs, plus taxes on the capital gain as it is not your primary residence).  Transaction costs savings would give you a 7-8% 'return' right there.  The benefit from tax avoidance - unknown as I don't know your current income and situation.  Add the rent, less expenses, the tax benefit of depreciation for two years, and the appreciation of the property (the nominal rate which would be 3-4% per year in the current market), and I think it's a keeper -- again, ONLY if you are really going to move into it.  On top of that, it's a property that you are familiar with and probably doesn't have any unknown/hidden issues that would not have already exposed themselves. 

I am not a fan of owning real estate outside of a primary residence, and even that is an emotional decision rather than a financial one.  But, if you insist on owning and not renting, and you are going to move into the rental house in two years, keep it.  Otherwise, sell it and invest the money or raise the rent and cross your fingers that you can get a good return.  Right now it's the equivalent of having cash in the mattress with the associated risks and worry.

This.  OP, when was the last time you raised the rent, and by how much.  My SoCal rental (San Diego) is worth probably about $575k, and when I list it in May when my tenant leaves, I think I'll be asking $2700.  (Currently getting $2600, which was slightly under valued even a year ago, in order to make sure I kept the tenant and didn't deal with vacancy and turnover costs.) 

So my first step in your shoes would me to make sure I was getting the appropriate rent.  A *small* discount, in order to keep a good tenant, is one thing.  But if you are losing hundreds of dollars a month, increasing the rent is going to pretty quickly offset a short vacancy and some minimal turnover costs.


ChpBstrd

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Re: Should we sell our rental house?
« Reply #23 on: March 12, 2017, 07:28:35 PM »
The problem with this comment is that it involves a crystal ball and magical powers. You are making a point with the hindsight of history. There is no way the OP could have known what the market was going to do.

This is true whether you're investing in a house, stocks, bonds, or beanie babies. The difference between stocks and houses, though, is that stocks have appreciated about 7% a year after accounting for inflation (in the US) and houses have appreciated... (wait for it) around zero after accounting for inflation.

In the right place at the right time, you can do great. In the wrong place, you can lose your shirt. Most likely you just don't make any gains but don't lose anything either. You tell me if that describes a good investment.

-W
Re Bold #1: "7% is the average return over a long period of time". It doesn't average that every year, nor do real estate gains follow a smooth appreciation path. In the crazy-ass California Real Estate market, prices frequently average well above inflation. Insanely, fucking nuts above appreciation. For example, I offer this, which just came on the market in my neighborhood. This piece of shit is asking $910 per square foot and will probably go over asking.

http://www.estately.com/listings/info/2496-larkey-lane

Re Bold #2, Yeah, I'd say it was a good investment. For the seller, anyway.

That house would struggle to fetch $100k in a good neighborhood of my city.

Spicolli

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Re: Should we sell our rental house?
« Reply #24 on: March 13, 2017, 11:00:21 AM »
OP here...thanks again for the replies. The rental rates in the neighborhood are around $2500, so yes, we are a good deal under market and will be raising the price when the lease expires in June. I would say the odds of us moving back there are very good (90%?) anytime from July 2018 to after I retire in 2022.

Answering other questions, in other investments, we have about $500K in TSP/457K accounts that we'll be maximizing contributions on for the next 5 years, have no debt outside of mortgage on current house (owe about $350K on $700K house) and will both be receiving pensions that will bring in around $140K so we are looking pretty stable overall.   

The price of the house is just now reaching the same price as we bought it so capital gains would not be an issue if we sold it now, even though we haven't lived there since 2010, right?   
« Last Edit: March 13, 2017, 11:23:37 AM by PeachFuzzTom »