Rent Out My Apartment -or- Sell and Invest Money?

[heybro]

Simple question with real life numbers!

It is assumed that I am going to live in an apartment costing me $1200/month.  I do not want to buy another 'condo (one bedroom)' and I do not want to buy a house.  It is assumed that I am going to rent.

My current condo (one bedroom) is paid off and I can either sell it for $100,000 or keep it and rent it out for $1,000 a month.  The expenses are the condo fee (200) and property taxes/insurance (100), making my net take away (700/month).

Of course there is going to be maintenance along the way but not much since it is a small one bedroom.  Yes there is going to be times where I am not collecting rent, but honestly, the entire building is mostly renters now and NO ONE has sat empty yet and everyone finds renters easily.  I could always use a property management company but for now, let's just assume I am going to be handling finding a renter and collecting rent, etc.

So......

A) Invest the 100k in stock-market
Assumed average return is 8% = $8,000 a year = $666/month

Pros: No rental headache, straight forward
Cons: Up and downs of stock-market -- not a big deal as I don't need the money short term.  Taxes on capital gains (should be small as a long term gain) -- assume taxable account for now even though I could do more in my employer IRA.  I already max out Roth IRA and I contribute for the 'matching' amount at work.

B) Rent the place out (100k in equity)
Assumed rent is $1,000 with $300 expenses = $8400 a year = $700/month

Pros: As the rent on my $1200 apartment goes up, I could presumably increase the rent on my condo.  It's the same city so in theory, I'm 'protected' in a way from high rent increases since I can just increase the rent of my place.
Con: Dealing with renter.  Potential property damage.  Not collecting rent.  Taxes on rental income.  I can 'depreciate' the place but from what I understand, you end up paying when you sell the place.

They seem pretty similar in terms of risk and reward.  What seems better?

[ashfo]

I'd say the rental looks better as you can invest that $700/month in index funds, and still have the equity in the condo to sell later with hopefully some appreciation.  Although I would set aside some of that for repairs, maintenance and vacancies into a more accessible account. 

[nereo]

My initial read is that both your expectations for stock-market growth and for rental income are overly rosy.

You will have vacancies, even if its only for 1 month while you do the necessary repairs, which you will also have.  There's a reason why landlords ballpark 50% of their rent towards vacancies, repairs, etc.  This means your monthly take after expenses is (again ballpark) probably closer to $500 than $700.
Likewise, 8% real-adjusted returns in the market is towards the high end of what's we've experienced over 10 year periods.  Maybe we'll see better, probably we'll see worse, perhaps we'll see negative.

so which is better?  Well a lot comes down to how you value your time and whether you want to be the landlord on call when a pipe breaks or tenants skip out without paying the last month's rent. It certainly seems like you have a cash-flow-positive situation here (good for you), and with ~$500/mo in profits you are about in line with what historical 10y periods have returned for the SP500. Both can result in dismal years (a bear market, or a burst pipe requiring $1500 in repairs + a few months vacancy).

[heybro]

Thank you so much!
Renting seems like a nightmare.  They can destroy things so easily!  Plus, I don't like the idea of paying income tax on rental income.
Lots to think about.
Maybe I should try to find another place to buy even if I'm sort of turned off by condos now and there really aren't many out there right now to buy as its all apartments being built.  Thank you!

[Dicey]

Not really a simple question. From the information you've provided, I'd flip a coin. Either option could prove to be right. Or wrong. Not so simple after all, is it?

Re: The "They" who can destroy things so easily. You plan on renting, which makes you one of those Theys, doesn't it? Thorough screening can help prevent the "They" kind of situations you fear. "They" can easily be people like you. Not the enemy.

And what the fuck (sorry, but this is MMM land) is wrong with paying taxes on rental income? You only pay tax on the net, not the gross. And returns on equities outside of Roth or retirement vehicles, which you will need to retire early, are taxable too.

Yes, you do have lots to think about, but please keep an open mind as you learn. The right answer may surprise you.

