Author Topic: Rent or Sell?  (Read 5471 times)

mpg350

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Rent or Sell?
« on: June 23, 2014, 12:56:37 PM »
Ok so I have problem that I need to bring forth to people that know about real estate.

I purchased my first home in 2007 when I was single for 135k in Florida.   I put down 10% and my interest rate is 6.9% fixed for 30 years. 
Flash forward to today and I owe 106k and the house if I sold might be able to get 90-95k.  Hard to say though maybe I can get close to the loan payoff, waiting to find out from real estate agent what they think I could get.

I have 195k in investments and the bank not including our 401k and I have no debt besides the house.

If I rented the house it would be for around $900,  the mortgage/taxes and flood insurance would be around $900 a month and my homeowners insurance is $1,500 a year.   So I would be losing money every year around $1,500 a year plus some for upkeep and it will need in the future a new AC and roof.   

Another option is I could pay the loan down to like 70k range and refinance then my mortgage would be $500 a month.

What would you do? Sell it as is, refinance ? 


« Last Edit: June 30, 2014, 05:26:23 PM by mpg350 »

gimp

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Re: Rent or Sell?
« Reply #1 on: June 23, 2014, 01:15:37 PM »
Do you see a large appreciation coming in the next couple yearS? Probably not, right? Sell it, cut your losses.

arebelspy

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Re: Rent or Sell?
« Reply #2 on: June 23, 2014, 01:25:29 PM »
Look into refinancing it (specifically a HARP refi).  That will help a LOT with the cash flow, and then you can evaluate.

As is, I'd probably sell.  But I'm guessing the benefits of refinancing will be enough that it'd tip over to keep, assuming you want to be a landlord and/or have rental property.

(Also I'm assuming this: "the mortgage/taxes and flood insurance would be around $900 a month" is a typo - you mean 900 annually?)
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mpg350

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Re: Rent or Sell?
« Reply #3 on: June 23, 2014, 01:32:25 PM »
Look into refinancing it (specifically a HARP refi).  That will help a LOT with the cash flow, and then you can evaluate.

As is, I'd probably sell.  But I'm guessing the benefits of refinancing will be enough that it'd tip over to keep, assuming you want to be a landlord and/or have rental property.

(Also I'm assuming this: "the mortgage/taxes and flood insurance would be around $900 a month" is a typo - you mean 900 annually?)

I don’t qualify for a refinance trust me I looked.  It wasn't a fannie mae backed loan.
I meant to say the mortgage payment would be around $900 a month that is with the taxes and flood insurance included.

tooqk4u22

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Re: Rent or Sell?
« Reply #4 on: June 23, 2014, 01:39:04 PM »
You could come out of pocket enough to qualify for a refi but even then the math doesn't seem to work out to well. 

One question - if you bought it in 2007 with 20% down then your balance should be close to or under $100K at this point vs. the $107k you indicate - did you finance $10k of closing costs?

mpg350

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Re: Rent or Sell?
« Reply #5 on: June 23, 2014, 01:44:23 PM »
You could come out of pocket enough to qualify for a refi but even then the math doesn't seem to work out to well. 

One question - if you bought it in 2007 with 20% down then your balance should be close to or under $100K at this point vs. the $107k you indicate - did you finance $10k of closing costs?

I don't think so.  I am doing this off the top of my head.  When I get home I will have to look at the numbers.

arebelspy

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Re: Rent or Sell?
« Reply #6 on: June 23, 2014, 03:13:25 PM »
I guess you should lay out your options.

If you sell, are you looking to protect your credit and pay out of pocket the shortfall?  Or are you looking to do a short sale?

If you rent, what will your eventual exit strategy be?
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mpg350

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Re: Rent or Sell?
« Reply #7 on: June 23, 2014, 03:18:20 PM »
You could come out of pocket enough to qualify for a refi but even then the math doesn't seem to work out to well. 

