The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: ether on July 04, 2013, 01:29:05 PM
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We are looking to move and I'm trying to decide between selling and renting out the current house.
It's worth about $330k, with PITI payments of $1300. Could probably be rented between 1700 and 1800. Mortgage is $235k, so we could net about $75k after selling fees.
Here's how I'm doing the math in my head:
1750 gross
-175 maintenance/vacancy
-1300 PITI
=275/month gross
+380/month principal paydown
=655/month income
=$7,860 annualized
With a $75k investment, that's ~10.5% ROI, not including appreciation, which even at 1.5% year (low, I think for Colorado), comes out to $4950. If you include that, ROI is ~17%. This still doesn't include the depreciation benefit (28% tax bracket), which would be about $2k/year.
What do you think?
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You'll have a slight loss each month on average. I'd sell and take the 75k.
I think you'll probably see more like 85k (selling costs should be about 8%).. do you have a large capital gain on it?
You aren't calculating in your expenses properly (as most new people don't), turnover costs, collection loss, maintenance (5% vacancy and 5% maintenance? what about long term capital repairs?), not paying yourself for managing it (whee, "free" job that you may hate).
I'd estimate you'll net a loss of 50-100 each month (median month you'll net $450.. then when it's vacant you'll lose 1300, then when big repairs hit you'll lose money, etc. - making your average month slightly negative.)
Unless you want a project (where you do the management and repairs yourself for free) to eke out some extra money as a side job, I'd lean towards selling.
All that said, it's not terrible - it's close to break even and the tenant pays down the mortgage for you. It'll probably come down to your inclinations to be a landlord.
To give it another perspective, I wouldn't buy that property as a real estate investor (put down 75-85k to break even or slight loss on cash flow). If you have a desire for rental property I'd sell it and move it to a more profitable investment. You can easily buy a turn-key brand new (built in 2013) duplex that grosses 2700+ rent (instead of 1700) for that same 75-80k downpayment, cash flows you way more, and is managed for you, so takes no work.
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Thanks for the perspective. One of the attractive things to me about this house is that we recently refinanced at 3.375%, which you can't touch anymore,especially with an investment property. Doesn't change the math though.
What are reasonable estimates % wise for maintenance and vacancy? No major repairs expected on this house, a/c, furnace, roof, and appliances all less than 7 years old.
Where do you find duplexes like the ones you mentioned? I've looked on zillow a bit with no luck.
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I think arebelspy gave you some good advice.
I like to use the 50% rule which says that half your monthly rent will go to repairs/taxes/insurance/referral/vacancy costs and I've found it to be fairly close with the house I'm renting out at the moment. I'm doing a little better than what the 50% rule suggests, but not by much.
I just had a tenant move out and it cost me $3800 (including $650 realtor fee for tenant referral) to get the house ready for new tenants plus it was vacant for 1.5 months. It rents for $1450/mth so that was another $2600 in costs roughly. I will likely sell when these tenants move out.