Author Topic: Case Study: Sell or rent?  (Read 1221 times)

Karsh

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Case Study: Sell or rent?
« on: February 20, 2017, 09:35:00 AM »
My wife and I are likely going to be moving within the next six months, and I'm mulling over what to do with our current townhouse. We have enough liquidity to make a new down payment without selling, but I haven't gotten completely up the curve on all the economics of renting our house vs selling. We live in Houston, which had a huge real estate run up until oil dropped at the end of 2014, and things have cooled off a bit since then. The market has stabilized somewhat, but other townhouse units in our development sat on the market for a couple of months before selling vs. going in weeks a few years ago.

Market Value: ~$270k (zestimate is lower but several have sold in this range)
Original Purchase price: $215k
Original Mortgage Amount: $172k
Interest Rate: 2.875%
Mortgage Term: 30 year 10/1 ARM
Term remaining: 26.5 years (6.5 years fixed)
Amount remaining on mortgage: $157k
Gross Rents: $1800-$1900/month
Principal and Interest: $714/month
Taxes and Insurance: ~5-6k per year
HOA costs: $500/year
Deferred maintenance notes: A/C unit is 12/13 years old so will probably need to be replaced in the next couple years
Anything else special or unique in regards to the numbers of the property: There's a possibility we may be moving out of the city, though I have family nearby that I could pay to deal with any issues that arose. We may also have a friend moving to the city for a medical residency that we might be able to rent to, who would basically guarantee that the place would be rented out for at least three years.

JustGettingStarted1980

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Re: Case Study: Sell or rent?
« Reply #1 on: February 20, 2017, 09:49:39 AM »
Let me get this straight...

$22,000 in possible Rental Income per year
Approximately $15,000 in minimum expenditures per year
With about 100K in equity available if you sold the place (and paid 6% realtor fees) to invest in an S&P fund as an alternative.

Add 10-20% in costs for vacancy and repairs, and you are looking at 22K-(16.5-18K) = 4-5.5K per year of profit for to have 100 K of cash tied up in the mortgage per year = 4-5.5% nominal return.

So would you invest 100K in a real estate venture in Houston right now if you knew you could get 4-5.5% return per year on your money? There are significant tax benefits to real estate as well, so would need to consider this as well (I let someone more versed in this do the math).

VINIX Fund has made 7.33% total return over the last 15 years (with no work at all involved).

There are a lot of smarter real estate investors on this site than myself, but hope this helps,

JGS

hankscorpio84

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Re: Case Study: Sell or rent?
« Reply #2 on: February 20, 2017, 10:32:02 AM »
The good news is that either option looks to be lucrative.  It may be worth it to think more about lifestyle and personal preference than hard numbers, however here are some additional considerations to think about: 

If you keep the townhouse as a rental, would you be self-managing or hiring a property manager?

You list $714/month principal and interest.  What is the breakdown?  The $714 is important for cash flow calculations, but the equity you are gaining should also be calculated.

If you sell, consider/research additional expenses above and beyond the 6% realtor commission.  I recently sold a house and had to shell out a lot of cash for appraisal, as-built, septic test, and heating system upgrades.  Granted, a townhouse might be more forgiving in this regard, but it's something to think about in your analysis.

How long have you lived in the townhouse?  If you lived there at least 2 of the last 5 years then the gains on the sale are tax free.  Note that this would still be the case if you rent the property for 3 years.



kissthesky

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Re: Case Study: Sell or rent?
« Reply #3 on: February 20, 2017, 11:07:26 AM »
Unless you're staying local and really, really want to be a landlord then I say sell it. Looks like pretty crap ROI.

Karsh

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Re: Case Study: Sell or rent?
« Reply #4 on: February 20, 2017, 11:17:49 AM »
Ideally we'd just self-manage. If we end up moving, that might be more challenging, but my parents live nearby and my father is very handy, so I think I'd try to pay him to deal with any problems that came up rather than fully outsourcing the property management. Of course, this could be totally naive, too!

For the last mortgage payment we made, the breakdown was ~$336 of principal and $378 of interest.

Looking at the settlement statement from our purchase, the prior owners pretty much paid just the commission and a $350 settlement fee to the title company.

We've been here for 3.5 years--that tax free capital gains is one of the biggest things giving me pause about renting it out, though if we have 3 years to sell, that's less of an issue. I guess that question becomes one of "how likely do I think it is that real estate appreciates in Houston over the next 3 years?"

waltworks

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Re: Case Study: Sell or rent?
« Reply #5 on: February 20, 2017, 07:28:40 PM »
I would sell.

I would *especially* sell if your plan is to call your family members to go fix things all the time. Nothing like adding family drama to low profits...

Serioiusly, ditch it. You did great, take your winnings and bank 'em (invest them).

-W