Author Topic: is renting with intent to sell net year ever a good idea?  (Read 2265 times)

nereo

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is renting with intent to sell net year ever a good idea?
« on: April 10, 2016, 12:41:23 PM »
I'd love a few others to look over my numebrs and give their opinions.
It seems likely that we will move in 2017. If rented out completely our place would be ~cash-flow neutral when accouting for T&I, but that doesn't account for vacancies and repairs. Our interest rate is stupidly-low (3.04%) and currently each month we're paying down ~$540 in principle (paying $410 in interest). Obviously that improves each year as principle is payed down and we can (presumably) increase the rent by 2-3%/year.

What looks 'borderline' for 2017 looks much more favorable in 2020.  Add to this: we have individuals we've lived with who are interested in renting for 2017/18.

My question (i guess) is: Is it ever wise to consider what a rental you already own might be worth in 3-5 years, or should you simply decide "rent vs. sell" based on that year only?


Market Value: $270k (est) in 2016
Original Purchase price: $246k in 2012
Original Mortgage Amount: $198k
Interest Rate: 3.04%
Mortgage Term: 25 years
Term remaining: 17 years
Amount remaining on mortgage: $160k
Gross Rents: $1200 (est - based on similar properties nearby)
Principal and Interest (the P&I of your PITI - should match with the above info): $950.  Breakdown this month is $540P & $410 I.
Taxes and Insurance (the T&I of your PITI): $320.  Paid seperately.
HOA costs: included with T&I (see below)
Deferred maintenance notes: none expected.  Recently replaced roof.  Interior, appliances, windows etc. all <6 years old. Building assessed and inspected in 2015 when one of hte units was purchased. Fund in place for unexpected repairs (see below)
Anything else special or unique in regards to the numbers of the property: This property is one of three apartments in a building. Do to some quirky laws, the T&I and HOA are all rolled into one fund split among three apartment units, giving us very low taxes for the area.  Currently there is ~$6k in the fund for future repairs, so we have a lot of headroom there should something major happen. 

undercover

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Re: is renting with intent to sell net year ever a good idea?
« Reply #1 on: April 10, 2016, 01:12:36 PM »
Here's what you should be asking:

"Would I pay $270k today for a property that I could rent out for $1,200/mo"?

Most people would say no I think, considering you're not even breaking even, but that depends on a lot of factors:

  • What's the market nearby like? Would it be reasonable/worth my while for me to find a better deal in RE?
  • If the nearby market is bad (for investing) - am I willing to invest at a distance?
  • Do I value the location of this property/the property itself more than making more money?
  • Do I ever want the option of living in this property again based on aforementioned point?

So yeah, opportunity costs change over time, as do personal situations, so it definitely makes sense to "rebalance" your RE just like you would stocks.

To answer your question of should you ever count on or factor in appreciation: no.

SwordGuy

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Re: is renting with intent to sell net year ever a good idea?
« Reply #2 on: April 10, 2016, 03:12:39 PM »
Here's what you should be asking:

"Would I pay $270k today for a property that I could rent out for $1,200/mo"?

Most people would say no I think, considering you're not even breaking even, but that depends on a lot of factors:

  • What's the market nearby like? Would it be reasonable/worth my while for me to find a better deal in RE?
  • If the nearby market is bad (for investing) - am I willing to invest at a distance?
  • Do I value the location of this property/the property itself more than making more money?
  • Do I ever want the option of living in this property again based on aforementioned point?

So yeah, opportunity costs change over time, as do personal situations, so it definitely makes sense to "rebalance" your RE just like you would stocks.

To answer your question of should you ever count on or factor in appreciation: no.

That's a very good answer.

nereo

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Re: is renting with intent to sell net year ever a good idea?
« Reply #3 on: April 10, 2016, 03:54:20 PM »
Thanks for the response.  I think it reaffirms what I've been thinking.


  • What's the market nearby like? Would it be reasonable/worth my while for me to find a better deal in RE?
  • If the nearby market is bad (for investing) - am I willing to invest at a distance?
  • Do I value the location of this property/the property itself more than making more money?
  • Do I ever want the option of living in this property again based on aforementioned point?