[ecochica]

We're currently in a similar boat, asking ourselves the same question.  6 years away from mortgage-free on a house that could bring in $3000/month and worth about $625,000 - $675,000 in a strong housing and rental market.  Thinking of downsizing to a house in a nearby area where we could be mortgage-free Right Now plus money in the market if we sold this house.  Do we sell this place?  Do we rent it?  Who knows.  I like the "Flip a coin" answer.  Clearly, there could be some serious financial upsides to keeping it and renting it.  But it sounds like maybe more work than we're up for and more of a psychic load than being Mortgage Free (cue the angels) in a smaller space, with much less to think/worry about and more time to focus on our kids and travel, which is our big priority (husband's job is location-independent and kids are unschooled, so we're pretty footloose and fancy-free).  I appreciate people's responses and look forward to gleaning more wisdom.

[nereo]

Thank you so much!
Renting seems like a nightmare.  They can destroy things so easily!  Plus, I don't like the idea of paying income tax on rental income.
Lots to think about.
Maybe I should try to find another place to buy even if I'm sort of turned off by condos now and there really aren't many out there right now to buy as its all apartments being built.  Thank you!

For us renting hasn't been so bad.  It certainly helps to have basic DIY skills, and if you enjoy that sort of thing a rental unit can actually be a nice way of honing your skills; renters care if things work, but they'll live with little mistakes, like a less-than-perfect drywall patch or a screw that's a different color than the others.

Regarding taxes - meh. You pay taxes on capitol gains, you pay taxes on rental income.  If anything you get pretty favorable tax treatment from rental income.

My take on being a landlord is that it's a bit more steady than year-to-year market returns.  You'll never make as much money as you will in a bull year, but you don't loose money like you do in a market crash (assuming you have a decent rental unit).  There is work involved and it can pop up at inconvenient times, but on average it's just a few hours per month (many months it will be near 0, other months it will be 20). Screening helps with nightmare tenants, and clear rental contracts help you out too.

Like Diane C said - I think your situation is a coin flip, or perhaps a decision between how much you dread being a landlord.

[frugaliknowit]

I concur with Nereo.

Question:  Why don't you just continue to live in the condo?  The return is the difference between ownership costs versus rent.  Rental increases will compound (say 3%...?):  1200, 1236, 1273,  1311, 1351....etc.
If the place isn't fancy enough, maybe do some updating?  Buy furniture that's scaled to small spaces to make it feel bigger?

[heybro]

We're currently in a similar boat, asking ourselves the same question.  6 years away from mortgage-free on a house that could bring in $3000/month and worth about $625,000 - $675,000 in a strong housing and rental market.  Thinking of downsizing to a house in a nearby area where we could be mortgage-free Right Now plus money in the market if we sold this house.  Do we sell this place?  Do we rent it?  Who knows.  I like the "Flip a coin" answer.  Clearly, there could be some serious financial upsides to keeping it and renting it.  But it sounds like maybe more work than we're up for and more of a psychic load than being Mortgage Free (cue the angels) in a smaller space, with much less to think/worry about and more time to focus on our kids and travel, which is our big priority (husband's job is location-independent and kids are unschooled, so we're pretty footloose and fancy-free).  I appreciate people's responses and look forward to gleaning more wisdom.

I think you should not rent out your nice big house.  There is too much that can go wrong in my opinion.  Lots of eggs in one basket.  I'd much rather have $675 in a well balanced portfolio than in one house.  I've always considered being a landlord to be something that you go in to intentionally with multiple properties (2-3 minimum) so that you aren't heavily relying on one place to perform.  (Sort of like how you'd never buy one companies stock).  Wow, replying to you has actually helped me answer my own question!  Thank you!  Thank you!  If I had 100k cash, I'd never go buy an apartment and rent it out.  Never.  So, I think my answer is that if I move, I sell.  Then, I either buy another place, or rent, and invest it.  Wow, sweet!!!!!!!!!!!

And, to answer frugaliknowit, the neighborhood has changed a lot and is a lot louder, which is something I can tolerate but with each year, I can tolerate it less and less!  hehe.  So, eventually, I have to move!  I am trying to push it off as long as I can!  Right now, in my area, they are building apartments like crazy, but condos have gone extinct.  Perhaps that will change and I'll have more options eventually.

Thank you to everyone!  I love MMM !!!!