Author Topic: Case Study: Sell home for better opportunities  (Read 3832 times)

neo von retorch

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Case Study: Sell home for better opportunities
« on: June 09, 2015, 12:36:21 PM »
Overview
In 2007, I bought a single family home. I rented out 1-2 bedrooms while I lived there. Last fall, I moved out and rented the master bedroom as well. Not counting past expenses (sunk costs), it looks like its mildly profitable month to month, but the net proceeds from a sale could probably make me more money elsewhere (invest more in index funds, REIT or other property.) Here are my numbers - what's your analysis?

Current Annual Expenses

Mortgage Interest: $3409
$101,024.37 balance remaining at 3.375%, paying $924.58 / mo, about $285 of which is currently interest.
Property Taxes: $3291
Maintenance: $1560
1% of purchase price estimate; original purchase $155,900
Electricity: $1800
Lawn Care: $500
Sewer/Trash: $594
Internet/TV: $1560
Landlord Insurance: $462
Travel costs: $600
Total: $13,776

Annual Income
Assumes 10% vacancy
Rent: $17,064

Annual Profit
$3288

The home value is likely $160-180k. I'm not sure how much is lost in selling costs, but I might net $45-70k in a sale, which could be invested elsewhere. Assuming $50k, my annual profit is 6.6%.

ETA: "Profit" is $274/mo but I put roughly $640 into principal each month. So is cash flow actually negative?
« Last Edit: June 09, 2015, 12:58:16 PM by neogodless »

neo von retorch

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Re: Case Study: Sell home for better opportunities
« Reply #1 on: June 10, 2015, 01:50:14 PM »
My question is - do you recommend selling this for better opportunities, either index fund investing, REITs or other investment property (compared to just keeping it as is, and enjoying the hopefully growing profit as interest dwindles to nothing)?

Poorman

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Re: Case Study: Sell home for better opportunities
« Reply #2 on: June 10, 2015, 03:30:11 PM »
You aren't including principal as part of your expenses.  You're monthly mortgage is $924.58 which comes out to $11,095 per year.  Adding that to your other expenses comes to a total of $21,463 per year, so you are negatively cash flowing $367 per month.  You aren't going to find many people here that advise holding a negatively cash flowing investment.  The only exception I would make is if the rents are increasing rapidly along with rapid property appreciation.  Based on your purchase price seven years ago I'm betting that isn't the case, so I would sell this alligator.

marty998

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Re: Case Study: Sell home for better opportunities
« Reply #3 on: June 10, 2015, 03:56:38 PM »
You aren't including principal as part of your expenses.  You're monthly mortgage is $924.58 which comes out to $11,095 per year.  Adding that to your other expenses comes to a total of $21,463 per year, so you are negatively cash flowing $367 per month.  You aren't going to find many people here that advise holding a negatively cash flowing investment.  The only exception I would make is if the rents are increasing rapidly along with rapid property appreciation.  Based on your purchase price seven years ago I'm betting that isn't the case, so I would sell this alligator.

I really don't see how a principal repayment is an expense?

This is basic accounting stuff - Dr Loan Liability, Cr Cash.

All balance sheet changes, no P&L impact.

Poorman

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Re: Case Study: Sell home for better opportunities
« Reply #4 on: June 10, 2015, 04:47:11 PM »
In true accounting terms you're correct, but for the sake of calculating cash flow, principal is an expense.  The OP seems to be unsure whether repayment of principal should be counted as cash flow and I'm pointing out that it shouldn't.  It's a gain in equity but for many investors that isn't a compelling enough reason to sustain a negative cash flow each month.

neo von retorch

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Re: Case Study: Sell home for better opportunities
« Reply #5 on: June 11, 2015, 08:48:40 AM »
Thanks - I'm neither an accountant or a full-fledged real estate investor. I do think about things in terms of "overall profit" including equity, but the perspective from experienced investors is what I'm looking for here!

