Author Topic: Sell Rental House to Pay off Student Loan?  (Read 5995 times)

robabsn

  • 5 O'Clock Shadow
  • *
  • Posts: 2
Sell Rental House to Pay off Student Loan?
« on: March 25, 2014, 04:10:19 PM »
I have a question that I'm hoping to receive some advice on. I have been debating if I should sell my rental home and use the proceeds to pay off my student loan debt.  Below are some of the details.  Any friendly thoughts are appreciated.

Monthly Net Income averages $310 month (net of expenses and vacancy allowance). Original down payment to purchase the house was approximately $25,000 (a 15% annual return on equity).

If I sold, I would likely net about $60,000 in net after tax proceeds (which includes return of equity...i.e. my original down payment). I don't expect future appreciation on this house to be signfiicant in the coming years (but I've been wrong on those predictions before). 

My student loan has a $55,000 balance at a 7% annual interest rate.  The minimum payment is about $335/month, but I've been more agressive in my payments at $800/month.
« Last Edit: March 25, 2014, 05:26:54 PM by robabsn »

Numbers Man

  • Guest
Re: Sell Rental House to Pay off Student Loan?
« Reply #1 on: March 25, 2014, 04:17:43 PM »
You're paying almost $4k of interest expense on your student loan in 2014. Are you getting over $4k of benefits from owning this rental?

waltworks

  • Magnum Stache
  • ******
  • Posts: 3305
Re: Sell Rental House to Pay off Student Loan?
« Reply #2 on: March 25, 2014, 04:37:03 PM »
How is $31/mo a 15% return on equity here? Or are you including appreciation?

-W

Blindsquirrel

  • Pencil Stache
  • ****
  • Posts: 656
  • Age: 1
  • Location: Flyover country
Re: Sell Rental House to Pay off Student Loan?
« Reply #3 on: March 25, 2014, 04:42:43 PM »
  Sell! Now! $31 a month? you can get that in your couch cushions. It has low future appreciation and pi$$ poor cash on cash return. You are one wretched tenant or blown HVAC system  from taking a bath. Lose the student loan ASAP.

phred

  • Pencil Stache
  • ****
  • Posts: 506
Re: Sell Rental House to Pay off Student Loan?
« Reply #4 on: March 25, 2014, 04:45:15 PM »
$31 times 12 = $373.  15% of 25k is $375

phred

  • Pencil Stache
  • ****
  • Posts: 506
Re: Sell Rental House to Pay off Student Loan?
« Reply #5 on: March 25, 2014, 04:49:03 PM »
How much is your own home worth?  May be better to sell that by moving into the rental.

MDM

  • Walrus Stache
  • *******
  • Posts: 9611
Re: Sell Rental House to Pay off Student Loan?
« Reply #6 on: March 25, 2014, 05:03:35 PM »
Someone (maybe me) is slipping a decimal point here: 15% * 25000 = 3750.

Put another way, 31 * 12 / 25000 = 1.5%.

Not to mention the additional money going to pay principal on the loan (unless it is an interest-only loan).

I'm with those wondering how the rental is a good deal?

robabsn

  • 5 O'Clock Shadow
  • *
  • Posts: 2
Re: Sell Rental House to Pay off Student Loan?
« Reply #7 on: March 25, 2014, 05:28:00 PM »
How is $31/mo a 15% return on equity here? Or are you including appreciation?

-W

Sorry!  I meant to write $310/month.  I omitted that final 0 accidentally...I have corrected it in my original post. 
« Last Edit: March 25, 2014, 05:40:38 PM by robabsn »

MDM

  • Walrus Stache
  • *******
  • Posts: 9611
Re: Sell Rental House to Pay off Student Loan?
« Reply #8 on: March 25, 2014, 05:45:02 PM »
Ok, that changes things, so now it's closer to a wash.

You have $60K that you could use to pay off a student loan that costs 7%, or you could keep the $60K in the rental and get 310*12/60000 = 6%.  But the 6% goes on and on while the 7% is one and done.

So you probably need to look at your overall tax and cash flow picture, and gut feel.  E.g., what tax benefits are you getting from depreciation on the rental?  What would you do with monthly cash flow you are now putting toward the loan?  Do you like being a landlord?  Would you like to have no student loan debt?

From here the numbers look close enough that you should do what makes you feel better.




Miss Growing Green

  • 5 O'Clock Shadow
  • *
  • Posts: 99
  • Age: 35
  • Location: Tucson, AZ
Re: Sell Rental House to Pay off Student Loan?
« Reply #9 on: March 26, 2014, 11:10:41 AM »
I agree with MDM- look at the tax benefits from each:

The student loan interest is a tax deduction whether or not you itemize.  So, your "true" interest rate is going to be less that 7%, depending on your tax bracket.

Most rental properties provide tax benefits (because you can claim depreciation, etc.), so you are likely getting tax breaks there, too, which would make your "effective" returns higher than 15%.  Rents should go up ~2%/yr, while your mortgage stays the same.

Without looking at actual numbers, I'm guessing it makes most sense to keep the rental and pay down the loan aggressively (like you are).

Thegoblinchief

  • Guest
Re: Sell Rental House to Pay off Student Loan?
« Reply #10 on: March 26, 2014, 11:19:37 AM »
I would lean towards keeping the rental, unless you can anticipate major expenses in next 5 years (look at HVAC, roof condition, etc).

waltworks

  • Magnum Stache
  • ******
  • Posts: 3305
Re: Sell Rental House to Pay off Student Loan?
« Reply #11 on: March 26, 2014, 11:43:31 AM »
If you are actually cash flowing (meaning making the 50% rule) it's a wash. If you are just at +$300 a month without including replacing/depreciating big stuff (HVAC, roof, etc) in the future then sell immediately.

-W

SDREMNGR

  • Bristles
  • ***
  • Posts: 324
Re: Sell Rental House to Pay off Student Loan?
« Reply #12 on: March 26, 2014, 12:50:01 PM »
Keep the rental use extra proceeds to pay down loan.  The rent will go up as well as price (eventually usually) and if you time it right you'll be making a lot more from the rental than the 7% from your loans.

skunkfunk

  • Handlebar Stache
  • *****
  • Posts: 1057
  • Age: 33
  • Location: Oklahoma City
Re: Sell Rental House to Pay off Student Loan?
« Reply #13 on: March 26, 2014, 01:01:29 PM »
I'd definitely sell it.