One question - if you bought it in 2007 with 20% down then your balance should be close to or under $100K at this point vs. the $107k you indicate - did you finance $10k of closing costs?

I don't think so.  I am doing this off the top of my head.  When I get home I will have to look at the numbers.

I was wrong I didn't put down 20% I put down less…


mpg350

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Re: Rent or Sell?
« Reply #8 on: June 23, 2014, 03:24:35 PM »
I guess you should lay out your options.

If you sell, are you looking to protect your credit and pay out of pocket the shortfall?  Or are you looking to do a short sale?

If you rent, what will your eventual exit strategy be?

I would pay the balance I don't want a short sale.

I would like to keep it as a rental but with the negative cash-flow doesn't make alot of sense.

One other option is I could pay the house off and live here for awhile then later rent out the house out…?
« Last Edit: June 23, 2014, 05:51:45 PM by mpg350 »

mpg350

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Re: Rent or Sell?
« Reply #9 on: June 28, 2014, 02:14:06 PM »
I have come to the conclusion I am going to rent it and evaluate in 2-3 years and then maybe sell.

I will be losing about $1,500 a year which is less than I thought but I think the housing market is starting to get some steam slowly.  I hopefully can sell in 3 years for 110k+

Another plus I can get some tax deductions per my parents which have some rental properties of their own.



« Last Edit: June 28, 2014, 02:17:03 PM by mpg350 »

waltworks

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Re: Rent or Sell?
« Reply #10 on: June 28, 2014, 04:25:37 PM »
If you are talking about depreciation of the structure/capital improvements, keep in mind that that money will be recaptured when you sell the place - so you can't write down the building and magically save $3k every year (or whatever amount) if you eventually plan to sell it.

-W

I have come to the conclusion I am going to rent it and evaluate in 2-3 years and then maybe sell.

I will be losing about $1,500 a year which is less than I thought but I think the housing market is starting to get some steam slowly.  I hopefully can sell in 3 years for 110k+

Another plus I can get some tax deductions per my parents which have some rental properties of their own.

mpg350

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Re: Rent or Sell?
« Reply #11 on: June 29, 2014, 07:17:44 AM »
If you are talking about depreciation of the structure/capital improvements, keep in mind that that money will be recaptured when you sell the place - so you can't write down the building and magically save $3k every year (or whatever amount) if you eventually plan to sell it.

-W

I have come to the conclusion I am going to rent it and evaluate in 2-3 years and then maybe sell.

I will be losing about $1,500 a year which is less than I thought but I think the housing market is starting to get some steam slowly.  I hopefully can sell in 3 years for 110k+

Another plus I can get some tax deductions per my parents which have some rental properties of their own.

Ok…well should I just go ahead and pay off the underwater house?  The loan is 6.7% and owe 106k.  Once paid for I would be making after insurance and maintenance around $9,000 a year.

waltworks

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Re: Rent or Sell?
« Reply #12 on: June 29, 2014, 07:31:26 AM »
You should sell it as fast as you can. You are losing money every day you hold onto it.

-W

mpg350

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Re: Rent or Sell?
« Reply #13 on: June 30, 2014, 05:10:06 PM »
You should sell it as fast as you can. You are losing money every day you hold onto it.

-W

What if I paid down the loan, would cost me around $30k, I could get around $900 a month. 
Mortgage would then be around $530 so a net profit would be $370 a month before expenses.


I am having a hard time explaining to the wife why we should walk away from this house.   She is really set on keeping it and renting it.



Another Reader

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Re: Rent or Sell?
« Reply #14 on: June 30, 2014, 05:38:06 PM »
Put the income and ALL the expenses in a spreadsheet and show her how much money you will likely lose over the next 5 years if you keep it.  Expenses include vacancy and collection loss, taxes, insurance, repairs and maintenance.  You also have to factor in any capital improvements, such as the roof and A/C, that you are likely to incur over the five years.  What's left is the net operating income.  If you have already expensed the taxes and insurance, subtract the principal and interest to get the cash flow to you, which will be negative.  You can add the pay down of principal back in, but you will still lose money.

