The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: lolliekw on November 15, 2017, 01:35:52 PM
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My husband and I bought our starter house about 6 years ago. Fast forward 4 years and 1 baby later and we moved. We tried to sell our old house, even had a cash buyer and a contract on it…until the appraisal came in.
It appraised for $2,000 less than we purchased it for despite some SERIOUS renovations. (New roof, new central air system, new water heater, redid the hardwood floors, new kitchen, built a new laundry room etc.) The buyer backed out, but she had already lined up a renter so we let them move in and found ourselves becoming accidental landlords.
We’ve been landlords for 2.5 years now. The house is always rented and will be paid off in the next year, at which point we would be making about $660.00 a month after taking into account taxes, insurance and repairs (oh so many ongoing plumbing repairs!) Currently we break even.
My concern is the house’s depreciated value. I haven’t had it appraised since we tried to sell but some real estate friends say it doesn’t look good. The rental market in our town is always strong due to a nearby military base. The housing market is weak for sellers.
So the question is:
Do we keep the depreciating house as a rental property and pay it off asap?
OR
Do we cut our losses and sell the house for a loss and put our money into a better investment?
House Stats:
Market Value: $125,000 (based on most recent appraisal from 2015)
Original Purchase price: $127,000
Monthly Mortgage Amount: 636.00
Interest Rate: 3.75%
Mortgage Term: 30 year
Term remaining: 24 years, BUT we plan to have the house paid off in 2018.
Amount remaining on mortgage: $17,800
Gross Rent: $900.00 per month
Taxes and Insurance
• Taxes: $975.00
• Insurance: $1967.20
HOA costs: $0
Maintenance Costs: $630 per year. We have plumbing issues despite having replaced the sewer line and almost all the plumbing in the house.
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You need ask yourself only one question. Do you want to be a landlord?
If yes, keep it.
If no, sell it.
Yes, it's as simple as that. You'll take a loss but that's the market. What you paid for the house is of no concern to someone buying in today's market.
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accidental landlord here too.
I usually see real estate as a diversification strategy.
I have a few properties and I like them all.
2 are across the country and 1 is local. I have managers for the 2 out of state. I pay 8% and they send me checks.
It's never been vacant and I've never had any issues. Literally I make a few decisions to stay in the "active management" category but that's about it.
My local property is more work and I self manage and self repair etc. It's fun until it's not and as I get older I like working on them less. I like finding younger hungry people who want the work and the knowledge from working on these types of projects.
Sounds like you might want to ride it out for a little bit and see?
Also are you talking about cash break even? There are lots of "break even" points depending on your knowledge and the metric you are using and they're all different.
Cash is obviously the easiest right? Well what about the value on your taxes from the depreciation? lots to think about :)
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It doesn't seem like that great of an investment, compared to what you would be getting other places.
Each month you paying to rent this property. A property that is not appreciating. Also your repairs and capital expenditures are low. Things break and need to be replaced. Paying for just cleaning, painting and normal wear can easily be 3,000 between tenants.
(900-636-975/12-1975/12-630/12) = (900-636-81-165-52)= -34 per month best case scenario with the mortgage or -284 with 3000 turn costs
(900-81-165-52) = 602 without mortgage and the best case scenario (602*12)/127000 = 5.6% return on investment
More realistically (900-81-165-52-250) = 352 w/o montage but with normal repairs (352*12)/127000 = 3.3% return
Rentals are risky. You should be paid for taking on that risk. Right now in the best case scenario you are not beating the market, taking on risk and working harder than you need to. The worse case scenario is not the one I presented. The worse case scenario involves evictions, bedbugs, a trashed house and months of repair with no income.
All of that being said. If you want to be a landlord you should do it. You will learn a lot. With all off my mistakes I just think about the cost of education. While I might have lost that money, what I did get was a great learning experience and that helps soften the blow.
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You need ask yourself only one question. Do you want to be a landlord?
If yes, keep it.
If no, sell it.
I agree with Car Jack. Take a loss if you don't want to be a landlord. Otherwise hunker down and plan to be a landlord for the foreseeable future. It is not uncommon when buying your starter home that you spend more than the house is worth.
If you do end up keeping it, your insurance seems a little high in my opinion. But then again that varies from one location to another.