Author Topic: Sell our rental property or keep for income?  (Read 2681 times)

Present Muse

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Sell our rental property or keep for income?
« on: April 01, 2022, 05:35:30 PM »
For the past several years I've been thinking about selling our rental house to reduce the hassle and use the proceeds to RE.

Here are the vitals for the situation:
  • Mortgage: 20 years and $240K remaining on principle
  • Value per Zillow: $1,013,000 (was $325K in 2011)
  • Current Monthly Income: -$50 (yes, that's negative).  We could raise rent, but probably not much more than $200/month.
  • Property tax increases eat up any raise in rent
  • Plan to retire in 2-3 years at age 51 and selling would put us over our number

If we sell, we would probably net around $670K after expenses and paying off the mortgage.  It seems like even a very conservative return on the $670K is better than holding the property, even if we raised the rent.

What would you do in our situation?  Sell, manage the property better for income, pay off the principle, or something else?

swirleyDude

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Re: Sell our rental property or keep for income?
« Reply #1 on: April 01, 2022, 06:14:29 PM »
Why are you cash-flowing -$50/month on a rental that's worth over $1,000,000 that you bought in 2011? Something doesn't add up. From what you've given, I'd take the $670K now over -$600/year.

I'd be curious to see what the monthly rent is, and what your monthly expenses are. There might be a way to make this baby cash-flow.

EchoStache

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Re: Sell our rental property or keep for income?
« Reply #2 on: April 01, 2022, 07:45:24 PM »
I'm a homeowner looking to rent in a couple of months.  $300,000 4 bedroom properties are renting for $2500-$3,000/month in a fairly low cost of living area due to the asinine housing market.  I'm not sure how its possible to rent a million dollar home for less than the mortgage on an original loan balance of $300k???

Are you renting a $1M property for $2k/month?

MustacheAndaHalf

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Re: Sell our rental property or keep for income?
« Reply #3 on: April 01, 2022, 11:16:46 PM »
I've heard cash offers are at an all time high, so I assume the housing market is very hot right now.  There's a good chance Zillow's estimate is too low.

You might want to take the key characteristics of your house (like # bedrooms, age/renovation) and go searching for similar houses nearby that sold within the past couple months ("comparables").  A typical way to use that information is to divide sale price by the house's square footage, and then you apply that to your house.  That will get you much closer to your house's expected sale price.

If you sell, how does the tennant figure into it?  Selling while they're still living in the house is awkward and limits your ability to show the house.  You also can't "stage" the house, which can boost the price.

nereo

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Re: Sell our rental property or keep for income?
« Reply #4 on: April 02, 2022, 04:56:17 AM »
I’m not sure how this is even a question.  Unless I’m misunderstanding you, the choice is to sell and pocket over $600k, or continue to hold a property that has a negative cash flow.

Add to that, it sounds like you don’t particularly want to be a landlord (“…to reduce the hassle”) and getting rid of this property would allow you to instantly hit a major goal (your retirement number).

To me it’s a no-brained.  Sell, sell, sell.  Don’t hold on to properties with negative cash-flow when there’s a huge payout potential. Uncomplicated your life.

uniwelder

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Re: Sell our rental property or keep for income?
« Reply #5 on: April 02, 2022, 05:33:44 AM »
I’m not sure how this is even a question.  Unless I’m misunderstanding you, the choice is to sell and pocket over $600k, or continue to hold a property that has a negative cash flow.

+1.  Additionally, as others have asked, I’d be curious to see a breakdown of numbers.

