Author Topic: Advice welcome: rent or sell  (Read 3037 times)

Pelky

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Advice welcome: rent or sell
« on: March 16, 2015, 07:24:58 PM »

Should we sell or rent?
Here's the data:

Townhouse in suburb

Market Value: $300K
Original Purchase price: $300K
Original Mortgage Amount: can't remember, lived here for 10 years
Interest Rate: 4 3/8
Mortgage Term: 30 years
Term remaining: don't know.
Amount remaining on mortgage: $35K
Gross Rents: $2K per mo
Principal and Interest:
Taxes and Insurance (the T&I of your PITI): $6K / yr
HOA costs: $125/ mo
Deferred maintenance notes: Most appliances, a/c, etc are about 15-20 y.o. But currently don't have any immediate repair.  Rental area is Luke-warm, but so is the house selling market.

Here's our situation:
We live in a Ne suburb.  We are moving 10 mi down the street.  Taking on a bigger mortgage (I know, sounds very un-mustachian, but I want the relatively huge amount of land to grow things and our house is also our splurge.  We live extremely frugall and have a healthy nest egg.  I am a full time mom and the husband is happy at his job and not looking to change anything.  If any of that were ever to change we could cut expenses/sell/relocate etc and be okay without any hardships or need to work.

On to the real estate question issue.  I know if I were buying a rental place this is not a good investment but our situation seems a bit matured and I'm not sure if we should sell or trial rent for almost 3 years (my tax man tell me this is an interesting option, lose $ on house it can be a loss, appreciate $ on house it can be invested in new house ).  Thing lost with that option is the time value of the $240K we'd make investing.

One Hold-up is that I'm very into the renting and managing but I'm also insanely busy these days being a mom of some very young children (3 less than 5y.o.).  In a few yrs they'll be less needy but for the next two years I'm already a very swamped FTE.  Hubby is less enthusiastic about the hassle of it all.

Part 2, for those who say to rent.  Should we pay off the balance on the mortgage?  We could.  In fact we need to do something better with some of our lousy cash sitting around not getting interest.  The interest rate on the new property will be lower. (We're good at making $ and not spending $ but a little too relaxed about investing $).

Thanks for all the insight. Please ask if you want some other info


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waltworks

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Re: Advice welcome: rent or sell
« Reply #1 on: March 16, 2015, 09:58:07 PM »
It is a horrible, horrible rental with those numbers (don't be upset, I have two that are much worse!) so unless you expect tons of appreciation, I'd sell it.

As for the tax advice, losing money on purpose for tax reasons is something you do if you're a billionaire with a bunch of irons in the fire and an army of tax attorneys. Not something you do if you're a family with mostly W-2 income and normal investments. He/she may be talking about depreciating the property, but you'll pay that back when you sell anyway, so I'd save the hassle.

$240k in stocks in 3 years would be expected to earn you something like 6-7% annually - call it $50k. Hard to imagine the house doing that in most cases though depending on the neighborhood and market it could obviously do much better or much worse.

-W

Pelky

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Re: Advice welcome: rent or sell
« Reply #2 on: March 17, 2015, 08:55:44 AM »
Not upset at all.  Tell me it's horrible so I can think of it from every angle...that's what I want.  I appreciate the input.

But here's my analysis, please point out my flaws.

The options are a wash ($-wise, not time-wise) over a 3 year period if we pay off the mortgage balance (debit) + rent OR invest the $240k in cash WHEN the interest is at ~5%. If you get better interest, say 7%, the investing option is better, lower then renting option is better.

This analysis doesn't consider any appreciation (or depreciation) of the house that might happen, which in 3 years can still be tax free deposit into our new mortgage. It also doesn't include any tax deferred depreciation or any other "tax reasons".  (We do have some complicated taxes where we often have to exercise options or can shelter losses based on some planning but that's not really the input I'm after in this post.)

It also doesn't include the lesson or the "taste" for whether we want to consider rental properties (more economic ones) in our portfolio with the opportunity just in our laps here.

I'm not trying to talk up renting.  I enjoy a debate and it helps me analyze. I would've come up with compelling reasons to sell if you had said it was great investment.

waltworks

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Re: Advice welcome: rent or sell
« Reply #3 on: March 17, 2015, 09:40:55 AM »
I'm confused by your analysis here - can you post details? Because it's hard to imagine that you'll make ~$50k on this property in 3 years, which is roughly the opportunity cost if you're going to invest the $240k net equity in something like a broad stock index fund. If you are going to stick the money in... cash, then yes, you'll do poorly, at least if you're in the US where you will only get 1% or so for it.

50% rule says you'll net $1000 a month before paying the principle and interest. Run your rental numbers based on that.

-W

Not upset at all.  Tell me it's horrible so I can think of it from every angle...that's what I want.  I appreciate the input.

But here's my analysis, please point out my flaws.

