Author Topic: Sell, rent, or vacation rental?  (Read 5126 times)

Daisy

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Sell, rent, or vacation rental?
« on: March 29, 2014, 12:32:11 PM »
Hello everyone,

I hope to get some good advice here on what to do with my house. The choices are:
 - Sell it
 - Rent it (long term) - I've never been a landlord so this scares me
 - Turn it into a vacation rental (short term leasing) - would need to furnish it and get ready for vacationers. It's a great location for this. I'm not sure if the town actually allows it, but others are doing it.

Background: I have owned the house for 10 years. I recently bought a nice condo a mile away and was able to buy it cash by getting a HELOC on the house. I pretty much got the idea from MMM himself when he posted he was doing the same thing. The house has a mortgage as well. Once I sell the house, I will have the funds to pay off the mortgage and the HELOC. I have not put the house on the market yet (too busy with work and vacations), but have spoken with a real estate agent about its value.

The house is a quarter mile from the beach in sunny and "hot" (hot as in real estate interest/values) south Florida. I think my area is undervalued for a house being so close to the beach. It was when I purchased it 10 years ago. I am about 8 miles north of South Beach. The same house there would be worth lots more. There are some new condo developments being developed on the beach...old buildings torn down and new fancy ones going up. These can go for 7 digits.

Estimated house market value: $550,000 (that's what my agent said in September...would want her to reevaluate now that I may put it on the market...I want to ask for more!) (will need to subtract out the 6% commission fees if I sell it)
Estimated monthly long-term rental: $3,000 (neighbors across the street may be getting $3,200 I heard)
Estimated monthly short-term rentals: $5,000 - $7,000 (just guessing from sites like VRBO)

Amount left on mortgage: $218,000
Monthly Mortgage payment (no escrow): $1,270
Yearly taxes: $5,200 (currently under homestead exemption...this will shoot up if I rent it out and lose the exemption)
Yearly insurance: $5000 - $6000 (estimate..includes hazard, windstorm, and flood required by mortgage...have heard flood insurance is about to skyrocket but don't know new rates...windstorm just shot up a lot too)
Amount of HELOC: $192,000
Interest paid montly on HELOC: $530

To me, this doesn't seem like it passes the 1% test. However, so many people are encouraging me to either short-term or long-term lease it. They think the property values will go up. They may...they may not. It would be a prime location for it since new expensive condos are popping up along the beach. I think getting another type of property (duplex, etc.) might be more profitable. But I do own the place already so I might as well think of my options.

Also along the lines of the 1% calculations, someone mentioned I should keep in mind that my HELOC allowed me to buy the new place mortgage-free so that I should take that into account in my calculations, but I am not sure how. Right now, it looks like I'd barely be breaking even, if not losing money (considering higher property taxes and flood insurance), on a monthly basis.

I am very unfamiliar with how to use any tax savings (depreciation, etc.) in my calculations.

If I turn it into a vacation rental, I'd have to furnish it and get it ready for travellers. I know a retired doctor in south Florida that has turned all of his properties into vacation rentals because he doesn't want to have to deal with long-term tenants who may be troublesome. He says he makes a lot more with the short-term rentals...but it is a lot more work. I have a full time job.

What should I do?!?!? Help!!! I was about ready to tell my agent to put it on the market but wanted to rethink this through.

EDIT: One more thing...keeping in mind capital gains tax restrictions - if I do the rent thing (short or long term), I may want to consider selling it in 3 years to cover the "live in the house 2 out of the last 5 years" rule to avoid paying any capital gains taxes. If the house appreciates past say $610k, I may have to pay capital gains tax on the sale. However, if I go the vacation rental route and I am getting a ton of income from this place I would consider holding on to it for income sake.
« Last Edit: March 29, 2014, 03:21:38 PM by Daisy »

Daisy

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Re: Sell, rent, or vacation rental?
« Reply #1 on: April 01, 2014, 08:37:10 PM »
It's getting a little lonely on this thread. :-(

Should I provide some more information?

Anyone have experiences with vacation rentals?

totoro

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Re: Sell, rent, or vacation rental?
« Reply #2 on: April 01, 2014, 09:51:21 PM »
I own a vacation rental.  I have two units in the house though.

As far as vacation rentals go where I am there is a high season and a no go season.  For example, in summer I get $1550 per week for the upper unit.  In winter it rents for $800 a month.  You need to be realistic about the vacancy rate for the home where you are. 

In your case, I'm not sure what the vacancy rates around you might be and what length the season is.  You need to be accurate on this.  Vacation rentals are more work because of cleaning and scheduling.  The furnishing is not a big deal given that you can get high quality furniture online easily for fairly little money.  All the sheets/towels are a cost but, again, not a huge outlay.

