Author Topic: Another rent vs. sell scenario  (Read 4323 times)

Rollin

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Another rent vs. sell scenario
« on: April 28, 2014, 02:47:01 PM »
I moved out of the home 1.5 years ago and have rented it for 14 months.  My renters are moving out June 1.

House will sell for about $170,000 ($157,185 profit)
I owe $44,700 on a LOC at 2.99% which must be paid if I sell. If I keep it the LOC will expire at the end of 2017, and will need refinancing with costs and likely higher rate.  I pat $500/month now and that would take 101 months to pay off at that rate.
My rent was $1,250, and may get as much as $1,300 now, but will likely loose the month of June for income.
Taxes $1,911
Insurance $829

If I keep it I will likely put $4,000 in a new AC unit within 1 year, other than that it is in nice shape and hasn't needed much upkeep.  It does have hardwood floors throughout that may need refinishing soon.  New kitchen with nice cabinets and granite counter tops.  Both bathrooms new.

My issue is that I want to uncomplicated my life and owning/renting this adds to my duties, although once I rent it out, my complications would not be reduced by much.  It's getting it ready for the next family and the selecting of tenants that gets to me.  I have another rental, plus I maintain our primary house, cars, bikes, boats, etc. and work full time as well as raise three children.

On the other hand if the money from renting is good I can retire earlier of course.  I just need to find a balance.

I would be required to payoff the LOC, but then would either invest the remaining $112,500, or pay it towards my current mortgage at 2.85% and reduce that loan interest by $42,100, and reduce the loan to 6.3 years vs. 13.5.

I'd appreciate some insight.  (BTW - I went through this exercise over a year ago, but had great tenants thrown in my lap so I couldn't turn that down.  I always thought I could sell after a year if they moved out)

RLTW

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Re: Another rent vs. sell scenario
« Reply #1 on: April 28, 2014, 03:07:49 PM »
Can't help with your underlying question, but it seems like putting that $112,500 into a low cost index fund would get you a much better return than paying off a 2.85% mortgage. 

Good luck.

Rollin

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Re: Another rent vs. sell scenario
« Reply #2 on: April 28, 2014, 06:25:28 PM »
Thanks RTLW.  I looked at the direct pay down as the sure thing, and would like to maybe pay some down on my mortgage and invest some like you are suggesting.

I ran some numbers and I'm looking at about $400/month over expenses if I continue to rent ($4,800/year), vs. $42,000+ in interest savings (after all tax advantages are factored in).  So, in simple terms it would take me 10 years of rent to make that, and that is without anything major happening (like installing a new AC unit) and having it rented for the entire time.

Rollin

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Re: Another rent vs. sell scenario
« Reply #3 on: April 28, 2014, 06:29:13 PM »
I just saw the sticky so I'll update the original information:

Market Value: $170,000
Original Purchase price: $69,000
Original Mortgage Amount: $65,000
Interest Rate: 10%
Mortgage Term: 30 years
Term remaining: 0
Amount remaining on mortgage: $44,700 on 2.99% LOC (at $500/month = 8.4 years to payoff)
Gross Rents: $1,250
Taxes and Insurance (the T&I of your PITI - the P&I we'll figure out from the above info): $2,740
HOA costs: 0
Deferred maintenance notes: $4,000 AC unit in 1-2 years
Anything else special or unique in regards to the numbers of the property (not the property itself; things such as city assessments, back taxes, special costs due to unique features of the property, etc. etc.): none
« Last Edit: April 28, 2014, 06:32:18 PM by Rollin »

Bearded Man

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Re: Another rent vs. sell scenario
« Reply #4 on: April 28, 2014, 09:44:48 PM »
I would sell it. You sound like you are busy anyways, and if you hold too much longer you are going to end up owing capital gains taxes on the rental when you sell. Take the money and run. I am in agreement with you though on paying off the house with proceeeds rather than just outright investing it in index funds.

Sure, index funds will give you a far better return, but a paid off house is a sure thing, and the return is just going to be that much higher as the cost of shelter rises for most while yours stays relatively small and the same (other than taxes, insurance and maintenance).


waltworks

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Re: Another rent vs. sell scenario
« Reply #5 on: April 29, 2014, 01:47:53 AM »
Someone has to say it, because it's the easiest way to look at any rental you are thinking about selling: would you BUY it at it's current market value to use as a rental? If no, sell. If yes, keep.

I would sell it if I were you - it is not going to cash flow in any meaningful way (fails the 1% rule at market value of $170k) and in fact might lose a little bit of money. You also don't want to deal with the stress of finding new tenants (of course, selling has it's own stresses...) Get rid of it and by all means don't pay down your <3% mortgage with the proceeds - invest in *anything* else!

