Author Topic: Sell or hold rental house?  (Read 7908 times)

bg2468

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Sell or hold rental house?
« on: September 24, 2013, 02:32:20 PM »
Hello,

I am looking for advice on whether to sell or hold on to my duplex. I paid $160,000 with only 3% down three years ago (yes, stupid). I have lived in the top unit and rented the bottom unit until now. There wasn't much of a kitchen so I removed what was left of it with intention of putting in a new one. Now that I am about to spend roughly $8,000 on the kitchen and other renovations to get the top unit rentable, I am debating whether or not to sell it. The problem is, if I sell it I will most likely have to bring money (up to $8,000) to the table since it has lost value since I bought it. I realize this hasn't been a good deal and paying $8,000 to get out of it would suck, but I would have a clean slate and avoid wasting future money on the place. Is this place worth hanging on to for future benefit, or is it just a drain on my money?

My question is, should I pay $8,000 to get it rentable, or pay $8,000 to get out of the deal? specifics below....

Rent revenue............................$1,500/month ($700 bottom unit, $800 projected rent top unit)
Mortgage pmt/pmi/taxes/ins.....$1,165
Sewer/water expense..............$    117
Net cash flow/month.................$    218 (assuming zero vacancies and zero maintenance, so basically it is breakeven)

Any advice is really appreciated.

lackofstache

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Re: Sell or hold rental house?
« Reply #1 on: September 24, 2013, 02:43:46 PM »
To me, this would depend on how your finacnes are otherwise. If you're okay w/ cashflowing it right now and paying off the mortgage slowly, keep it and eventually make money on it. If you need the money to do other things for you; pay off other debt, down payment on a personal home, other investments that have a higher return, sell it and start fresh.

bg2468

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Re: Sell or hold rental house?
« Reply #2 on: September 24, 2013, 03:11:11 PM »
Thanks for the response. My finances are good otherwise and my savings rate is decent (just over 50%), I just don't want to hold on to this property if it isn't worth it. I have heard of the 50% and 2% rules, but obviously this property is nowhere near those kinds of returns (which are extremely high). To rephrase my question, at what point does it become non beneficial to hold on to rental property?

Johnny Aloha

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Re: Sell or hold rental house?
« Reply #3 on: September 24, 2013, 04:35:08 PM »
$1500/month on $160k purchase isn't great but isn't that bad either.

How much is your PMI?  It's hard to get it removed but if you can get rid of it, what would the mortgage payment be? 

And what kind of financing do you have?

If it was me and I had a 30yr fixed mortgage ~4%, and if the property condition was average or good, and if I lived close enough to manage it myself, I'd probably consider holding it.

MKinVA

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Re: Sell or hold rental house?
« Reply #4 on: September 24, 2013, 04:38:04 PM »
Do you think it will increase in value in the next few years? How long before you can raise the rent in each unit? If the answer is no increase in either in the next five years or so, sell it. If it's a good deal otherwise (except that you don't have much equity now), I would keep it.

MKinVA

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Re: Sell or hold rental house?
« Reply #5 on: September 24, 2013, 04:52:45 PM »
Yeah, what Johnny said. Really this isn't a bad return. The cash flow on rental property comes from lowering the mortgage payment (higher down payment next time) and then being able to rent it for a higher rent. By the way, is it the best decision financially to move out and rent both?

Hamster

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Re: Sell or hold rental house?
« Reply #6 on: September 24, 2013, 05:23:45 PM »
I second the question about the financial wisdom of moving out. I don't know your situation, your market, etc.

One thought: How much cash do you have, and is it a property you'd want to put money into?
If you can finish the kitchen, then put down another 17% and refinance with no PMI, then at 4.75%, your P+I would be $670/month (30 year mortgage).

At that rate, would it make sense to live in half and rent the other half out?

Daleth

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Re: Sell or hold rental house?
« Reply #7 on: September 24, 2013, 05:46:53 PM »
I second the question about the financial wisdom of moving out. I don't know your situation, your market, etc.

One thought: How much cash do you have, and is it a property you'd want to put money into?
If you can finish the kitchen, then put down another 17% and refinance with no PMI, then at 4.75%, your P+I would be $670/month (30 year mortgage).

At that rate, would it make sense to live in half and rent the other half out?

That's a great question and it's important to answer it before moving out, because you can't get refi deals on rentals like you can on owner-occupied properties.

