Author Topic: Case study: rent or sell analysis - need advice in midst of life change  (Read 1660 times)

Ashcons

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Sorry in advance for the long thread, but I need some advice about making some huge changes!

My wife and I may soon see an opportunity to relocate to pursue career changes (for the better, for both of us). Our combined income would likely stay flat as mine would decrease, but hers would increase; however my hours would drop from ~60/wk to 40/wk and the work actually be fulfilling to me on a personal level as opposed to what I currently do. If we were renters, the decision would be a no-brainer, but back in July 2012, before I had found MMM, we "purchased" our first house. It was...an experience. I learned a lot about things you should and should not do when buying a house. After a scant two years of "ownership," we are faced with the decision of renting or selling if we relocate.

In addition to the information below, we would be selling one vehicle and cutting about $150 in gas and insurance out of our monthly expenses. If we sell, we face a significant (to us) loss due to the related selling fees (we'll end up having to pay something like $3000, which is more than we have in savings since I have been aggressively paying down our consumer debt). If we keep the house and rent, I know we're not going to be able to hit the 1%; in a few years, MIP falling off would make the house more desirable as a rental property, but in the meantime, it would be an occasional money sink as the HVAC and water heater are older systems (I assume a negative cashflow while we have to pay MIP). I believe our very close (immediate family) REA contact would be willing to assist in selling the house in some capacity that would reduce our costs, by helping us review offers and counter if we decided to sell - and potentially acting as the buyers' agent at a reduced commission.

Taking this opportunity would set us up for future success and seems like it would be a huge upgrade to my QoL (I am not motivated by what I do currently and put in way too much time).

Market Value: $108k per Zillow (have not talked to a REA - could be different from the market and this neighborhood seems to have pretty quick turnover)
Original Purchase price: $112.5k, net of related fees
Original Mortgage Amount: $110,461 ($3,319.80 as prepaid finance charges)
Interest Rate: 3.375% (APR 4.3205%)
Mortgage Term: 360 mo.
Term remaining: 339 mo.
Amount remaining on mortgage: ~106k
Gross Rents: ~1000+-50
Principal and Interest (the P&I of your PITI - should match with the above info): $488.34
Taxes and Insurance (the T&I of your PITI): ~$250
HOA costs: N/A
Deferred maintenance notes: HVAC and water heater are near EOL; lots of little, issues
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.): Quiet neighborhood full of SFH, abutts a large, empty field, close to hospitals/medical facilities, vets, a huge park, Lowes, shopping, banks, biking trails, golf, and all of the local, major roadways (good location for a working family). Not a lot of rental houses in the area.

Any emotionless suggestions for whether to rent sub-optimally as first-time landlords or sell at a loss that would be a struggle to swallow, financially? Any suggestions for more information?

I would assume that we would have to pay about $100/mo. May - Oct for lawn care costs. Furthermore, I do not know whether we would ever return to this area.

If we do not sell, we will be limited to renting ourselves for several more years and will be paying close to the same price. One factor that goes against renting is the first year would be very risky as we build a cash reserve, though we could do that at a rate of probably $700+/mo. if we make minimum debt payments for a while. Rent or sell, we're going to be locked out of the housing market for years (next house WILL be financed after we have our 20% DP) if/when this opportunity hits, which bothers me as an avid DIYer!
« Last Edit: May 15, 2014, 08:44:34 PM by Ashcons »

Fishingmn

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Standard rule of thumb is that 50% of your income will go toward expenses. If you go to a great real estate investor website like biggerpockets.com you'll see all kinds of discussions about the 50% rule.

Therefore, assuming $1,000/mo in rent the numbers would look like this:

Income - $12,000
Expenses - $6,000
Debt Service - $5,860  ($488*12)

Net Income - $140/year

Based on that I'd bite the bullet and sell if you can.

Definitely do get 2-3 Realtors to do a full CMA on your home. Zillow is wrong a lot.

Ashcons

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Thanks for the reply, Fish; I have been browsing BP a bit over the past couple days trying to get a handle on what would be required on our end if we do decide to rent, including how to analyze whether it would work financially. That analysis you gave helps! Anyone else?
« Last Edit: May 15, 2014, 08:45:20 PM by Ashcons »

waltworks

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Step one would be to get an agent to do a market analysis for you - it may be that you can actually sell it and break even or make a few bucks. Or it may be that you'll need to bring $20k to close - Zillow is a very vague estimate, not gospel.

Another good bit of research to do is throw the house up on Craigslist or some of the online rental ad sites (ie Trulia, Zillow, etc). Just do free ads with some decent pictures and test the waters. If you list it for $1200/mo and there are people beating down your door... awesome! If it's crickets at $1000/mo, obviously that's also useful info.

If your guesses/estimates are accurate, I'd probably sell the house unless you expect the area to appreciate significantly. It's going to slowly suck away money (or quickly suck it away if the HVAC blows up) and also be annoying to deal with from far away. Move on with your life and enjoy all your extra free time, keep saving, and consider this place a lesson learned.

-W


Ashcons

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Thanks for the advice, Walt - that's the direction I feel would be the least risky move if we do relocate. Thankfully we have access to a REA who has been in this market for years, so we should be able to get some better numbers for analysis soon.