Author Topic: Considering renting a house I own - Any financial advice?  (Read 2475 times)

Mississippi Mudstache

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Considering renting a house I own - Any financial advice?
« on: February 04, 2015, 11:56:49 AM »
My wife and I recently moved from Mississippi to Florida. We own a home in Mississippi that we've been trying to sell since early October. We bought it for $126,000 in 2011 (100% mortgage, PMI was rolled into the loan principal - facepunches welcome, I had no idea what I was doing). We now owe $108,000.

We have it listed for $129,000 and we had one decent offer on it (we would have netted $124,000), but the deal fell through because the buyers couldn't get a loan. The market is incredibly slow, and I'm afraid that I would have to price the thing at ~$115K to get a reasonably quick sale on it. It's currently costing us about $700 a month in interest, taxes, insurance, and utilities to hang on to it.

I have been toying with the idea of renting it. My next-door neighbor from Mississippi was a friend and someone I trust. He is an experienced landlord and handyman (full-time, actually) and owns several of the homes in our neighborhood and rents them out. I suspect he would be willing to manage the property for a 10% commission, though I haven't brought it up to him. He would also be my guy for most maintenance/repairs.

I could probably re-finance the property on a 30-year mortgage at 4% interest (it's currently at a painful 5.125%), which would reduce the monthly mortgage to about $516. Taxes+insurance are $210/mo. Add in 10% property management costs, and that works out to ~$840 in fixed expenses. I know it would rent for $1100/month in a heartbeat. I could probably get $1200/month without much trouble. So, that gives me an allowance of $260-360/month to cover vacancy/repairs. The roof is new (2013), the HVAC is creeping up in age (2008 I think).

Any thoughts on the financials? If I felt like appreciation was a possibility, I would probably be more gung-ho about the thought of renting, but in all honesty, I feel like this is a dying market, so cash flow would be my only hope.

Bobberth

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Re: Considering renting a house I own - Any financial advice?
« Reply #1 on: February 04, 2015, 12:02:49 PM »
Why not sell it for $115k?  Seems like it would be a lot easier to sell at break even than to be a reluctant landlord.  Oct-Feb is the worst time to try and list a property here, not sure if that is the same in MS.  From my experience as being a landlord on purpose and knowing people in your situation, if you can get out at break even-DO IT!

Mississippi Mudstache

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Re: Considering renting a house I own - Any financial advice?
« Reply #2 on: February 04, 2015, 12:10:30 PM »
If someone offered me $115,000 today, I would definitely give the offer strong consideration. But, I'm resistant to dropping the price so soon (it's only been listed for 3 months), given that I already had a willing buyer at $124K, who just couldn't come up with the resources.

Honestly, I think there's very little chance that I'm actually going to rent the property, but I was hoping for an honest financial assessment as a rental so I could more accurately weigh my options.

Thoughtful Mule

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Re: Considering renting a house I own - Any financial advice?
« Reply #3 on: February 04, 2015, 12:16:50 PM »
You have to look at this from a perspective of... would you buy this as a rental property as an out of state owner for what you could sell it for, around 115K.  If the answer is yes, then you should consider it. 

Before you make any decisions, there are some things you are leaving out of your analysis. Add 10% of your gross income to your expenses to account for vacancy. Now add additional maintenance and capital expenditures to your expenses.

Your best bet is to chat with your neighbor.  He sounds like an experienced landlord / investor in your area and will be a valuable resource.  Don't bring up his managing your property, but ask him, if he were in your shoes, how would he proceed. Experience goes a long way in this game.

Mississippi Mudstache

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Re: Considering renting a house I own - Any financial advice?
« Reply #4 on: February 04, 2015, 12:47:03 PM »
You do bring up some good points - I had mentioned that there should be ~$260-360/month to cover vacancy and repairs. You gave me a specific number on the vacancy assumption - 10% - which sounds reasonable enough. So that would leave $150-250/month for repairs and profit (not counting any principal payments that I would be making). That's a seems like a pretty thin margin, especially with the specter of an HVAC replacement hovering in the near future. I would also definitely pick my neighbor's brain on the rental business in that area if I decide to look any deeper.

You have to look at this from a perspective of... would you buy this as a rental property as an out of state owner for what you could sell it for, around 115K.  If the answer is yes, then you should consider it. 

I am admittedly inexperienced, but I might quibble with this oft-repeated sentiment. Greater risk demands greater returns, but the fact that I know the house inside and out, that I have a neighbor that I would trust to handle the property management, and that I know what every rental home on my block rents for would seem to have the general effect of reducing the overall risk - at least somewhat. So I don't quite agree with the idea of comparing the property to a generic $115K out-of-state property that I really don't know anything about.

escolegrove

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Re: Considering renting a house I own - Any financial advice?
« Reply #5 on: February 06, 2015, 10:38:12 AM »
If you are going to refinance. Do it while it is still a personal property! MUCH better loans rates :) This is the perfect time as loan rates keep following.

That being said, everyone has their own opinion. Here's an article going in depth on all the things one should think about

http://www.biggerpockets.com/renewsblog/2014/12/29/sell-or-rent-out-home-factors-to-consider/

Mississippi Mudstache

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Re: Considering renting a house I own - Any financial advice?
« Reply #6 on: June 18, 2015, 03:12:09 PM »
Well, it's been 4.5 months since I started this topic. The housing market has only gotten worse, shitloads of homes for sale. We had one offer for $110,000. I countered with $118,000, they offered $113,000. I countered again at $115,000 and they walked away and withdrew the offer. Had another offer for $98,000. I basically told them to f*** off (politely, though). That was over 2 months ago, no activity since.

I was approached by some friends of friends about renting the place. I checked them out - credit reports 780+, landlord of 3 years gave them a positive review, both have good jobs. I offered to rent to them for $1200/month, and they accepted. So at least my intuition about rental rates were spot on. We just inked the 12-month lease this week. So it appears that I am (once again) a tentative landlord. I'm not hiring a property manager just yet. Hopefully I won't need one. Wish me luck...

fishnfool

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Re: Considering renting a house I own - Any financial advice?
« Reply #7 on: June 18, 2015, 08:51:40 PM »
Congrats! They sound like great tenants and hopefully the market will rebound there in the meantime. If you can manage it yourself that is a big plus. Now if you can do a refi and get rid of the pmi you'll be set!

Good luck with your new venture!