Given that your house is estimated at $550 000 and your taxes and insurance are really really high compared to me, your ROI on a long-term rental does not seem great to me.  There are online calculators you can use to estimate your ROI.  I use this one with some modifications: http://www.biggerpockets.com/tools/REIPropertyAnalyzer.xls

I also have a house with a suite that I rent out long term and it is cash flow positive, but barely.  My market in Canada has really high house prices so I'm banking on long term appreciation, but I would probably not make this choice if I lived in the US.  You have access to better ROI in some states. 

If you sell you might consider saving the commission by doing it yourself.  Entirely possible where I live anyway.

Perhaps posting this scenario on biggerpockets.com would get you some more local responses?

Daisy

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Re: Sell, rent, or vacation rental?
« Reply #3 on: April 02, 2014, 10:33:54 PM »
I own a vacation rental.  I have two units in the house though.

As far as vacation rentals go where I am there is a high season and a no go season.  For example, in summer I get $1550 per week for the upper unit.  In winter it rents for $800 a month.  You need to be realistic about the vacancy rate for the home where you are. 

In your case, I'm not sure what the vacancy rates around you might be and what length the season is.  You need to be accurate on this.  Vacation rentals are more work because of cleaning and scheduling.  The furnishing is not a big deal given that you can get high quality furniture online easily for fairly little money.  All the sheets/towels are a cost but, again, not a huge outlay.

Given that your house is estimated at $550 000 and your taxes and insurance are really really high compared to me, your ROI on a long-term rental does not seem great to me.  There are online calculators you can use to estimate your ROI.  I use this one with some modifications: http://www.biggerpockets.com/tools/REIPropertyAnalyzer.xls

I also have a house with a suite that I rent out long term and it is cash flow positive, but barely.  My market in Canada has really high house prices so I'm banking on long term appreciation, but I would probably not make this choice if I lived in the US.  You have access to better ROI in some states. 

If you sell you might consider saving the commission by doing it yourself.  Entirely possible where I live anyway.

Perhaps posting this scenario on biggerpockets.com would get you some more local responses?

Hi! Thanks for your response.

You are right. My calculations for a long-term rental don't give me much hope.

I was thinking the only way I could work this was through a vacation rental. I was assuming an 8-month rental peak period, with a 75% occupancy rate during that time. Even then, I would have to get $6,000 a month for 8 months at 75% occupancy rate just to equal a long-term rental at $3,000 a month (both would total $36,000 a year). That might be do-able as far as the occupancy rate, but it's just breaking even or losing money.

I contacted my insurance company to see if they can give me a quote on what my flood insurance rate will be later this year during renewal. The agent said it was still being discussed in Congress and didn't give me an amount. I was not pleased...I think they should be warning their customers about this potential hike in flood insurance rates due to the federal government cutting back on their subsidies. I only heard about it on the news. Who knows, some are saying it could jump from $2,000 to $20,000. It sure makes me uncomfortable and more likely to sell the house.

Assuming it is sold at $550,000 minus 6% commissions, after paying off the mortgage and HELOC I should walk away with a little over $100k (minus the extra savings I put in to buy the new condo...so maybe about $25k). And I got to buy a condo mortage-free with the HELOC. Not bad!
« Last Edit: April 02, 2014, 10:35:32 PM by Daisy »

Thegoblinchief

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Re: Sell, rent, or vacation rental?
« Reply #4 on: April 03, 2014, 06:39:56 AM »
I would sell it unless you really want to try your hand at land lording. The fixed costs of taxes and insurance are too high to make it a great investment.

If you want experience land lording, give it a try for a year or two. You are close enough that managing it yourself is easy, but realize that playing the appreciation game is always a risk.

arebelspy

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Re: Sell, rent, or vacation rental?
« Reply #5 on: April 03, 2014, 07:31:40 AM »
EDIT: One more thing...keeping in mind capital gains tax restrictions - if I do the rent thing (short or long term), I may want to consider selling it in 3 years to cover the "live in the house 2 out of the last 5 years" rule to avoid paying any capital gains taxes.

Keep in mind this is pro-rated.  If you only lived there 2/5 years, you only save on 40% of the tax...
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plantingourpennies

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Re: Sell, rent, or vacation rental?
« Reply #6 on: April 03, 2014, 12:47:50 PM »
I used to live in that area, but didn't buy until I moved to a lower COL area of FL.  Here's my $0.02. 