If values were going up at a high rate that was sustainable, you might eventually make the losses back and profit a little.  However, I suspect it is going to take a long time to break even with the current appreciation rate.


arebelspy

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Re: Rent or Sell?
« Reply #15 on: June 30, 2014, 05:49:54 PM »
You should sell it as fast as you can. You are losing money every day you hold onto it.

-W

What if I paid down the loan, would cost me around $30k, I could get around $900 a month. 
Mortgage would then be around $530 so a net profit would be $370 a month before expenses.


I am having a hard time explaining to the wife why we should walk away from this house.   She is really set on keeping it and renting it.

(Emphasis added.)

Okay, let's address that idea.

Any time you pay down a loan you're missing giant opportunity cost.

Let's look at an extreme example.  Let's say you have a mortgage for one million dollars, and the monthly rent is $1000.  After expenses you get $500 to service the loan.  It's at 5%, so your P&I payment is ~5400/mo.

You are cash flow negative $4900/mo.  You have to pay in that amount every month to break even on cash flow.

You should sell that property!

Then you inherit a million dollars after tax, or win it in the lotto, or whatever.  You think "hey, I can pay off that loan and no longer be cash flow negative!"

...that's true.  You could take the 1MM and pay off the loan.  Now your cash flow is $500/mo (1000 rent - 500 expenses = 500, and no mortgage to pay).  Alright.

But your return on that 1MM?  500*12/1MM = 0.6%.  Under 1% return.  Ugly. 

The correct move in that case is to sell that house, and invest the million in a GOOD investment.  Not to pay down a loan on a bad one.  Get rid of the bad investment.

Your situation is similar, just not as extreme with the numbers.  You could pay down that loan, sure.  Or you could get rid of the house and use that money you'd pay it down with to invest in a good investment. 
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irishQ

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Re: Rent or Sell?
« Reply #16 on: June 30, 2014, 07:24:40 PM »
your $1500 homeowners ins will need to be changed to fire and dwelling - that should cut it to 1100 or better. you will need a signed lease for you ins agent.

take your time, rent it to well qualified good credit type and manage it yourself.

mpg350

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Re: Rent or Sell?
« Reply #17 on: July 01, 2014, 04:10:32 AM »
You should sell it as fast as you can. You are losing money every day you hold onto it.

-W

What if I paid down the loan, would cost me around $30k, I could get around $900 a month. 
Mortgage would then be around $530 so a net profit would be $370 a month before expenses.


I am having a hard time explaining to the wife why we should walk away from this house.   She is really set on keeping it and renting it.

  You could pay down that loan, sure.  Or you could get rid of the house and use that money you'd pay it down with to invest in a good investment.

Well no way will I qualify for a short sale…husband and wife making 150k+ a year and near 300k in savings I am pretty sure that bank won't fly with this, they gave my sister a tough time and we are doing way better than them.

I am waiting to hear back from the realtor what she thinks I could get for the home.  I will know more in a few days I guess.

This house is a perfect example of somebody buying at the very top of the market.   

My mom says to keep the property and rent it but she keeps harping about the tax deductions since I would be losing money.

I am just trying to figure out the best exist strategy.    I think I can rule out short sale….either pay the loan difference which could be 20k+ ? or pay the loan down enough to refinance and then rent or just pay the house off and rent but from my figures the return would be 5%....  Uggh 
Looking like I guess just freaking bite the bullet and pay the difference and learn a lesson about buying at the top.
« Last Edit: July 01, 2014, 05:41:42 AM by mpg350 »

waltworks

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Re: Rent or Sell?
« Reply #18 on: July 01, 2014, 07:25:31 AM »
Yes, you should just bring the necessary $ to closing and suck it up. Then, as A-spy suggests, you should put your considerable income/assets into investing in some *good* investments.