The options are a wash ($-wise, not time-wise) over a 3 year period if we pay off the mortgage balance (debit) + rent OR invest the $240k in cash WHEN the interest is at ~5%. If you get better interest, say 7%, the investing option is better, lower then renting option is better.

This analysis doesn't consider any appreciation (or depreciation) of the house that might happen, which in 3 years can still be tax free deposit into our new mortgage. It also doesn't include any tax deferred depreciation or any other "tax reasons".  (We do have some complicated taxes where we often have to exercise options or can shelter losses based on some planning but that's not really the input I'm after in this post.)

It also doesn't include the lesson or the "taste" for whether we want to consider rental properties (more economic ones) in our portfolio with the opportunity just in our laps here.

I'm not trying to talk up renting.  I enjoy a debate and it helps me analyze. I would've come up with compelling reasons to sell if you had said it was great investment.

vipulshah1

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Re: Advice welcome: rent or sell
« Reply #4 on: July 01, 2016, 04:53:00 AM »
Hi There,
               I am new here. I would like to discussion related with real estate.

Blindsquirrel

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Re: Advice welcome: rent or sell
« Reply #5 on: July 02, 2016, 07:31:11 PM »
 no offense but sell it, your numbers for a rental are genuinely poor. It will cash flow but your yield on a huge investment will be very poor. Esp if you are in the midwest, then it is a horrible investment.

thedayisbrave

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Re: Advice welcome: rent or sell
« Reply #6 on: July 04, 2016, 08:02:09 PM »
If you wouldn't buy it as an rental property, sell.

SwordGuy

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Re: Advice welcome: rent or sell
« Reply #7 on: July 04, 2016, 08:56:08 PM »
I'm missing something.  Why do people think the numbers are awful?

$2000 per month gross rent.

Only expenses listed are:

$500 per month PITI
$125 per month HOA.

Add in 6% vacancy

$120

And 20% for maintenance because of the deferred maintenance:

$400

Total expense is $1145, for $855 cash flow.

After about 3 years or so of catching up on deferred maintenance at $4800 per year, it should drop down to a much more reasonable amount.  Let's guestimate $200 instead, for $945 expenses and $1155 cash flow.

Plus, if the balance on the loan is just $35k on $240,000+ of a mortgage, you're in the home stretch on that too.  Won't get as much on depreciation due to the smaller amount of interest on the mortgage, but you're also closer to that PITI dropping by a goodly bit.

How is that so awful?

GuitarBrian

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Re: Advice welcome: rent or sell
« Reply #8 on: July 04, 2016, 11:35:00 PM »
While the numbers aren't great... They aren't the worst I have seen.
You very well might match or outperform the stock market.

If you are in certain states (Mass., Iowa...) it can be very tenant friendly, taking many months to evict a poor tenant. Check out how long an eviction takes in your state. AZ is 21 days. Colorado is 30...

Lmoot

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Re: Advice welcome: rent or sell
« Reply #9 on: July 05, 2016, 05:23:29 AM »
If neither you or your husband is going to be able to manage it you'll also need to slap on up to 10% of rental income for a property manager which eats up an additional $200 per month. It doesn't look like the best rental investment, but if you use renting as a placeholder while waiting for the market value to go up before you sell, you might come out further ahead despite monthly cash flow. You will have to research the value trends in your area to see which direction they go, and how quickly.

thedayisbrave

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Re: Advice welcome: rent or sell
« Reply #10 on: July 05, 2016, 09:06:36 AM »
I'm missing something.  Why do people think the numbers are awful?

$2000 per month gross rent.

Only expenses listed are:

$500 per month PITI
$125 per month HOA.

Add in 6% vacancy

$120

And 20% for maintenance because of the deferred maintenance:

$400

Total expense is $1145, for $855 cash flow.

After about 3 years or so of catching up on deferred maintenance at $4800 per year, it should drop down to a much more reasonable amount.  Let's guestimate $200 instead, for $945 expenses and $1155 cash flow.

Plus, if the balance on the loan is just $35k on $240,000+ of a mortgage, you're in the home stretch on that too.  Won't get as much on depreciation due to the smaller amount of interest on the mortgage, but you're also closer to that PITI dropping by a goodly bit.

How is that so awful?

$855 x 12 = $10,260.  Divide that by home equity of $265,000 (capital invested)... that's 3.8%.  I tend to prefer an 8-10% return, but that's just me, especially considering you have that much capital tied up in ONE asset, which seems pretty risky to me.

Lmoot

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Re: Advice welcome: rent or sell
« Reply #11 on: July 05, 2016, 09:25:27 AM »
Also another thing I forgot to add, without at least 2 years of rental income recorded, you likely cannot use rental income in the consideration for another mortgage. You could have trouble getting a mortgage for the new place since most lenders calculate your DTI using the 1st and second homes (many lenders include cost of taxes and insurance)....and often times the DTI requirement is even more stringent when your purchasing a second home....at a time when your DTI is significantly higher since you'll be carrying costs of both homes.

If you are well stocked though in your retirement accounts and liquid cash, then this might not be an issue.