Author Topic: Case Study: Sell or Rent My Home  (Read 1271 times)

Bones81

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Case Study: Sell or Rent My Home
« on: April 24, 2017, 05:03:40 AM »
The Home:

Market Value: $416,816 (according to Zillow)
Original Purchase price: $300,000
Original Mortgage Amount: $264,500
Interest Rate: 3.0% Fixed
Mortgage Term: 180 Months
Term remaining: 155 Months
Amount remaining on mortgage: $234,475.55
Gross Rents: $3,081 (according to Zillow)
Principal and Interest: $1,826.59
Taxes and Insurance: $961.50
HOA costs: $100 per month

Home is a town house located inside the inner loop in Houston and is 2 miles from downtown and the medical center.  I bought the home in 2011 and it was originally on a 30 year mortgage.  Refi'd to a 15 year mortgage 2 years ago to lock in a lower rate and because I wanted to build equity faster and pay less interest. 

In the next few weeks, I'm looking at a major stucco repair project which involves repairing areas that have been damaged by water, re-sealing and then repainting the entire house.  All-In cost of the repair is ~$19k.  This repair will have to be done regardless of whether or not I sell or rent.  I'm going to receive a ~$23k severance payment from my previous employer, so this will cover the repairs without effecting my liquidity mentioned below. 

The neighborhood is presently a mixed bag.  Since I bought the home in 2011, there has been a lot of new construction in the area with similar sized town homes going up.  At present, there are about a half dozen new homes being completed within a few blocks of my house and they're all listed at over $450k.  The downside is that there has been a huge spike in the homeless/transient population around the nearby metro transit center.  The result is that there are dozens of tents and makeshift structures erected under an overpass about a quarter of a mile from my house and burglaries and car break-ins have risen.  The city has recently passed a new law banning the structures which goes into effect in May, but they can't prevent people from sleeping in public places.  Officials are looking at permanent solutions (think Hamsterdam from The Wire) but has no immediate solution.  Long-term, the overpasses under which they currently congregate will be converted to underpasses as part of a massive highway project but that's likely 5 or so years out. 

Present Situation:

After getting completely burned out on a terrible job (and career), I'm presently unemployed.  Fortunately, I have ~$176k sitting in bank and taxable brokerage accounts that I can immediately access and another $416k in retirement accounts.  I'm presently at a cross-roads in life and evaluating what I would like to do.  Getting another job is downright repulsive right now and I'm going to enjoy some time off and de-tox from the old job.  The idea of owning and eventually selling a business is pretty appealing and I'm going to take a lot of time to research ideas and businesses which make sense for me.   

The Case to Sell:

If the Zillow estimate is to be trusted (big if), I'd pocket $182k from the sale (assuming I sold it myself; could be other expenses though, need to check).  Adding this to the other investments I have would give me ~$775k.  Being single with no dependents, this is $31k a year to live on using a 4% SWR, so I could FIRE.  No mortgage, no tenants, no repairs, I'd be free and clear.  Alternatively, I could use the funds from the sale to deploy as capital into a business or businesses. 

However, given the neighborhood situation, I'm not sure if that sale price is realistic.  My nextdoor neighbor recently sold her house for ~$325k.  Her house is a few hundred square feet smaller and not on the corner like mine, but that's a huge gap from the Zillow estimate.  Additionally, her house also needs stucco repairs and a new paint job, so that as well as any other issues could have contributed to the relatively low price.  I also think she may have been in a liquidity crunch as she'd recently had a child and moved to another city and from what I'd seen of her lifestyle versus her profession, she didn't seem like the type to have a lot of money sitting around.     

The Case to Rent:

While FIRE could be a possibility if I sold my house, psychologically, I'm not sure if I'm fully prepared to completely uproot myself.  Renting would give me the option to hang on to my house while lowering my monthly living expenses while I figure out what to do.  Additionally, I'd continue to build equity in the house, retain the upside of additional appreciation and in 13 years I'd have a paid-off home that I could either live in relatively cheap or have a significant cash flow stream. 

The downside is that based on the Zillow estimate for rent (which seems ballpark given what actually homes in the neighborhood are listed at) and a few real estate evaluation spreadsheets I've used, I'm going to be in the red by up to a few thousand dollars annually when factoring in vacancy rates, maintenance and repairs and whether or not I use a property manager.  Given my financial situation, a few grand a year doesn't seem like a terrible price for basically what I see as an option to retain the home.  Additionally, refinancing back into a 30 year mortgage could be a possibility if I want to reduce the cash flow deficit. 

Would like to hear what others think.  The good news is that I'm not under any pressure at the moment to make a decision one way or another and even if I go the rental route, I can always sell in the future if I'd like. 

sequoia

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Re: Case Study: Sell or Rent My Home
« Reply #1 on: April 25, 2017, 12:31:50 PM »
So if you rent your house, where are you going to live? Smaller and cheaper apartment? This does not seems a good option, but maybe the number will work out.

Is getting a roommate or Airbnb an option for you? This would lower your mortgage, and you can still stay in the house and keep an eye - do maintenance, fix a few things etc - basically keep you busy.

Good luck with the job situation. I was laid-off and jobless for two years.

SeattleCPA

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Re: Case Study: Sell or Rent My Home
« Reply #2 on: April 25, 2017, 04:08:07 PM »
Make sure you've carefully thought about the Sec. 121 exclusion you may lose if you turn your principal residence into a rental.

Bones81

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Re: Case Study: Sell or Rent My Home
« Reply #3 on: May 05, 2017, 04:37:02 PM »
So if you rent your house, where are you going to live? Smaller and cheaper apartment? This does not seems a good option, but maybe the number will work out.

Is getting a roommate or Airbnb an option for you? This would lower your mortgage, and you can still stay in the house and keep an eye - do maintenance, fix a few things etc - basically keep you busy.

Good luck with the job situation. I was laid-off and jobless for two years.

I'm looking to downsize significantly, a studio apartment or renting a room.  Been exploring the option of going overseas to a place with a low cost of living while researching and getting into web-based businesses.  I have been renting my guest bedroom on Airbnb; that's been generating $600-$1000 a month which definitely helps. 

The plan is to reduce costs to as low as possible while i research businesses ideas and get things going.  That way I can take my time and ease into things without having to worry about a large monthly outlay on housing expenses.