OP, this topic should go to the real estate section of the forum.
« Last Edit: April 02, 2022, 05:35:54 AM by uniwelder »

Mr. Green

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Re: Sell our rental property or keep for income?
« Reply #6 on: April 02, 2022, 05:37:42 AM »
I'm in the sell camp, as others are. Assuming your cash flow can't actually be improved, it presumably isn't going to change for the next 20 years because that's how long your mortgage is. That does nothing for you income-wise. Interest rates have already popped up so the window for refinancing to an ultra-low rate is closed. Home prices are at an all-time high and there's speculation of a bubble brewing. Regardless of whether that ends up being the case, if you're looking to retire in a couple of years selling at an all-time high is great timing, particularly if the alternative is continuing to hold an asset which generates no income.

vand

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Re: Sell our rental property or keep for income?
« Reply #7 on: April 02, 2022, 07:30:35 AM »
Either the property isn't worth $1m, or your tenants are living there rent-free, or you're on the most uncompetitive mortgage in product in the world, because there is no way those numbers stack up.

clifp

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Re: Sell our rental property or keep for income?
« Reply #8 on: April 02, 2022, 12:52:50 PM »
I don't disagree with the comments that seem hard to imagine you are still generating negative cash flow after holding a property for 11 years, that's tripled in value.  When you factor in the principal payoff you may not have a negative cash flow. On the other hand, you have mentioned anything about expenses so your cash flow may be even more negative.

Your house has appreciated at almost 11% for the 11 years, that's less than the total stock market or S&P ~14%, but much better than foreign stocks ~6% or total bond ~2.5%.  If you do sell you'll be in the 20% bracket for a least some of the gains so probably ~$110k this leaves you say $660K.

The problem is what do you do after you sell it. I know conventional wisdom on the board is to put into the stock market, which seems to me is replace one overvalued asset with another.
The only truly conservative investment is the 3-year Treasury at 2.56%, where it now earns more than 10 or 30-year bonds.

In truth, I need a lot more information before, I or frankly anybody could give you intelligent advice.
House location, rent, mortgage rate, maintenance and other costs, are you using a property manager comparable rents?
Plus information on the rest of your assets and current tax bracket.
If you currently have $500K in stocks, I'd say sell if you have $5 million, I'd say hold and between those two numbers I'd say it depends.

Telecaster

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Re: Sell our rental property or keep for income?
« Reply #9 on: April 02, 2022, 03:57:18 PM »
In truth, I need a lot more information before, I or frankly anybody could give you intelligent advice.
House location, rent, mortgage rate, maintenance and other costs, are you using a property manager comparable rents?
Plus information on the rest of your assets and current tax bracket.
If you currently have $500K in stocks, I'd say sell if you have $5 million, I'd say hold and between those two numbers I'd say it depends.

I think there is enough here to make a decision.  One thing that has to be included is the opportunity cost of the negative cash flow of -$600/year.  That's not a lot, but it is not nothing either. 

If the OP were to sell and net $660K as you suggest, using the 4% rule in a standard portfolio that would that would translate to an inflation-adjusted $26,640/year, meaning he is $27,240/year to the good by selling.   That's not a close contest. 

bthewalls

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Re: Sell our rental property or keep for income?
« Reply #10 on: April 02, 2022, 04:06:14 PM »
We sold ours while back...tenants were Generally ok but I’m glad it’s gone


Mr. Boh

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Re: Sell our rental property or keep for income?
« Reply #11 on: April 03, 2022, 02:17:05 PM »
Sell. Why would you not?

Present Muse

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Re: Sell our rental property or keep for income?
« Reply #12 on: April 03, 2022, 05:39:41 PM »
Thanks everyone!  Definitely a lot of strong opinions here to sell, given the numbers.  We had the same opinion, but I wanted to check in with this community first.  Seems like a no-brainer if all my assumptions are correct.

However, the biggest assumptions here are the rent and the value of the home.  For rent, I need to do some research for the most competitive rate - maybe look at Craigslist or talk with a management company.  As for the overall property value, I'm not sure how much I trust Zillow.  I've heard from some people that this could be too high or too low.  To add, the home is older and smaller than most houses in the area.  Many homes are 50 years younger and twice the square footage.  Seems like a chat with a RE agent might help me get a better idea.  However, even if Zillow is off by 25% then the numbers still seem to point to selling.