-W

GrayGhost

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Re: Rent or Sell?
« Reply #19 on: July 01, 2014, 08:30:30 AM »
OP, I understand that it's a tough pill to swallow, that you've made a bad investment, but the thing is that the numbers just don't work on this house. Even if you pay down some of the mortgage and rent it out, you don't quite meet the 50% rule, and if you rent it now, you're one bad tenant or major repair from losing even more dollars.

On the other hand, if you sell now, sure, you lose some money, but after closing, you don't have to be a landlord, all you need to do is to buy a few nice index funds or blue chips, and in a couple of years, this whole affair will barely be a footnote in the story of your financial life. :)

mpg350

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Re: Rent or Sell?
« Reply #20 on: July 01, 2014, 09:02:07 AM »
OP, I understand that it's a tough pill to swallow, that you've made a bad investment, but the thing is that the numbers just don't work on this house. Even if you pay down some of the mortgage and rent it out, you don't quite meet the 50% rule, and if you rent it now, you're one bad tenant or major repair from losing even more dollars.

On the other hand, if you sell now, sure, you lose some money, but after closing, you don't have to be a landlord, all you need to do is to buy a few nice index funds or blue chips, and in a couple of years, this whole affair will barely be a footnote in the story of your financial life. :)


Yeah I know its a tough pill but I am glad I am not underwater a huge amount like 100k or something.  Thanks guys for your input this has been a tough situation for my wife and I to figure out what we would do on our house but we see the writing on the wall now and it says SELL.

 

arebelspy

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Re: Rent or Sell?
« Reply #21 on: July 01, 2014, 09:06:14 AM »
OP, I understand that it's a tough pill to swallow, that you've made a bad investment, but the thing is that the numbers just don't work on this house. Even if you pay down some of the mortgage and rent it out, you don't quite meet the 50% rule, and if you rent it now, you're one bad tenant or major repair from losing even more dollars.

On the other hand, if you sell now, sure, you lose some money, but after closing, you don't have to be a landlord, all you need to do is to buy a few nice index funds or blue chips, and in a couple of years, this whole affair will barely be a footnote in the story of your financial life. :)

+1.

Quote
I am just trying to figure out the best exist strategy.    I think I can rule out short sale….either pay the loan difference which could be 20k+ ? or pay the loan down enough to refinance and then rent or just pay the house off and rent but from my figures the return would be 5%....  Uggh 
Looking like I guess just freaking bite the bullet and pay the difference and learn a lesson about buying at the top.

So scenario one, you come to the table with a big chunk of money, then rid yourself of the albatross.

Or scenario two, you come to the table with an even bigger chunk of money, but still have this rental with poor numbers?

Yeah I know its a tough pill but I am glad I am not underwater a huge amount like 100k or something.  Thanks guys for your input this has been a tough situation for my wife and I to figure out what we would do on our house but we see the writing on the wall now and it says SELL.

I think you're making the right decision.  :)
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DoubleDown

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Re: Rent or Sell?
« Reply #22 on: July 01, 2014, 10:54:01 AM »
Yup, selling sounds like the best decision, even though it sucks.

Even if the house hits $110k within three years (an increase of $15-20k), that increase will very easily be eaten up by the costs to maintain it during that time, particularly if you need to replace either the A/C or roof in that time as you've said. If you have to replace both, you'll really be losing more money.

The only conceivable way I would consider holding that house is if you had solid reason to believe the house would appreciate so much that it would significantly offset the losses in that time, and that would be a pretty big bet, to be sure. And a bet without much expected gain on the other end, even if you win it -- i.e., risking a lot to perhaps break even or win a little.

Try not to beat yourself up too much over it, or for buying "at the top of the market." You had no way of knowing at the time you were buying at the top. The money lost here will end up being a little noise in the overall equation of your net worth. At your earnings, you can easily amass enough wealth that you'll barely notice this amount. In time, you'll see that you'll catch some breaks the other way. Heck, you can even use this experience to go find a property that's undervalued by $20k and a great cash flowing rental, and immediately recoup your temporary loss.