Learning, Sharing, and Teaching > Real Estate and Landlording

How bad did we screw up?: Rent or Sell first home

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BuffaloStache:
My family lives in a condo that my wife purchased many years ago in the Denver metro area. We've kept it in pretty good shape, so it doesn't need a lot of work to make it rent ready (maybe just new carpet). It is located in an area that has really become popular in the last 1-2 years. We want to move in the next year or so (and have saved up a separate 20% downpayment for that), and are trying to determine whether to rent or sell when we do. Mini-case study relevant numbers:

*Amount owed: ~$125k
*Here is the ringer: we refinanced 3 years ago to a 15 yr fixed mortgage at 3.125%. Because of this...
*Monthly mortgage payment + escrow + HOA: ~$1400

*Market monthly rent for similar properties: ~$1600 (we may be able to get $1650 or $1700, but no guarantee)
*Approximate current value: ~$295k (Zillow Zestimate is ~$310+, but I know not to trust that)

With this information, is it best to:
1) Rent it as-is when we leave, only giving us a ~$200 cash flow for the next ~11 yrs till the mortgage is paid off.
2) Refinance the condo to a 30 yr. fixed (lowering the monthly mortgage + HOA payment to ~$1000), giving us a $600 monthly cash flow but taking much longer to pay off.
3) Sell- since we purchased the house for much less than it's worth, take our gains and use them to bolster the 'stash.

FWIW I'm very interested in learning more about Real Estate investing, landlording, and related investment strategies.

waltworks:
Your condo is a miserable failure as a rental based on the numbers, but luckily for you, it's a slam dunk of a sale and you'll make a nice profit.

The usual rule of thumb is that 50% of your gross will go to expenses (management, repairs/maintenance, vacancy, insurance, taxes, etc, NOT including the mortgage P&I). For a condo where HOA should (theoretically) cover all exterior maintenance, you could use 40% instead, maybe. That would leave you with negative cash flow even if you refinanced, though. And HOA special assessments are a nasty wildcard. How well do you know your HOA's reserve study numbers?

If a property doesn't rent for 1% of it's market value per month, it's *unlikely* that you'll do well with it for cash flow. There are exceptions but you're at something like 0.5% - no bueno.

Take the money and run.

-W

BuffaloStache:

--- Quote from: waltworks on December 13, 2017, 06:21:58 PM ---And HOA special assessments are a nasty wildcard. How well do you know your HOA's reserve study numbers?

--- End quote ---

I know these numbers fairly well- I'm not on the HOA board, but am active and go to some of the meetings. Because of the health of the reserve, I don't think special assessments are very likely in the future.

Also, Walt, are those numbers primarily for certain markets, or are they overarching goals for all real estate investors? When I plug my numbers into calculators like this one (http://www.calculator.net/rental-property-calculator.html), it seems to come out favorably to rent. I'm guessing I'm missing something here?

waltworks:

--- Quote from: BuffaloStache on December 14, 2017, 10:55:06 AM ---Also, Walt, are those numbers primarily for certain markets, or are they overarching goals for all real estate investors? When I plug my numbers into calculators like this one (http://www.calculator.net/rental-property-calculator.html), it seems to come out favorably to rent. I'm guessing I'm missing something here?

--- End quote ---

Input the *market value* of the property (subtract 5-10% depending on how much you expect to pay to sell in fees/commissions/tax) and run the calculator with that amount.

Your purchase price is irrelevant here. The question you should ask is: would I buy this property to use as a rental? If the answer is no, you should sell it.

I'm unfamiliar with the calculator or the assumptions it's making but it appears that it is ignoring capital gains taxes on the sale of the property, which (since in this case the majority of the return is from the equity/appreciation) probably cuts down the actual return pretty significantly depending on your tax bracket and how you do the sale (ie leave to heirs, 1031 exchange would avoid capital gains).

If you want an investment property, you can do much, much better in other parts of the country.

-W

HawkeyeNFO:
SELL.  This would likely be a money loser as a rental under the current mortgage.

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