Author Topic: Another Rent or Sell Question  (Read 2506 times)

Cwadda

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Another Rent or Sell Question
« on: July 30, 2014, 06:26:20 AM »
So my mom bought a 2 bed/2 bath condo in a nice area. She got a really good deal on it and is in the process of fixing it up now. She wants to sell it in order to buy another house. I'm wondering if it would be better to rent and hold for a while. The loan is a HELOC fixed at 4%. Here are the details:

Condo purchase price: $70,500
Expected money put in: No more than $15,000
Carrying costs: $750/mo
Expected value after all work has been done: $110,000. This is a comparison to similar condos in the same complex. There was one next door that sold for $100k a few years ago and it was only a 1 bedroom/2 bath. Plus this one is going to be absolutely beautiful, if not one of the nicest in the whole complex. It could even go for $120k.
Expected rent income: $1200/mo. This would be around a $450/mo positive cash flow to put back into the mortgage. Meaning the house could be completely paid off in 6 years.

Any opinions? Thanks.

« Last Edit: July 30, 2014, 06:27:59 AM by Cwadda »

Fishingmn

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Re: Another Rent or Sell Question
« Reply #1 on: July 30, 2014, 08:19:24 AM »
First question would be does she need to sell in order to qualify for a loan in purchasing her next place? Also, it's a little strange that a HELOC is the primary loan so you might want to check that. Does the current lender have issue if it's not a primary residence?

In regards to the rental numbers - what's included in carrying costs?

Normally, you would factor about 1/2 of the expected rent ($600/mo) to go toward things like vacancy, maintenance, property management, potential cost of litigation, potential cost of city rental license, taxes, insurance (inc. landlord policy to cover liability) and extra utilities. You then factor in your lending cost in the other half left over to come to a true expected positive cash flow estimate. I'm guessing it's not $450/mo.

Cwadda

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Re: Another Rent or Sell Question
« Reply #2 on: July 30, 2014, 08:48:11 AM »
Quote
First question would be does she need to sell in order to qualify for a loan in purchasing her next place? Also, it's a little strange that a HELOC is the primary loan so you might want to check that. Does the current lender have issue if it's not a primary residence?
The HELOC is reaching capacity in terms of equity (it's nearing maxed out) so she wouldn't be able to take any more out without selling another property first. She already bought (and is holding) another place right now that's not primary residence so I don't think the lender has any issues with it.

Quote
In regards to the rental numbers - what's included in carrying costs?
Condo association fee of $367/mo (this pays for heat, gas, property maintenance), taxes, mortgage, etc. It doesn't include landlord insurance though. The renter would pay for utilities separately.

Also, this condo requires a 20% minimum downpayment (I forget the official term for this). That's another important factor. I feel like that could make selling the condo more difficult.

RobLucky

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Re: Another Rent or Sell Question
« Reply #3 on: July 30, 2014, 09:15:18 PM »
Does she need a lump of money now, or income over a longer period?

It's a question of flipping for a short-term profit (which could be plowed into the next flip), vs. holding for a long-term profit.

If the house market is expected to increase, renting (holding to sell at a later date) makes sense. The numbers look like they would work to cover expenses and then some.

If the property is in a desirable place near any tourist attractions, you could also consider operating it as a furnished vacation rental rather than a long-term rental. The rent can be much higher on the income side of the equation.

escolegrove

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Re: Another Rent or Sell Question
« Reply #4 on: July 30, 2014, 10:41:14 PM »
Rental Property are an important part of our FIRE plan. Personally the thing that bothers me are the condo fees. Those are high. Although it includes utilities it might be hard to get a renter. In my experience and markets renters have a certain number/ceiling. They don't even look above  a certain number in the search engines. I wonder if she could do vrbo, or a fully furnished executive rental.

The other issue is the HOA rules.

Cwadda

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Re: Another Rent or Sell Question
« Reply #5 on: July 31, 2014, 05:17:26 AM »
Does she need a lump of money now, or income over a longer period?

It's a question of flipping for a short-term profit (which could be plowed into the next flip), vs. holding for a long-term profit.

If the house market is expected to increase, renting (holding to sell at a later date) makes sense. The numbers look like they would work to cover expenses and then some.

If the property is in a desirable place near any tourist attractions, you could also consider operating it as a furnished vacation rental rather than a long-term rental. The rent can be much higher on the income side of the equation.

She would prefer a lump sum now to do more houses but I'm wondering if it makes more sense to rent it over a longer period.

Folks around her have been enthusiastically saying it would easily sell for $110-115k. That would be a $25k minimum profit assuming she puts in $15k. But she'd have to pay taxes and we are in like a 28% tax bracket. Would holding it as a rental be more "tax-sheltering"?

I did look over the numbers again and can confirm the carrying costs are $750/mo. The only other costs to include would be landlord insurance, I believe.

Unfortunately it's not near any tourist attractions but it is in a nice location with a very nice community (nice people, pool, quiet, good location for working).

 

Cwadda

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Re: Another Rent or Sell Question
« Reply #6 on: July 31, 2014, 05:20:56 AM »
Rental Property are an important part of our FIRE plan. Personally the thing that bothers me are the condo fees. Those are high. Although it includes utilities it might be hard to get a renter. In my experience and markets renters have a certain number/ceiling. They don't even look above  a certain number in the search engines. I wonder if she could do vrbo, or a fully furnished executive rental.

The other issue is the HOA rules.

The condo fees are high but it does cover heat, which is the main thing. We are talking about New England with very cold winters. The heat bill alone could run much higher than the condo fees during the winter.

One more thing mention-worthy is that the condo is on the ground floor. This is both good and bad. The good part is that the condo is more marketable to older folks. The bad part is that the building has been known to have minor water damage. Definitely would not want that kind of thing to come up in a few years.

The real estate agent (who owns 3 of these) has said the bare minimum rental price she could get would be $1000/mo. It could easily be as high as $1200/mo.

My mom is set on staging it (she is a very talented designer) and has considered "rent-to-owning" it as well.
« Last Edit: July 31, 2014, 05:22:33 AM by Cwadda »