And let me "third" the question about whether it makes sense to move out. If you live there and rent the downstairs for $700/mo, then WITHOUT even changing your mortgage at all your housing payment, including water/sewer, is only $582/mo. Can you realistically find a better deal than that in your area? That's an incredibly low housing payment in this day and age. And if you put some more money into the mortgage to get to a point where you have 20% equity and no more PMI, and you refinance, then your housing payment would be $87/month (the $670 Hamster mentioned, plus water and sewage, minus the $700/mo rent your tenant pays you). That is a GREAT deal.

chasesfish

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Re: Sell or hold rental house?
« Reply #8 on: September 24, 2013, 05:58:07 PM »
What's your interest rate on the loan and exactly how much is 50% of your income.

I'd recommend diverting your savings into paying this property down/off, that's a nice guaranteed rate of return and a good long term rental

bg2468

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Re: Sell or hold rental house?
« Reply #9 on: September 24, 2013, 07:02:42 PM »
Thanks for all the great questions, let me explain a little more (answers to specific questions further below). I bought the place when I was single, now I am about to get engaged. My girlfriend and I have talked and she does not want to live in it. She would rather live close to work (our jobs are 5 miles apart) in an area that we both really like which would allow us to bike to work and walk most places. The duplex is about a 15 min drive from my work, so I would like to get it rented and paid off asap. My original plan was to renovate the top unit then refi while living in it, then move out after I took advantage of the owner occupied interest rate. The problem is, I don't think it will appraise out at ~$185,000 even with a new kitchen in the top unit. So I think I'm stuck paying PMI until I get the principal paid down. So my fundamental question is: is this property a good enough investment to keep? Or should I just eat the loss and move on? Remember, to keep and rent I would need to dump about 8k into it which is also my estimate of the cash I would have to bring to the table if I sell.

 - PMI = $70/month
 - Mortgage is 30 yr fixed at 4.75%, balance of $145,000
 - I've raised rent all three years
 - I would expect the value to increase, but I bought at $160,000 and comps are now in the 140s - 150s
 - Monthly savings outside of 401k and company pension is about $2,000 after taxes (which is going towards a 20% down pmt on house with future wife)
 - Other debt = student loans that will be paid off in one year

Jwilliamson22

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Re: Sell or hold rental house?
« Reply #10 on: September 24, 2013, 07:27:33 PM »
Thanks for all the great questions, let me explain a little more (answers to specific questions further below). I bought the place when I was single, now I am about to get engaged. My girlfriend and I have talked and she does not want to live in it. She would rather live close to work (our jobs are 5 miles apart) in an area that we both really like which would allow us to bike to work and walk most places. The duplex is about a 15 min drive from my work, so I would like to get it rented and paid off asap. My original plan was to renovate the top unit then refi while living in it, then move out after I took advantage of the owner occupied interest rate. The problem is, I don't think it will appraise out at ~$185,000 even with a new kitchen in the top unit. So I think I'm stuck paying PMI until I get the principal paid down. So my fundamental question is: is this property a good enough investment to keep? Or should I just eat the loss and move on? Remember, to keep and rent I would need to dump about 8k into it which is also my estimate of the cash I would have to bring to the table if I sell.

 - PMI = $70/month
 - Mortgage is 30 yr fixed at 4.75%, balance of $145,000
 - I've raised rent all three years
 - I would expect the value to increase, but I bought at $160,000 and comps are now in the 140s - 150s
 - Monthly savings outside of 401k and company pension is about $2,000 after taxes (which is going towards a 20% down pmt on house with future wife)
 - Other debt = student loans that will be paid off in one year

Just another question, but what is included in the 8,000 worth of improvements? I just put all new cabinets, counter top, sink, facet, drywall etc in my kitchen for $500. Granted I was fortunate enough to find someone giving away nearly new cabinets for free, but my point being that if the kitchen just needs remodeled it 8,000 sounds like a lot especially for a rental. It doesn't have to get granite counter tops and top of the line stainless. Now obviously if your remodel is more involved and includes drastic changes/fixes then that is a different story.

bg2468

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Re: Sell or hold rental house?
« Reply #11 on: September 24, 2013, 07:50:20 PM »
The 8k of improvements includes a little more than the kitchen. Cabinets, appliances, countertops, drywall for two walls, electric, floors refinished, paint, and new storm doors. I have to pay for some of the labor since I have limited time (work full time and pursuing MBA). 8k is supposed to be an extremely conservative estimate.

Jwilliamson22

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Re: Sell or hold rental house?
« Reply #12 on: September 25, 2013, 08:39:34 AM »
The 8k of improvements includes a little more than the kitchen. Cabinets, appliances, countertops, drywall for two walls, electric, floors refinished, paint, and new storm doors. I have to pay for some of the labor since I have limited time (work full time and pursuing MBA). 8k is supposed to be an extremely conservative estimate.