I also forgot to include expenses (thanks @swirleyDude).  We've had some pretty significant expenses over the years - a new roof and a new septic system for a total of around $30K.

It's clear to me that I need to manage this investment better and do my best to keep up with the market and opportunities.

Another Reader

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Re: Sell our rental property or keep for income?
« Reply #13 on: April 03, 2022, 06:26:51 PM »
For rents, look at Zillow, Realtor.com, and Hotpads.  Craigslist is not a reliable source.  Do a formal rent survey by calling a few property managers.  Talk to a couple of the better sales agents about the market value as well.  Get recent comps and listings from them to back up their opinions.

My guess is you are not managing the asset well.  You need a more accurate picture of income and expense.  I suspect you are getting some tax write off, although your basis is low.  You are going to have to recapture depreciation and pay capital gains tax on your net appreciation.  Not clear if you considered that in your numbers.

I'm a long time landlord with multiple properties.  There are a lot of moving parts in rental property ownership and operation.  Without better numbers, I don't have an opinion, except you seem to be unenthusiastic about the rental business.  In the end, that may be the most important factor.

clarkfan1979

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Re: Sell our rental property or keep for income?
« Reply #14 on: April 07, 2022, 08:08:58 PM »
Either the property isn't worth $1m, or your tenants are living there rent-free, or you're on the most uncompetitive mortgage in product in the world, because there is no way those numbers stack up.

a little harsh, but I agree.

rothwem

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Re: Sell our rental property or keep for income?
« Reply #15 on: April 25, 2022, 06:31:44 AM »
Either the property isn't worth $1m, or your tenants are living there rent-free, or you're on the most uncompetitive mortgage in product in the world, because there is no way those numbers stack up.

a little harsh, but I agree.

Which means that they definitely need to sell. Sure, SOMEONE could make money with this, but it’s not likely that the OP can.

jmustache1

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Re: Sell our rental property or keep for income?
« Reply #16 on: May 11, 2022, 11:17:45 AM »
I'm a new-ish poster, so not sure if we're supposed to piggyback on existing topics or start new ones.

We also have a couple of short term rentals and I've got a similar question.  We're likely 5-10 years from retirement, but given the current market conditions I'm wondering if I should sell.

Both houses are are mile apart and within a 5 minute walk to the beach.  The biggest risk to the area would be a hurricane that wipes things out, otherwise it should stay relatively stable rental wise.  Covid has really screwed up projections on what they SHOULD do in a normal year.  We use a rental management company for both as we have full-time jobs and can't manage them, plus we live a 12 hour drive away.

Property 1 - Zillow value of $2,200,000 and we owe about $500k.   Generated $200k in revenue the last couple of years, but likely around $150k longterm.  This will net us about $40k before taxes.
Property 2 - Zillow value of $1,300,000 and we owe about $550k.   Generated $150k in revenue the last couple of years, but likely around $125k longterm.  This will net us about $20k before taxes.

If we sell we're going to net about $2.3mm.  In retirement they are both houses that we could see ourselves living in for months or seasons at a time, although neither is likely a long-term living option for us.

The combination of the drop in the stock market and the acceleration of the real estate market has me wondering if I should sell now and try and get a better ROI, or if I should just keep and be thankful that we are diversified and have protections from the stock market tanking like it has.

JLee

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Re: Sell our rental property or keep for income?
« Reply #17 on: May 11, 2022, 11:19:16 AM »
I'm a new-ish poster, so not sure if we're supposed to piggyback on existing topics or start new ones.

We also have a couple of short term rentals and I've got a similar question.  We're likely 5-10 years from retirement, but given the current market conditions I'm wondering if I should sell.

Both houses are are mile apart and within a 5 minute walk to the beach.  The biggest risk to the area would be a hurricane that wipes things out, otherwise it should stay relatively stable rental wise.  Covid has really screwed up projections on what they SHOULD do in a normal year.  We use a rental management company for both as we have full-time jobs and can't manage them, plus we live a 12 hour drive away.

