Author Topic: case study- planning on selling, finally, have been renting it out for a decade  (Read 3916 times)

monarda

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We lived in the house 2006-2008.  We've been renting it out since then.

Market Value: 160-170K
Original Purchase price: 130K
Original Mortgage Amount: 104K
Interest Rate: ARM, currently 5.25%  varied between 2.7% and 6% over the years.
Mortgage Term: 30 years
Term remaining:17
Amount remaining on mortgage:78K  (made some lump sum paydowns when interest rate was high)
Gross Rents:1200
Principal and Interest (the P&I of your PITI - should match with the above info): 550 monthly
Taxes and Insurance (the T&I of your PITI): 4000 annually
HOA costs: none

needs a roof. 160-170K price window is as-is condition.
$3300 special assessment (significant street work done last year)
We put in a new kitchen and a new furnace over the years, as well as significant energy efficiency improvements. Including all of this, the 50% rule was pretty darn accurate.

I think we'll do okay in the end considering cash flow and sales price. We're thinking about how to go about calculating what's the lowest acceptable price if we get a lowball offer. We can rent it again pretty easily. But we'd like to unload it.


nwnative

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Don't forget that you will have to recapture your depreciation, even if you didn't claim it as an expense.

monarda

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yep, total depreciation is about 40K. But that's on next year's taxes.

monarda

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Going to meet with realtor tomorrow and touch-up paint and do whatever else his eye sees.

monarda

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OK, we put it on the market in mid-February, then there was a ton of snow and ice. We had an ice dam.  A LOT of water leaked into the kitchen and bathroom, we took it off the market.

Replaced the roof April 1.
Repaired drywall in kitchen and bathroom. Repainted almost every room to neutral colors.

Put about 10K into the house so far in 2019. Asking price is still 165K. (The same as it was in February). The feedback we get from the showings is that it's priced well, it shows "excellent", but the buyers not interested. People who've toured the house (and not made an offer) are bothered by it being across the street from a cemetery, as well as the asbestos siding shingles. And there's no bathroom on the main level (one is upstairs and one is down in the basement). Are any of these actual problems for the right buyer ??

If we get an offer for anything less than, say,  10K under our asking price, we most likely want to rent it out again.

We are considering replacing the siding even though it is in quite good condition (but that would cost probably at least 10K) and renting it out again for a while to recoup that expense.

Over the 11 years renting, our net positive cash flow has been $54K. So we're still in the black... Depreciation recapture will be about 40K.

What would you mustachians do?
« Last Edit: May 19, 2019, 10:09:48 AM by monarda »

tralfamadorian

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Are any of these actual problems for the right buyer ??

Sorry about the water damage.

Your problem is not the "right buyer"; it's that the price is too high.

Sell:
Let's say you lower the price by $10k to $155k and get a full priced offer.
Sale price: $155k
Mortgage: $78k
Closing costs: $12.4k
Depreciation recapture: $40k * 25% = $10k (being lazy and presuming your highest bracket is >=25%
Cap gains: $0 (with the recent repairs, your basis is close to a wash)
Net: $54.6k

VTSAX $54.6k * 7% = average yearly return of $3.8k

Keep:
average yearly return of $4.9k per your experience

Option #3: refi and keep
75% LTV cash out refi with presumed appraisal of $155k and ~$1k closing costs -->  $37k cash
new PI with 4.25% fixed rate 30yr (going rate in my area): $572
current PI: $550
increase in yearly PI: $264

avg yearly return (rental): $4.6k
avg yearly return ($37k cash out in VTSAX): $2.59k
net: $7.1k

monarda

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Thanks @tralfamadorian

Hadn't thought about the keep/refinance option. I could maybe even do a 7/1 ARM (under 4% interest in our area) and plan to try and sell again before 7 years.


monarda

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So since the last message I priced out a refinance. Best so far is 4.875% with about $1500 closing costs.

And we've had two offers. One fell through pretty quickly.
The second one is probably going to work out. They have to sell a house first, so they will rent from us at market rate until they do. $157K
Inspection is this weekend.