I understand that some of the work is either too time consuming or too technical (electrical?) and need to be hired out, but still even with what you described it seems like you could do it for much less. For the record I work full time and am also a full time grad student as well (graduate in May!) as well as getting married in two months and managing a rental property. Im not downplaying your time situation, just saying that if you want it bad enough I'm sure you could do it. I had help from my father and brother in law, but we redid my kitchen over a 3 day weekend. The skills I learned where priceless as well.

bg2468

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Re: Sell or hold rental house?
« Reply #13 on: September 25, 2013, 10:36:26 AM »
Jwilliamson22 - that is awesome that you accomplished that with all you had going on. That is definitely motivating! I agree that it can be done cheaper, and I hope to get it done much cheaper. But that is a worst case number and I have budgeted for it. Ideally I would do everything myself, but there is the time issue and most importantly the fact that my skills are limited. I will be paying someone for help and I hope to learn how to do everything myself in the process. What metrics do you use to determine whether or not you should hold or sell your rental? Would you view mine as a good investment?

Jwilliamson22

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Re: Sell or hold rental house?
« Reply #14 on: September 25, 2013, 11:13:33 AM »
Jwilliamson22 - that is awesome that you accomplished that with all you had going on. That is definitely motivating! I agree that it can be done cheaper, and I hope to get it done much cheaper. But that is a worst case number and I have budgeted for it. Ideally I would do everything myself, but there is the time issue and most importantly the fact that my skills are limited. I will be paying someone for help and I hope to learn how to do everything myself in the process. What metrics do you use to determine whether or not you should hold or sell your rental? Would you view mine as a good investment?

Ill give you my opinion, but your best bet is to head over to biggerpockets.com and ask the guys over there. They are experts on real estate like mustachians are experts on budgets/ER. I'm a newer real estate investor and know my niche pretty well, but that is it. Now, in my opinion it appears that the property is producing negative cash flow. You said it is basically breaking even, but even with minor vacancy and maintenance your in the red. In my market I would not keep this property as there are better options available that cashflow monthly.

bg2468

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Re: Sell or hold rental house?
« Reply #15 on: September 25, 2013, 11:48:35 AM »
Thanks for the advice, I just posted the question over at biggerpockets (which looks like a great site). The property is actually producing a positive cash flow and is projected to continue to assuming zero vacancies and zero maintenance; which is why I said it is basically break even. Thanks again for the advice, any other comments are certainly welcome and I will update the thread with advice from biggerpockets and ultimately with what I decide to do.

Jwilliamson22

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Re: Sell or hold rental house?
« Reply #16 on: September 25, 2013, 12:50:29 PM »
Thanks for the advice, I just posted the question over at biggerpockets (which looks like a great site). The property is actually producing a positive cash flow and is projected to continue to assuming zero vacancies and zero maintenance; which is why I said it is basically break even. Thanks again for the advice, any other comments are certainly welcome and I will update the thread with advice from biggerpockets and ultimately with what I decide to do.

I understand your saying its "cash flow positive", but if that doesn't take into account vacancy and maintenance then you can't say that. That is like saying its cashflow positive because your taxes aren't due for six months. Eventually it is going to average out and you WILL have a vacancy and you WILL have maintenance, but I digress. Biggerpockets will have better advice than I can provide :)

MKinVA

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Re: Sell or hold rental house?
« Reply #17 on: September 25, 2013, 03:06:20 PM »
I still think this is a pretty good investment returning over 200 per month. If you focused on getting the mortgage down, you will get a better return. You said the eight grand is basically a wash whether you keep it or sell it. Right now, you don't have that much capital tied up and you're still making a couple of hundred bucks. Try and stay in it while renovations are done and be ready to rent it immediately upon moving out so that you don't lose a month's rent. From what you have said, you don't see rental income going down, so it's only up from here. Instead of raising the rent, can you impose a monthly water fee? Earlier you said you paid the water. How about passing some of that cost to renters? Just a thought. Maybe marketing it as free water/sewer is better in your area (I know it would be in my area).

Are there better deals out there? I'm sure there are, but if you want to be a landlord, you'll find a new place, pay closing costs, etc., maybe have to fix it up a little, find good tenants, all of which it sounds like you already have here.

But if you don't want to be a landlord, there's your answer.

Daleth

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Re: Sell or hold rental house?
« Reply #18 on: September 25, 2013, 04:14:14 PM »
The 8k of improvements includes a little more than the kitchen. Cabinets, appliances, countertops, drywall for two walls, electric, floors refinished, paint, and new storm doors. I have to pay for some of the labor since I have limited time (work full time and pursuing MBA). 8k is supposed to be an extremely conservative estimate.