People that rent by the week or month are usually incredibly needy.  Incredibly.  If you can't accept calls when the internet goes out (have you calculated adding utilities and bills like cable and internet for short term rentals?  You'll need to cover them) or stupid stuff like that at all hours, and can't afford to pay someone else to manage it and take those calls for you, I wouldn't go that route. 

You should be able to look your property up at the Dade County Property Appraiser's site: http://www.miamidade.gov/pa/property_search.asp 
From there, you will be able to see how much your homestead exemption is decreasing your taxable value for the various taxable districts.  With that, you should be able to interpolate how much taxes will go up on the house when you switch your homestead exemption to the condo.  (Since at that point Market value will reset to assessed value and assessed value can at that point start increasing 10% per year as long as it's still less than or equal to market value.) 

For flood insurance, do you know your flood zone classification? 
If not, you can find it by going to the FEMA website here: https://msc.fema.gov/webapp/wcs/stores/servlet/FemaWelcomeView?storeId=10001&catalogId=10001&langId=-1  Use street address + zip, then on the next window, you want to "retrieve printed FIRM panel" and then click the little magnifying glass icon to view.  It annoyingly opens up a lot of new windows in your browser, but the info is all there.  The areas are shaded showing the different flood zones.
Being coastal, you're most likely AE EL #, where #, the number, represents how high your base level needs to be above sea level in order to qualify for market flood insurance rates.  If you had a survey done when you bought the property, your survey will tell you what that base elevation is.  Otherwise, you can call around and get an Elevation Certificate done for $70-$100. 
If your elevation is over the # in your AE rating, then you are already paying market rates for your flood insurance and you shouldn't need to worry about crazy increases.  If your # is under the AE rating then your rate will increase, and the FEMA site had information on that which I can't find right now. 
You might be surprised.  I just looked up Surfside and it says it's an AE 8.  That's actually pretty low (we're an AE 10), so you might be close to having market rates already (I say never having been to your house).   The map was updated in 2009, and isn't scheduled for another update for at least 5 years or so I think.  So those flood zones should be stable for the 3 year window you're considering for riding appreciation before selling. 

Anyhow... If I were in your shoes, I'd look up those numbers to see what the impact on taxes and flood insurance will actually be, and then see if you can make it work as a long-term rental.  With a full time job, I know I would hate dealing with the neediness of short-term renters. 

plantingourpennies

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Re: Sell, rent, or vacation rental?
« Reply #7 on: April 03, 2014, 01:00:18 PM »
One more thing...

This (http://www.fema.gov/media-library-data/20130726-1912-25045-8239/bw_timeline_table_04172013.pdf) says that flood insurance rates should only rise by 25% per year until subsidized rates match market rates.  So I'm not sure where the $20K premiums that agents and the media are using to scare people are coming from. 

So an upper bound on the cost for the next couple of years should be found by using current premium*1.25 for next renewal, and current premium*1.25^2 for the one after that. 

However under the current law, someone who buys your property (anytime after 1/1/14, which it is) will have to pay market rates immediately.  If your elevation is well below your flood zone rating, then this is likely to impact the sale value. 

AJ

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Re: Sell, rent, or vacation rental?
« Reply #8 on: April 03, 2014, 01:10:38 PM »
have heard flood insurance is about to skyrocket but don't know new rates...

I recommend talking with your insurance agent now about this. You're referring to the Briggart-Waters act and it is fucking insane! Ours went up 600% (not a typo) because of it, and we didn't even get the worst of it. It only affects about 20% of people in flood zones, so you may be fine, but it would be better to know now so you can plan accordingly.

So I'm not sure where the $20K premiums that agents and the media are using to scare people are coming from. 

Our escrow company paid our flood policy late last year (unbeknownst to us) which means we were immediately hit with the increased rate. For reference, our home is only valued at $61k and our flood rate went from $500 a year to $2700. So yeah, for people with much nicer homes, or in worse zones (like near a beach) $20k is very possible. If the OP's flood is $2k a year and his goes up like ours then he is looking at $12k. Even if it takes a few years to reach that level, that is still a LOT of money. We had no idea our rate was being subsidized when we bough the house, and would not have bought if the rates had been that high, or if we had any idea that the rules might change to cause the rates to jump that quickly.

AJ

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Re: Sell, rent, or vacation rental?
« Reply #9 on: April 03, 2014, 01:13:24 PM »
Otherwise, you can call around and get an Elevation Certificate done for $70-$100. 

Our elevation certificate cost $1,150.