It sounds like the more advisable course is to start preparing the house for sale. I may open a new thread (and search others) for how to best do that in my situation (3 renters with different lease endings...)

neo von retorch

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Re: Case Study: Sell home for better opportunities
« Reply #6 on: June 17, 2015, 09:32:31 AM »
So I can see that "right now" - it's a less than ideal investment, so I want to frame it a different way and see if any opinions change. There's almost exactly 10 years left to pay off the mortgage. At that point in time, the cash flow would obviously become very positive. Assuming a very modest increase in gross rents, the cash flow at that point would be about $900-1100/month positive. The equity in the home would be at least the current value of $180k (most likely $200k+, right?)

Is that still a pretty bad investment, compared to other options?
Or would the positive cash flow be a nice supplement to FIRE income?
« Last Edit: June 19, 2015, 11:45:44 AM by neogodless »

neo von retorch

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Re: Case Study: Sell home for better opportunities
« Reply #7 on: June 19, 2015, 11:46:02 AM »
Added comments on long-term value.

Rezdent

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Re: Case Study: Sell home for better opportunities
« Reply #8 on: June 19, 2015, 01:41:02 PM »
What is your goal (goals)?
I didn't do math, but above states you are going under to the tune of 300+/mth.  If the goal is to move back at some point, some people would accept going in the hole for a while.

If not planning a move back, suggest looking hard at these numbers.

I am curious about some of the numbers and the way you've listed them.

Maintenance at 1% of purchase price...seems low to me.  We earmark half of rent income for this expense.  We don't use this fund often but we've had major repairs run into tens of thousands. Just saying that you might get blindsided if you are too low on this item.

Rents seem low when compared to utilities.  Are you renting rooms as all bills paid? If so, are you confident that your rents are pegged correctly?  This could easily be a game-changer.  Your rents need to cover these utilities if ABP.  Personally I don't like renting as ABP because the renters have no skin in the game to keep costs down.  Researching and tweaking this variable could turn this cash positive, but it's somewhat of a long shot.

If market rents can't support the costs, I'd sell.  (300*12*10=36,000).  Paying 36000 for later cash flow sounds like a bad plan to me, especially when rentals can and should be generating cash flow the first year.  That 36000 could probably do more good somewhere else.

Also keep in mind that there is no guarantee that the house will increase or even maintain value.  Rents are pegged to market conditions - if there is an increase in rentals in the area, rents could actually decrease after adjusting for inflation.

neo von retorch

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Re: Case Study: Sell home for better opportunities
« Reply #9 on: June 19, 2015, 03:44:20 PM »
Good observations. As you picked up on - since I used to live there, for simplicity I did ABP (as you call it). Then I transitioned to not living there, but it's still individual rooms rented. Not sure how to transition out of that, but maybe just need to get the rents higher to account for that. That being said, a realtor (friend) is going to do a walk-through next week so I have a better idea of market value.

I think the plan will be to sell it as the current leases expire, while trying to use Craigslist to get short-term leases in there. (The home is close to major hospital/school center as well as some other major employers - another reason I could probably get away with higher rents.)

I'm not really sure how you determine rent in this kind of situation (shared living, utilities paid), but I suppose I've had pretty low vacancy, so that might be a good sign...

Rezdent

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Re: Case Study: Sell home for better opportunities
« Reply #10 on: June 19, 2015, 04:50:07 PM »
Our realtor is also a property manager and will do the numbers for us.  Perhaps your realtor can also give you current rents for short-term, ABP rent rates in your market.

Arebelspy had a link to an online estimator (like zillow but for rent), but I can't seem to find it now.

Poorman

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Re: Case Study: Sell home for better opportunities
« Reply #11 on: June 22, 2015, 01:07:02 PM »
Many people use www.rentometer.com although it's just an estimate.  I would still advise gathering your own rental comps on Craigslist, Zillow, and maybe even call some local property managers to get their opinion.