Property 1 - Zillow value of $2,200,000 and we owe about $500k.   Generated $200k in revenue the last couple of years, but likely around $150k longterm.  This will net us about $40k before taxes.
Property 2 - Zillow value of $1,300,000 and we owe about $550k.   Generated $150k in revenue the last couple of years, but likely around $125k longterm.  This will net us about $20k before taxes.

If we sell we're going to net about $2.3mm.  In retirement they are both houses that we could see ourselves living in for months or seasons at a time, although neither is likely a long-term living option for us.

The combination of the drop in the stock market and the acceleration of the real estate market has me wondering if I should sell now and try and get a better ROI, or if I should just keep and be thankful that we are diversified and have protections from the stock market tanking like it has.

I would sell them both and then immediately retire in a low / medium cost area, lol.

Dicey

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Re: Sell our rental property or keep for income?
« Reply #18 on: May 11, 2022, 02:45:18 PM »
Just a quick observation: rents have gone up astronomically in the last 12-24 months. Before I made any decision, I'd ask a couple of realtors what the house would go for in the current market.

One of our rentals (worth about half of yours) just turned over and the rent is jumping from $1900 to $2750. It was snapped up before it even went on MLS. It was at or slightly below market just 18 months ago. Wowza!

« Last Edit: May 11, 2022, 10:25:37 PM by Dicey »

JLee

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Re: Sell our rental property or keep for income?
« Reply #19 on: May 11, 2022, 05:15:28 PM »
Just a quick observation: rents have gone up astronomically in the last 12-24 months. Before I made any decision, I'd ask a couple of realtors what the house would go for in the current market.

One of our rentals (worth less than half of yours) just turned over and the rent is jumping from $1900 to $2750. It was snapped up before it even went on MLS. It was at or slightly below market just 18 months ago. Wowza!

We are considering a move to the other coast (job opportunity plus being tired of the east coast) and I was having similar thoughts - I was initially planning on selling my house, but with hearing that a friend of ours is paying $2300/mo for a 3rd floor walk-up apartment, I'm starting to consider that it may be worth renting my house instead.

Archipelago

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Re: Sell our rental property or keep for income?
« Reply #20 on: May 11, 2022, 06:20:48 PM »
I'm a new-ish poster, so not sure if we're supposed to piggyback on existing topics or start new ones.

We also have a couple of short term rentals and I've got a similar question.  We're likely 5-10 years from retirement, but given the current market conditions I'm wondering if I should sell.

Both houses are are mile apart and within a 5 minute walk to the beach.  The biggest risk to the area would be a hurricane that wipes things out, otherwise it should stay relatively stable rental wise.  Covid has really screwed up projections on what they SHOULD do in a normal year.  We use a rental management company for both as we have full-time jobs and can't manage them, plus we live a 12 hour drive away.

Property 1 - Zillow value of $2,200,000 and we owe about $500k.   Generated $200k in revenue the last couple of years, but likely around $150k longterm.  This will net us about $40k before taxes.
Property 2 - Zillow value of $1,300,000 and we owe about $550k.   Generated $150k in revenue the last couple of years, but likely around $125k longterm.  This will net us about $20k before taxes.

If we sell we're going to net about $2.3mm.  In retirement they are both houses that we could see ourselves living in for months or seasons at a time, although neither is likely a long-term living option for us.

The combination of the drop in the stock market and the acceleration of the real estate market has me wondering if I should sell now and try and get a better ROI, or if I should just keep and be thankful that we are diversified and have protections from the stock market tanking like it has.

@jmustache1

You're better off making a rent vs. sell topic for more replies. Your scenario in this topic might get buried.

Are either of the rentals in a tax-friendly state?

 

Wow, a phone plan for fifteen bucks!