MKinVA

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Re: Sell, rent, or vacation rental?
« Reply #10 on: April 03, 2014, 01:56:50 PM »
The fear of flood insurance may also impact sale/asking prices just when you get ready to sell if you wait the 3-4 years. We have a vacation rental and would not recommend it to someone with no experience. It very different from renting out a single family home to a nice young couple who take care of the yard and want to decorate your house with their money. This is hard core rental churn. You furnish the house, they break stuff, you fill the drawers with interesting kitchen gadgets, they steal them, and your blankets, and your knick knacks, and you get the point. We have had holes put into walls, smashed microwave, flooded bathrooms, etc. And this is in a small bay town, not the Jersey Shore. You also have to carry all the monthly utilities on a vacation rental and your tenants don't care that the air conditioning is on cause they want all the doors open!

Three little words: Don't do it.

plantingourpennies

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Re: Sell, rent, or vacation rental?
« Reply #11 on: April 03, 2014, 02:13:11 PM »
Otherwise, you can call around and get an Elevation Certificate done for $70-$100. 

Our elevation certificate cost $1,150.

If OP needs one, I can dig up a flyer for the cert guy we used less than 3 years ago.  (PM if you want it.)  Was $75 or so and he covered everything location south of Lake O.  I can't imagine costs have gone up over 10x in 3 years. 

Also, once you know your elevation and your BFE (that's the # portion of AE EL #), you can use this table to look up current market rates.  http://www.bayareahouston.com/Assets/flood%20insurance/1%20%20nfip%20october%201%20ae%20sf%20res%20n-elv.pdf

Then look up if your community is in the CRS (Community Rating System), most FL communities qualify to varying degrees - you can find a full list here: http://www.fema.gov/media-library-data/45d30e14bdec841d92462f9424567b73/19_crs_508_oct2013.pdf  (scroll down to find FL listings) and the 6th column shows you how much of a discount you get for your community participating in the CRS. 

Using these together gets us to an accurate representation of our rates:  For example, we are AE 10 and our elevation is 13'3" (I know this to the inch because it made a HUGE difference when we bought).  So we are BFE +3 with a 1 story house, and coverage for column B.  Looking it up, that's $403, but our CRS gets us a 20% discount, so our rate is $322. 

Daisy

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Re: Sell, rent, or vacation rental?
« Reply #12 on: April 03, 2014, 03:29:53 PM »
Thanks everyone for your responses. It has been very helpful.

I had an interesting exchange with my insurance agent today. It was a back and forth between me (wanting numbers and wondering why they hadn't informed their clients of this big change in flood insurance policies) and her (basically not being able to give me an estimate on the new rates). She said a new law signed on March 21 means the government will still subsidize flood policies. However, she didn't mention the specifics of the law or if it is referring to just the 25% yearly increases instead of an instant adjustment upwards. I asked for more information but she said she wouldn't know until like 8-10 months from now when my policy renews. I told her I can't make important financial decisions unless she tells me the specifics. So frustrating...so I basically told her this was going to force me to sell my house (and subsequently they would lose my business).

I bet a lot of people are going to be surprised by these increases if they are not being warned by their insurance companies.

I may be selling this at just the right time. The new buyer may have lower rates at first before the insurance companies get the new law into their systems (agent said it could take 1-2 years for that).

Also good points on the hassles of vacation rentals. My retired doctor friend did not really go into that. He made it sound so easy. Secretly, I think his wife does all of the work.

I am so glad I have "wasted" some (many) hours at work and home reading this blog over the last months. If it wasn't for MMM's post on getting a HELOC to buy his new place I may have never made the decision move and would have been totally frustrated by my flood insurance at the old house. Thank you so much! I dodged a bullet.

I will sell the house and enjoy my new mortgage-free life and a path that takes me closer to ER.



momo5

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Re: Sell, rent, or vacation rental?
« Reply #13 on: April 03, 2014, 08:47:04 PM »

People that rent by the week or month are usually incredibly needy.  Incredibly.

   

lol, that is so true! we recently rented a house in south florida for a week. the cable wouldnt work, we called and someone came to fix it. we were told that the pool would be heated to 86 and it was at 77 (it was in the sixties so it really made a difference and the whole point of renting this house was the heated pool) so we called and something was broken, someone came to fix it that night so we could swim the next morning. the people renting the house next door were partying all night and climbed over the fence (drunk) and broke the gate, we called to let the owner know and yeah, he had to come again to have it fixed.
and after that was all said and done, when we called to let them know we had left, they thanked us for being such easy guests. I guess they get even needier tenants than us!

another note, my mom rented her house (long term) and the tenants trashed the house to the degree that it required over 10,000 cleaning before she could show it for sale. it was crazy. and the house didnt appreciate much during the time it was rented, she could have just sold it when she moved and gone without the headache. renting is risky, sometimes a risk worth taking, but be aware is all.