Confirming my logic: Continue Renting vs. Putting House on Market

[MNBen]

I own a townhome that I manage on my own, where I currently clear about $475/month ($5,700/year).  This means that rent minus expenses (mortgage, prop. tax, association dues, water, and insurance).   I fully understand there are some other expenses at times, but I'm not including them for this discussion.  I have three rental properties so this is the simple math I use for a general gauge.

My mortgage balance is $80,000 and is currently an interest-only ARM.  So my principal is not currently declining which makes the comparisons a little easier.   I have had the same renter for five years and they are moving out at the end of the month.   I have made the personal choice not to increase rent on them for five years but the market has jumped up recently and this year I was going to raise a little, but I had a feeling they were moving due to their child starting school in the Fall.

So I listed it yesterday for $200/month more and should easily get that as it will be one of the cheaper rentals available.  So for the discussion, let's assume I will be clearing $675/month ($8,100/year).

While researching rentals in my area, I noticed someone in my complex with the exact same floor plan has their home on the market for $132,500.   This will be the first person in nearly 10 years who has attempted to sell at a market price, as all previous sales in the past year were foreclosures or short sales. 

But the market is heating up, especially for first-time buyers, as this home is the only listing in my zip code under $150,000 which is Active, all the others have already sold this Spring or are "Active Contingent".

If the homes sells at this price, I know I can get this price as well.  With my renter moving out, this would be a convenient time to put it on the market.

So I'm just confirming my logic that if I sold, I'd end up with something like $45,000 - $50,000 in cash.  If I keep renting, and with the increased rate, I'm getting about $8,000 year of income.   So that's around 16% return on investment ($8000 divided by $50,000) which I could never match investing the cash on my own.  So to me this is a no-brainer that I should continue renting as long as I'm willing to do the landlord work.

I wasn't really considering selling my place, however with my renter moving out, at least wanted to think about it.   

So just seeking any confirmation I'm making the right choice, or wondering if there is anything I'm not considering in my decision.  Thank you.

[curler]

As you acknowledge at the beginning you don't factor in maintenance (either routine or extraordinary).  Additionally, it doesn't look like you have accounted for vacancies.  Obviously, hard to predict how often it will turn over, but even if it fills quickly you will probably have up to a month or two without a tenant every time it does.

[RexualChocolate]

If you're clearing 700 in profit/month, not counting the part of the mortgage payment that is paying down principal, on a 130k property, why would you ever sell it?

However, I bet your accounting sucks since your ROI calculation isn't correct.

That said, 1% of prop value a year in gross rent is usually the benchmark, so 12% gross annual revenue meaning approximately 6-10% ROA a year (at 0% leverage) is a very realistic goal for single family homes. If you're grossing 13k a year or more and its not much of a time sink, keep it.

[nereo]

While researching rentals in my area, I noticed someone in my complex with the exact same floor plan has their home on the market for $132,500.   This will be the first person in nearly 10 years who has attempted to sell at a market price, as all previous sales in the past year were foreclosures or short sales.

See if that property sells for the list price, and watch how many weeks it takes to sell.  Consider whether the fit & finish and building orientation is indeed similar to your own.  Then, after the property has sold you can do a more thorough calculation of what your property makes, including things like maintenance (time & expenses) and vacancies which you ignored for simplicity in your earlier calculations.

In other words... counting ducks before they hatch...

[MNBen]

As you acknowledge at the beginning you don't factor in maintenance (either routine or extraordinary).  Additionally, it doesn't look like you have accounted for vacancies.  Obviously, hard to predict how often it will turn over, but even if it fills quickly you will probably have up to a month or two without a tenant every time it does.

Thank you for your feedback. 

Of my three rentals, I've rented for 10 years and during that time, I've yet to have a day of vacancy during the turnovers.  I don't know if I'm just lucky, or price the market well, but even for this rental I've already had 10 calls and will be showing to at least 4 people by the end of the this week who will be ready to move in the day the renter moves out.

Also, being it's a townhome, there is very minimal maintenance.  All of the big things (failed appliances) have happened.  Everything else is new (for now).  So while I know expenses can happen, they often don't.  For example, in the past year there was zero maintenance in this townhome.

[MNBen]

If you're clearing 700 in profit/month, not counting the part of the mortgage payment that is paying down principal, on a 130k property, why would you ever sell it?

Well right now it's being self-managed and I live a few miles from the property.  Should I ever move, FIRE, or extensive travel, I would have to look into professional management which eats into that profit. 

However, I bet your accounting sucks since your ROI calculation isn't correct.

I was saying, that assuming I could sell and ended up with $50,000 cash, I could either turn that into a $8,000 annual profit in the rental, or try investing it elsewhere.  So I was attempting to say that the 16% return in the rental seems hard to beat elsewhere.   If my math is wrong, I'd be curious to hear what I missed.  Thank you.

[MNBen]

In other words... counting ducks before they hatch...

Thanks for the feedback.  Yes, I was only considering now because I was putting the place on the market.  I've already had 10 calls and will be showing to at least 4 people by the end of the this week who will be ready to move in the day the renter moves out.

So I fully admit I was thinking about this before the other person even sells.  I was only doing it because I will likely have a signed lease by the weekend so I wanted to make sure I wasn't making a mistake in my logic.   But yes, once the place sells, at which time my place will be rented already, then I'll crunch those numbers again.  But seeing the first 'for sale' sign in 10 years that wasn't a foreclosure, had me at least curious on the what-ifs.