Cabinets and countertops can be had at Ikea for $1000 for a smallish/medium kitchen (go with the butcherblock countertop--it's less than $200 for a six-foot run). You could probably also get the sink in for that price too, if you go with the fabulous Ikea Domsjo single-bowl and an inexpensive faucet--that sink is fantastic, huge, looks great, costs $185 (!!!) and it saves you time and money in this key way: it's an apron-front sink that **goes back to the wall**, so you don't need to pay for any fancy cutouts in your countertop. Just put some countertop on the left, then the sink, then some countertop on the right and you're good.

And appliances? Look on Craigslist. Look at your local scratch-and-dent. Look on AJMadison.com. You could probably get a white dishwasher, fridge and stove for $1200-ish, and with a bit of luck you could do far better. And I have to wonder, if you've been living there yourself, how bad is the kitchen? Surely it has appliances? Why do you need to completely re-do it? Ditto the floors: do they really need to be *refinished,* as opposed to just well cleaned, in order for you to find a decent tenant willing to pay $800?

bg2468

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Re: Sell or hold rental house?
« Reply #19 on: September 25, 2013, 05:59:41 PM »
MKinVa - Nice idea about a fee on top of rent. It was much easier to rent by marketing it with free water/trash. Now that it's rented, I just try and raise rent each year...so far it has worked. $200/month is best case scenario, as Jwilliams22 mentioned, I am likely to experience some vacancy or maintenance issue so the income is overstated.

Daleth - I am sure I will come in under budget for the kitchen. Unfortunately, the closest Ikea is in Chicago and I'm in St. Louis (Ikea charges out the ass for shipping) so I'll have to stick with Craigslist. I wanted to budget for worst case scenario and I think the 8k represents that. The main issue is that I don't have much experience doing this kind of work on my own so it takes a ton of time, which I have limited amounts of. And, if I value the project correctly by paying myself a reasonable wage, then it may come out cheaper to pay someone else that is more expensive but quicker than I am do the tough jobs.

Right now I am leaning towards fixing up the kitchen on the cheap and renting out the whole thing. But I still can't resist taking a hard look at the numbers to make sure I shouldn't unload this thing. All of your advice has given me some good perspective, I really appreciate it. Please keep the comments coming!

Daleth

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Re: Sell or hold rental house?
« Reply #20 on: September 25, 2013, 08:11:36 PM »
Daleth - I am sure I will come in under budget for the kitchen. Unfortunately, the closest Ikea is in Chicago and I'm in St. Louis (Ikea charges out the ass for shipping) so I'll have to stick with Craigslist.

Also google "ready to assemble cabinets." There are plenty of companies that sell cabinets, either flat (totally ready to assemble) or built (ready to install), and they do not charge anything ass-related when it comes to shipping. :)

bg2468

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Re: Sell or hold rental house?
« Reply #21 on: September 25, 2013, 08:22:21 PM »
Thanks for the tip! I will definitely look into them, and good to hear about the shipping haha!

MKinVA

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Re: Sell or hold rental house?
« Reply #22 on: September 26, 2013, 08:06:26 AM »
Do you have a habitat for humanity restore in your area? This is where contractors and home builders donate their leftovers to the charity which sells them cheap to raise money for their building projects. It isn't junk, it's over orders and stuff. Say a builder ordered kitchen cabinets for 25 apartments, but only used 23 sets. He donates them to habitat and they sell them. They most often have cabinets and flooring.

bg2468

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Re: Sell or hold rental house?
« Reply #23 on: September 26, 2013, 08:42:00 AM »
There is a habitat for humanity within a 30 min drive. I have looked there before and came up empty, but definitely worth another look. Thanks for all of the ideas to reduce the cost of the kitchen. I am still on the fence whether to hold or sell regardless of what the kitchen costs. In the big picture and looking long term, $4,000 saved on the kitchen isn't going to make or break this deal. I am still left asking myself the question of: is this a good enough investment to hold on to long term?

