Author Topic: Case Study: Sell or Rent Sumter SC  (Read 698 times)

socialistgambler

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Case Study: Sell or Rent Sumter SC
« on: September 10, 2019, 05:01:39 PM »
We purchased this house when we moved to the area 8 years ago.   We made a poor decision and wouldnít do this again.  Luckily for us, it really hasnít been too costly of a mistake, but itís definitely not a money maker.  We moved away 5 years ago and have rented it since the day we left.

Here are the basics:

Market Value: 187000
Original Purchase price: 194000
Original Mortgage Amount: 194000
Interest Rate: 4.25
Mortgage Term: 30 year VA
Term remaining: 22 Years
Amount remaining on mortgage:161714
Gross Rents: 1450
Principal and Interest (the P&I of your PITI - should match with the above info):P:$402.14 I: $572.74
Taxes and Insurance (the T&I of your PITI):  $141.41
HOA costs: 0

Deferred maintenance notes: Probably need a new roof in the next 3-5 years, and new carpet in the bedrooms.

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.):
Property Management fee is $116.
Lawn maintenance is about $100 a month.

One other thing to note is that SC has a law where Active Duty Military continues to pay resident taxes on rental properties even when theyíre not residents.  Iíll lose that benefit when I retire in the next 3-4 years. 

Right now the math works out that Iím losing money annually with owning this house when you consider maintenance costs and releasing fees.  At the same time, the depreciation of the house and no down payment will likely mean a home sale would be a break-even or small loss.

Is there any reasoning that would say to hold the property for ~5 more years and hope to recapture those annual loses in the increased equity?  Or should I just assume that any increased equity will be offset by additional property value decreases?   

There are some natural biases that make me not want to sell, but once I look at the math, Iím inclined to think thatís the right decision if itís just about money.  Thanks for your time.

BECABECA

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Re: Case Study: Sell or Rent Sumter SC
« Reply #1 on: September 11, 2019, 09:44:00 AM »
First, welcome to the forums! I swear we are usually faster with answers than this, but your question is proving to be a tricky one. Iím going to give it a shot and hopefully itíll spur some other comments to help sanity check.

TLDR: keep renting it out

Since you were able to buy it with no money down, and since it has gone down in value, you have very little equity invested in it. Selling it wouldnít net you much money at all, and having $402.14 getting paid down on the principle each month is a high return on the small amount that you have invested.

You currently have $25,286 in equity. Rents minus costs nets you 519.85 each month excluding maintenance. Although $402.14 of that is going to pay down the principle of your mortgage and isnít cash flowing, you can still count that as returns that the rental is generating. So this rental is generating $6,238.20 per year, a 24.7% return on your $25,286 equity.

Now this wouldnít be the way that a real estate investor would value this. Theyíre typically trying to maximize cash flow and this property doesnít cash flow. But youíre in a unique situation where you didnít put any money down and have a pretty low interest rate and selling transaction costs would eat nearly half of your equity. So I think it makes financial sense to keep renting it. Youíll want to revisit the numbers in a few years once you retire and your property tax liability goes up.

You can also estimate the money youíd be left with if you sold it. 6% of the sale price goes to realty fees, another 1% for closing costs, which leaves you with $12,196 that youíd walk away with, assuming that you were able to sell for the current market value of 187,000. So you could even think about that $6,283.20 per year as returns on $12,196 equity, since thatís what you would actually be able to get out of the transaction, a 51.1% ROI!

One thing that would be good to get a handle on is the average yearly maintenance expense, since I didnít see that in your numbers. As long as itís less than about $3k then the numbers still are good, providing that you can cash flow that since thatíd be more cash than what could be covered by the monthly rent. Youíll also want to consider how many days of vacancy your property manager averages between tenant turnovers and pad that into your estimated expenses.

Another thing to consider would be changing the lease so the tenants pay for the $100 per month lawn maintenance instead of you. Thatíd be a big boost to your bottom line.

Hope this helps, and hopefully we can get some others to weigh in!

socialistgambler

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Re: Case Study: Sell or Rent Sumter SC
« Reply #2 on: September 11, 2019, 05:12:40 PM »
Thanks for the response.  You've laid it out in a way I didn't consider. 

I've thought about the lawn maintenance.  It's a huge lot and I'm afraid might deter potential renters.  Once this current lease ends, I'll reconsider it.

 

twe

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Re: Case Study: Sell or Rent Sumter SC
« Reply #3 on: September 12, 2019, 07:51:51 PM »
It's a VA loan-you should do a VA IRRL. I just looked for a rental I have and USAA is quoting 3.375% for a 30 year IRRL refinance with a deal on closing costs. You can probably do better somewhere else-Navy fed maybe, although I'm partial to USAA. Cutting interest by .875% and reamortizing back to 30 years will make a significant cash flow benefit. Back of the envelope would be about $700 Principal and interest payment. If you aren't familiar with the VA IRRL, i think the militarywallet blog has a good explanation if I remember correctly.

But having lived in Sumter before, you probably won't get much appreciation. Although I haven't lived or been there in 20 years I doubt it's changed much.

socialistgambler

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Re: Case Study: Sell or Rent Sumter SC
« Reply #4 on: September 14, 2019, 06:15:35 PM »
I didn't think you could use a VA type loan for rental property. I'll look into it.

Papa bear

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Re: Case Study: Sell or Rent Sumter SC
« Reply #5 on: September 15, 2019, 06:46:23 AM »
Do you like being a landlord?  Iím normally a cash flow above everything guy, but this one leaves me thinking itís an either or.   If you donít mind being a landlord, or even enjoy it, keep the place.  But if this is causing you major stress, keeping you up at night, fights with family, etc., offload this thing just for the mental wellbeing. 



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socialistgambler

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Re: Case Study: Sell or Rent Sumter SC
« Reply #6 on: September 16, 2019, 06:28:04 AM »
Papa bear

Did you talk with my wife yesterday?  This is exactly inline with her point of view.  It is an important consideration.