The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: Jester22 on June 24, 2015, 09:49:24 PM
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Hi all,
Followed for a while, but first post. =)
I'm a numbers guy, so I'll get right to it as I'd love to hear your feedback about our rental home situation:
Current Market Value - $480k-$490k
Purchase Price - $410k in 2010 (new construction)
Current Mortgage Amount - $355k on a 30 year fixed at 3.375% (refinanced in 2013)
Rent - $2400/mo.
Mortgage Payment - $2200/mo. (about $1000 interest / $600 principal with remaining going to taxes (~$490 & Insurance $60)
Self manage the property
+$2400/yr. rent
+$7000/yr. principal pay down
+$15000/yr. @ 3% appreciation
+tax write-off
-expenses (new house, so don't really have any besides low HOA & sewer capacity charge, will have paint, carpet, etc.)
The house is about 30-40 minutes from Seattle and the market has been nuts over the past year - more so closer to downtown, but the appreciation has been quite strong since the beginning of 2013. My wife and I moved out of state (Maui), however, with wife's work, we are back for several months of the year. We have had the same family as tenants in our house for the past 2 years and they are awesome. They had inquired about potentially purchasing the home, however, they're still up in the air and deciding what to do with their rental, so still waiting on that possibility. Without getting into too much detail, I feel good about tenants (hopefully stay long-term), have a great rate 3.375%, and have captured some appreciation over the past couple of years. Strictly looking at the numbers though, it seems like the only thing making this resemble a good investment is the appreciation that we've had. If the market gains 3% as opposed to what it has been recently, does it make sense to keep renting it out or should we try to sell to our tenants? Any help or guidance would be greatly appreciated. =)
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Sell it now!
This is a big loser from a cash flow standpoint. If you included maintenance in your calculations you'd be losing lots. Also, never include appreciation in your calculation. With interest rates rising it's quite possible that values of homes may be decreasing in the near future.
From what I can tell you have lived in the home for 2 of the past 5 years. If this is true you won't have to pay any taxes on the gains (with the exception of the depreciation recapture).
Since you have such a low interest rate you may want to consider selling it on a CD. Just make sure you get a good sized down payment.
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i agree with salmp, although the house has great appreciation, that is a speculative play in the future. The rental is negative cash flow according to my calculations as well.
Is there anyway you can increase the cash flow by either getting a new cheaper insurance, increasing the rent, or possibly removing PMI if you're paying for it.
If you sell now, you can walk away with 100k+. You should be able to use that 100k to purchase a new investment that will garnish you better returns.
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Unless you think you might want to move back into the Seattle house at some point I would cash out now and get your appreciation tax free.
Aloha
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I'm local to you. What city is this in? Bonney Lake?
If it is an area desirable to tech commuters, it might be worth keeping. Facebook just leased just under 300,000 square feet of space that is being built (to add to their existing space in the area). Google and other tech companies are expanding their operations here. Appreciation should stay up for some time as the market here continues to heat up. Commercial space rent is up 22% from last year according to one Seattle article I was reading.
Yes, the cash flow is not great, but the principal payment is, as is depreciation. The lack of cash flow really helps out on the taxes, so unless you need the house as income for now, as long as the mortgage is getting paid I'd keep it. The principal payment will keep increasing, and the tax deductions on house like that are phenomenal. I'm trying to buy houses in the 300-400K range just for the depreciation benefits alone! Kidding, but you get the idea.
In 5-10 years, I think you'll be glad you kept it, rent and appreciation wise. No, it's not the SFBA, but it's rapidly approaching as Seattle becomes second only to SFBA...
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Thanks for the replies and feedback.
Cashflowdiaries: Insurance is dialed in and we do not have PMI. I'd feel comfortable with $2450-$2500, but I believe any significant increase would be above market value. Ideally, we'd keep the same tenants as that's worth more to me than bumping it by $200-$400.
fishnfool: The house was pretty much our safety net if we wanted to return to the Seattle area. This was purchased with the intent to be our primary, not a rental house, and that's the kicker. It wasn't meant to be an investment property - if we would have purchased a home at that time with the mind-set of it being a rental, this wouldn't have been the house.
Bearded Man: Maple Valley. Comparing to SFBA is a tricky one as it's been said before and why the Seattle market is different (2006-2008) and that didn't work out too well for some folks. It is a valid point that the job market is very strong at the moment though, and that's the other part of the equation for me. If we sell and I get 8% elsewhere on the 100k, it's 8k in profit. If we keep the home and it goes up by 3% along with principal paydown, I'm looking at a 20% return with that equity. Gaining 3-5% appreciation for the next couple of years isn't out of the question barring any macroeconomic meltdown. The soonest that we'd be able to sell is next year and that's the direction I'm leaning unless I'm missing something that somebody points out.
-I know recapture is 25% on the depreciation and the 121 exclusion is pro-rated.