Author Topic: Rent or sell paid off home.  (Read 2131 times)

maybecherie

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Rent or sell paid off home.
« on: December 13, 2018, 10:48:47 AM »
My husband and I paid off our starter home.  We are in the process of buying our forever home.  I use to rent out our starter home, but then decided to move in and pay it off.  We've lived here for three years so we don't have to pay capital gains.   It's in a great rental market, but the house is old and and tons of character that might not withstand lots of renters.   We also aren't great at repairs.  I'm tempted to sell it and invest the rest.  Input?   I could rent it for around 1400 or sell for 215,000

Greyweld

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Re: Rent or sell paid off home.
« Reply #1 on: December 13, 2018, 11:01:28 AM »
I would say sell it. There's a concept of the "One percent rule," saying that gross monthly rent should be equal to at least 1% of the purchase price. https://affordanything.com/one-percent-rule-gross-rent-multiplier/

Now, maybe your initial purchase price was lower, but if you had $215k right now to spend on an investment property, this property would not be a good investment because it doesn't fit the 1% rule.

This is all just from my own reading and what I would do in your present situation, but I'm not a landlord, so others may have further advice.

nereo

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Re: Rent or sell paid off home.
« Reply #2 on: December 13, 2018, 11:29:34 AM »
  I could rent it for around 1400 or sell for 215,000

This seems like a no-brainer; sell.  $1,400/mo in rent is not sufficient for a property you could sell for $215,000. 
The fact that you described it as "old" and "might not withstand lots of renters' just further cements my opinion that it's a bad financial decision to rent it instead of selling.


maybecherie

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Re: Rent or sell paid off home.
« Reply #3 on: December 13, 2018, 12:02:41 PM »
We originally bought the house for 70,000 I've probably put in 25,000 in it. 

AccidentalMiser

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Re: Rent or sell paid off home.
« Reply #4 on: December 13, 2018, 12:08:30 PM »
With the capital gain question off the table, Iíd sell immediately before the capital gain question becomes a factor again.

This is doubly true if you donít have the skills and inclination to keep it up.

IF you had 215k in the bank or stock market and found your starter house on the market for 215k, would you withdraw the cash, buy the house and rent it out for 1400 per month?  If so, then you might consider keeping it. If not, sell sell SELL!

Best of luck to you!

Greyweld

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Re: Rent or sell paid off home.
« Reply #5 on: December 13, 2018, 12:11:31 PM »
We originally bought the house for 70,000 I've probably put in 25,000 in it.

Ok, fair, so maybe it was at original price a good price for a rental property.

But start by assuming you spend 50% of the rent price on repairs over time. That's ~$700 per month profit, or $8400/year. This is about 4% of the current value of your property in returns per year.

If you invested the current value of the property, if over the long term you assume 7% average returns, you'll be earning more yearly on your money, without the labor of being a landlord (or additional expenses for a managment company), the work or hiring out of repairs, etc. Or, if you do want to start doing rental properties, now might be a good time to sell and spend the $215k (minus selling expenses) on a multi-family property or a couple houses in another location where you'll get a better return on the value of your investment.

nereo

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Re: Rent or sell paid off home.
« Reply #6 on: December 13, 2018, 12:43:25 PM »
We originally bought the house for 70,000 I've probably put in 25,000 in it.

This doesn't matter whenever considering whether a property currently is a good rental.  Since you will pay no capitol gains, there's no reason not to cash in your gains given your estimated rent would be 0.6% of your selling price, which is not a good rent given the current value of the home.  The outcome is even more dreary when you consider above-average upkeep costs, which is typically the case whenever the words "old" and "not great at repairs" are thrown around.

Always evaluate what you could currently sell the home for against what you could reasonably get in rent. 

Does that make sense?

Another Reader

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Re: Rent or sell paid off home.
« Reply #7 on: December 13, 2018, 12:55:32 PM »
Because you lived in it, moved out, and then moved back in, you may have to pay prorated capital gains if you sell.    There is an IRS publication that covers this scenario or talk to your tax person.

tralfamadorian

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Re: Rent or sell paid off home.
« Reply #8 on: December 13, 2018, 01:45:30 PM »
Because you lived in it, moved out, and then moved back in, you may have to pay prorated capital gains if you sell.    There is an IRS publication that covers this scenario or talk to your tax person.

+1

It sounds like you all are not interested in being landlords and it would be best to sell.

robartsd

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Re: Rent or sell paid off home.
« Reply #9 on: December 13, 2018, 02:50:46 PM »
Because you lived in it, moved out, and then moved back in, you may have to pay prorated capital gains if you sell.    There is an IRS publication that covers this scenario or talk to your tax person.

+1

It sounds like you all are not interested in being landlords and it would be best to sell.
You certainly have to pay for gains due to depreciation you could have claimed (even if you neglected to claim the depreciation). Since 2008, gains attributed to appreciation while the home was not your primary residence are also subject to tax. See IRS Pub 523.

Dicey

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Re: Rent or sell paid off home.
« Reply #10 on: December 13, 2018, 03:41:05 PM »
Sell, pay whatever depreciation recapture you have to. Invest like this and never look back.

https://jlcollinsnh.com/stock-series/

Don't prepay that new 80% mortgage either.

AccidentalMiser

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Re: Rent or sell paid off home.
« Reply #11 on: December 13, 2018, 05:43:51 PM »
Because you lived in it, moved out, and then moved back in, you may have to pay prorated capital gains if you sell.    There is an IRS publication that covers this scenario or talk to your tax person.

They've lived in the house for the past three years.  There is no capital gain tax due.


maybecherie

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Re: Rent or sell paid off home.
« Reply #13 on: December 16, 2018, 09:23:37 AM »
Thank you everyone for your responses. We decided not to move. It's really hard to move away from  a paid off house.  We are going to wait until the market cools down.