-W

Rollin

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Re: Another rent vs. sell scenario
« Reply #6 on: April 29, 2014, 06:18:39 PM »
I would sell it. You sound like you are busy anyways, and if you hold too much longer you are going to end up owing capital gains taxes on the rental when you sell. Take the money and run. I am in agreement with you though on paying off the house with proceeeds rather than just outright investing it in index funds.

Sure, index funds will give you a far better return, but a paid off house is a sure thing, and the return is just going to be that much higher as the cost of shelter rises for most while yours stays relatively small and the same (other than taxes, insurance and maintenance).

Yes, that dawned on me today too (about the capital gains).  Once I go past the 2 outta 5 years living in it I'm committed to renting for a long time, and I don't want to do that.

Rollin

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Re: Another rent vs. sell scenario
« Reply #7 on: April 29, 2014, 06:19:54 PM »
Someone has to say it, because it's the easiest way to look at any rental you are thinking about selling: would you BUY it at it's current market value to use as a rental? If no, sell. If yes, keep.

I would sell it if I were you - it is not going to cash flow in any meaningful way (fails the 1% rule at market value of $170k) and in fact might lose a little bit of money. You also don't want to deal with the stress of finding new tenants (of course, selling has it's own stresses...) Get rid of it and by all means don't pay down your <3% mortgage with the proceeds - invest in *anything* else!

-W

Probably not.  And I will take your suggestion and look elsewhere to get better than 2.85%.

Now, anyone use Craigslist or For Sale By Owner to save Realtor fees :)

S0VERE1GN

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Re: Another rent vs. sell scenario
« Reply #8 on: April 30, 2014, 10:56:51 AM »
seems like more of a lifestyle choice than a finance one.

Do you like the constant monthly income from the home? or would you rather place your assets into something else?

That's about all there is to it as far as i can see.

Rollin

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Re: Another rent vs. sell scenario
« Reply #9 on: April 30, 2014, 02:38:56 PM »
seems like more of a lifestyle choice than a finance one.

Do you like the constant monthly income from the home? or would you rather place your assets into something else?

That's about all there is to it as far as i can see.

it's that (a lifestyle choice), and more - which makes it complicated.  In the long run (say 10-15 years) I would likely benefit more financially having it as a rental.  However, there is risk and effort involved in that choice, and potentially some gains (higher rent in a few years) and losses (higher insurance and taxes, new AC unit, a hurricane, and just painting and fixing stuff).

I dunno, I think I just have too many complications and would like to simplify.  I have been saying to my DW that if I were retired I might not mind having this rental (plus my other rental).

it would be cool to put the assets someplace else at 5%!  That's about what I am getting out of the rental now right (netting $8,300 per year on the rental for a $170,000 home)?

S0VERE1GN

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Re: Another rent vs. sell scenario
« Reply #10 on: May 01, 2014, 10:13:48 AM »
Take a look at the tax implications as well. If you don't live in a home you can deduct a lot of things off of your taxes. If you have a fairly high income this alone can save you a lot of money.

might make sense to get with a CPA for an hour and run some real numbers. or see if there are any helpful ones on the forums.

waltworks

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Re: Another rent vs. sell scenario
« Reply #11 on: May 01, 2014, 10:27:36 AM »
What? If you don't live there, there's not much you can deduct. You can depreciate the structure, but you have to cough that money back up when you sell, so it's just deferring taxes, not avoiding them.

What writeoffs are you talking about?

-W

Take a look at the tax implications as well. If you don't live in a home you can deduct a lot of things off of your taxes. If you have a fairly high income this alone can save you a lot of money.

might make sense to get with a CPA for an hour and run some real numbers. or see if there are any helpful ones on the forums.

Rollin

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Re: Another rent vs. sell scenario
« Reply #12 on: May 01, 2014, 06:17:09 PM »
What? If you don't live there, there's not much you can deduct. You can depreciate the structure, but you have to cough that money back up when you sell, so it's just deferring taxes, not avoiding them.

What writeoffs are you talking about?

-W

Take a look at the tax implications as well. If you don't live in a home you can deduct a lot of things off of your taxes. If you have a fairly high income this alone can save you a lot of money.

might make sense to get with a CPA for an hour and run some real numbers. or see if there are any helpful ones on the forums.

Of course it does reduce my tax burden (by the amount of my taxes, insurance, incidentals, and depreciation).  However, as Soverien said, it just defers taxes (on the depreciation).

I did run the comparison looking at the profit after the tax benefits.

waltworks

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Re: Another rent vs. sell scenario
« Reply #13 on: May 02, 2014, 08:43:35 AM »
Yes, those reduce your tax burden (insurance, property taxes, etc) but that's a terrible way to reduce your tax burden, since those costs are *directly reducing your income*. By that logic, I should just stop earning money to reduce my tax burden.

-W



Of course it does reduce my tax burden (by the amount of my taxes, insurance, incidentals, and depreciation).  However, as Soverien said, it just defers taxes (on the depreciation).

I did run the comparison looking at the profit after the tax benefits.