Slow&Steady

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PTF.

I have a very similar situation playing out.  Bought a house in 2006, moved out of the area in 2008, has been rented since and I am really ready to unload it.  Interested to see how this works out for you, we have realtors supposed to go to the house this week to give us a market analysis.

monarda

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Good luck Slow&Steady. I'll post the final numbers when we have them. Make sure you are happy with your realtor. We found ours through a friend.

Just got an email from the realtor. We are very likely going to have a signed contract this afternoon!

monarda

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Inspection, lease signing, and occupancy all supposed to happen tomorrow. Hopefully all will go smoothly.
Fixed term lease from tomorrow to 9/15 or closing date. They will list their house for sale by this Weds.

monarda

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All went smoothly. Lease signed, after small amendment to purchase price after inspection. They started moving in on 6/3.  Their house is on the market now. So now we wait until they have a contract on their house. Then we can set a closing date.


Slow&Steady

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My rental is supposed to be listed today.  I am ready to move it off my books!

monarda

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Is it vacant, @SlowAndSteady ? Or are you selling with tenants in place? PM me the listing!

Slow&Steady

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Is it vacant, @SlowAndSteady ? Or are you selling with tenants in place? PM me the listing!

Vacant

monarda

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Our buyers have a contract on their house! We should close at the end of August, sometime between 8/23 and 9/1

monarda

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Closing date is 8/23
We walk away with about $63K cash. 
$26K was down payment, so a net gain of $37K

Add that to our net rental income the whole time we've owned it after all expenses subtracted, $54.5 K
equals $117.5K total, with down payment, or 91.5K gain.

This doesn't count the tax bill we will have considering depreciation recapture. I can update once we figure that out.

edited:
Net gain of $37K isn't really true, that counts principal payments (total 29 K), so the actual appreciation is $8K.
Add that to $54.5K rental gain for a net profit of $62.5K. Considering the portion of the 29K principal pay-down that the tenants did, that's only 9K... so counting that, the net profit is back up to $71.5K

Over 13 years is 5.5K per year.

I'll make one more update around tax time when we know our depreciation recapture bill.
And like tralfamadorian said, the capital gains will probably disappear with all the improvements.

« Last Edit: August 26, 2019, 08:19:22 AM by monarda »

monarda

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Closing date is 8/23
We walk away with about $63K cash. 
$26K was down payment, so a net gain of $37K

Add that to our net rental income the whole time we've owned it after all expenses subtracted, $54.5 K
equals $117.5K total, with down payment, or 91.5K gain.

This doesn't count the tax bill we will have considering depreciation recapture. I can update once we figure that out.

edited:
Net gain of $37K isn't really true, that counts principal payments (total 29 K), so the actual appreciation is $8K.
Add that to $54.5K rental gain for a net profit of $62.5K. Considering the portion of the 29K principal pay-down that the tenants did, that's only 9K... so counting that, the net profit is back up to $71.5K

Over 13 years is 5.5K per year.

I'll make one more update around tax time when we know our depreciation recapture bill.
And like tralfamadorian said, the capital gains will probably disappear with all the improvements.

Ok, taxes are done. Net gain, considering sale price, increased basis and recapture of depreciation is 23K. Add to rental gain of $56K (some expenses added to basis, so a bit more than 54.5K above), equals 79K gain total. Not much but good to be rid of this property.

Cb1234567

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Thank you for posting the whole progression on your rental sale. Looks like you saved yourself a bit by being patient, recognizing the weather impact on the market, and you must have a good realtor.


Just getting out of the property with your investment dollars is a success. Appreciation is a bonus.

It’s helpful to see the full picture...we have a similar story except for the selling part :) will be waiting on our buyer, rather than constantly adjust the price downward - which, as you calculated, results in an instant loss. Very good to know your bottom line!

monarda

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You're welcome, Cb1-7. If your place is easy to rent, then keep on doing that.

We still wonder what the final numbers would have been like had we kept renting it out, but now with the virus this year, I'm even more glad to be rid of it.