MKinVA

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Re: Sell or hold rental house?
« Reply #24 on: September 26, 2013, 09:07:41 AM »
Let me ask you this, is being a landlord a part of your long term financial plan? Or do you just find yourself in this situation? If part of the plan, is this a property that you would purchase again as a rental (not withstanding that you weren't able to put enough down)? In my neck of the woods (central virginia), prices are so over inflated that a couple of hundred bucks is not a bad starting place. Richmond was just in the news as a great city to be a renter which means its a terrible place to be a landlord. I have a girlfriend who lives in a 300,000 dollar house and only pays 1350 per month. No where near the mortgage, taxes, upkeep, etc. it really costs. 1200 is the going rate for rentals here.

bg2468

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Re: Sell or hold rental house?
« Reply #25 on: September 26, 2013, 09:26:34 AM »
Being a landlord is part of my long term plan because I always looked at it as a way to hedge my corporate job. I also grew up helping my grandpa with his rental properties and enjoyed learning the skills. I do enjoy running the business as well. When I bought this place I didn't have debt paid down or a significant amount of reserves built up and would not do that again. I viewed the 1st time home buyer tax credit as a way to bridge that gap...again, I would not repeat this mistake knowing what I know now. I feel like I have some momentum built up (awesome tenant, close to renting both units, I know what I've got with this building), but I just want to make sure I don't have my blinders on. After all, this is only a part of a bigger strategy to reach financial independence so I don't want to hang on to the property for any other reason that it is a sound investment. To answer your second question, I would not purchase the property again at the price I purchased it at. I would value it at around $140,000 - $145,000. With that said, there is a cost to selling so that needs to be factored in as well.

Hamster

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Re: Sell or hold rental house?
« Reply #26 on: September 26, 2013, 10:01:41 AM »
Cabinets and countertops can be had at Ikea for $1000 for a smallish/medium kitchen (go with the butcherblock countertop--it's less than $200 for a six-foot run).

And appliances? Look on Craigslist. Look at your local scratch-and-dent. Look on AJMadison.com. You could probably get a white dishwasher, fridge and stove for $1200-ish, and with a bit of luck you could do far better.
I don't have any more thoughts on whether you should keep it, but if you do the kitchen:

I've said this in other places, but look for a cheap Chinese prefab granite and cabinet business. There must be some in St. Louis, although maybe cheaper here on the West Coast since they just unload the ship and go straight to the warehouse. Bring in measurements and they can mock it up and give you a quote very quickly. Nothing lost in looking.

We bought 8 foot lengths of prefab black granite countertop (their cheapest) for $200! and install was next to nothing. They came to our house, measured, and cut for the sinks on-site. We paid a bit extra since we did a section of "bar" counter with an overhang, but still way under half the price of most places - like $12 per square foot, finished. Photos on my other post.

I absolutely vote for Craigslist for appliances. We got one full kitchen in nice quality stainless, plus second kitchen in stainless stove and microwave and small washer/drier combo for $1250. we were lucky since some guy bought a condo and hated stainless, so we got a nearly-new matching set for super cheap. One dishwasher crapped out after 2 years, but still a great price...

monicafaye

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Re: Sell or hold rental house?
« Reply #27 on: September 26, 2013, 02:48:14 PM »
My two cents.  I have owned single family rental property for over 20 years.  Most were foreclosures purchased with my husband at low cost during the 1980's. Your situation has changed compared to when you purchased your rental property.  If you were inclined to continue living in one unit and renting out the other, I would say keep the property.  However, you now have a girlfriend that has entered the picture and doesn't want to live in the unit.  If you have long-term plans for the relationship (maybe marriage), you should be discussing how supportive she is of the added responsibility and expenses involved in being a landlord.  It is one thing to be in business by yourself, but quite another to have a partner that is not supportive of your plans.  It is hard to ever assume zero maintenance of rental property.  With the currently good rental market you could probably come close to zero vacancy, for now.  However promising investment rental property ownership might appear, the bottom line is that your gains and losses largely depend on the behavior of other people.  That behavior (paying timely rent, taking good care of your property, being reasonable to deal with) has a direct impact on you.  Non-payment of rent will happen, eviction will happen and damages to the property will happen.    If you decide to keep the property, try to put as little money in the kitchen remodel as possible.  The Habitat Store for materials like cabinets and used or inexpensive appliances are good suggestions by previous posters. Doing as much of the work yourself is the way to go, but it takes a good bit of time away from other things you might rather be doing.  Good luck.

bg2468

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Re: Sell or hold rental house?
« Reply #28 on: September 26, 2013, 03:16:40 PM »
Monica - thanks for your input. I have discussed at length with my girlfriend (soon to be engaged) and she wants to keep it. We both like the idea of possibly building up a small portfolio or rental properties (up to 3, we'll see how this goes) to generate income into retirement. I should clarify that I am not assuming zero vacancy and maintenance, I just wanted to show what the actual cash flow is right now. When I forecast, I assume 5% of the rent lost to vacancy and another 5% lost to maintenance. How did you determine whether or not to sell?