Quick answers:
i) nearby market is similar, and there are certainly better properties available from a strictly money-making perspective, but I wouldn't put the time in to find them. I have this unit because I live in it, that's the main reason.
ii) not at present.
iii) probably. The location is really what helps here. It's equidistant and close to both a large university and several government buildings with a vibrant neighborhood all around it. As such I feel its very insulated from 'bad times' as well as in an urban area that's going to go up considerably over the next 5-10 years. But this brings appreciation into the equation, something you've said I shouldn't do (for good reason).
iv) Yes. That's probably the biggest reason we'd consider renting instead of selling - we love living here and there's maybe a 30-40% chance we'd return after 2-3 years.  It's far from certain, so I'm fair from certain I should consider that when making our decision.

FWIW the place was refurbished and went from a 3bd room apartment to a much, much nicer 2 bedroom that we live in (and rent out 1 bedroom). As a 3 bedroom it was able to bring in more total rent, but we're not prepared to do the kind of renovation that it would take to change it again.

Jim2001

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Re: is renting with intent to sell net year ever a good idea?
« Reply #4 on: April 10, 2016, 05:00:35 PM »
Nereo,

  Here are a few other things to consider.  First, there are transaction costs that would reduce your net equity if you were to sell.  If you were to sell this place and replace it with something "better", it would have to be enough better to cover both the sale and purchase transaction costs (think realtor commission, title insurance, appraisal, inspection, transfer tax, new loan costs, escrow/attorney fees, etc).  Next, you know this property and it's maintenance history.  If you were to find a replacement property that was "better", even after transaction fees, you would be dependent on the inspector's identify any deferred maintenance.  Lastly, and some may argue with this one shouldn't be part of the equation, assuming you're in the US, consider what the IRS allows you to take in depreciation on the building. You may actually be positive on an annual basis right now.

+1 on considering the opportunity costs. Of course, selling it eliminates the option to move back.  Holding it for a small monthly outlay keeps that option open for as long as you want.  How valuable is that option?

Let us know how things progress.

nereo

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Re: is renting with intent to sell net year ever a good idea?
« Reply #5 on: April 11, 2016, 10:31:29 AM »
Nereo,

  Here are a few other things to consider.  First, there are transaction costs that would reduce your net equity if you were to sell.  If you were to sell this place and replace it with something "better", it would have to be enough better to cover both the sale and purchase transaction costs (think realtor commission, title insurance, appraisal, inspection, transfer tax, new loan costs, escrow/attorney fees, etc).  Next, you know this property and it's maintenance history.  If you were to find a replacement property that was "better", even after transaction fees, you would be dependent on the inspector's identify any deferred maintenance.  Lastly, and some may argue with this one shouldn't be part of the equation, assuming you're in the US, consider what the IRS allows you to take in depreciation on the building. You may actually be positive on an annual basis right now.

+1 on considering the opportunity costs. Of course, selling it eliminates the option to move back.  Holding it for a small monthly outlay keeps that option open for as long as you want.  How valuable is that option?

Let us know how things progress.

Thanks Jim.  If we sell next year will will be sooner than we originally anticipated, and that's part of our knee-jerk reaction towards renting it out at least for a few years.  As you said, the selling costs would reduce some of the equity in the home, and the sale looks a lot better on paper if we waited a few more years to sell.  However, this ignores the opportunity costs.

Having a former tenant interested in renting the entire place for at least one year is also tempting.  I know the renter, I know it would be stable (she will have either a 12 or 18 month contract), and I could essentially keep it on autopilot, with rental income basically being equal to PITA.
Right now I'm assuming that selling costs wouldn't change very much over a period of 1-2 years, but the total net equity might by several $K.  Over that period I'm viewing it as a 'return' of ~3%.  Not great but not horrible either in today's low interest world.

I'll keep pondering, but selling seems the way to go here.

ETA: I'm not going to look for another rental property at present, regardless of what I do with this one. I probably will in ~3-5 years when our job situation becomes more stable.

beltim

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Re: is renting with intent to sell net year ever a good idea?
« Reply #6 on: April 11, 2016, 10:40:51 AM »
Here's what you should be asking:

"Would I pay $270k today for a property that I could rent out for $1,200/mo"?

This is not the question you should ask, since you don't have an interest in real estate that you don't already own. 

The question should be: what is the opportunity cost of staying in this investment, and is that a price you're willing to pay for the chance that you will move back?

When figuring the opportunity cost, you shouldn't count on appreciation, but I think you should consider it a possibility.  Just like when thinking about a stock investment, you can't count on any appreciation over the short term, but you also shouldn't ignore the possibility.  You also shouldn't ignore the possibility of a decline in housing prices, since you do plan to sell it at some point.

nereo

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Re: is renting with intent to sell net year ever a good idea?
« Reply #7 on: April 13, 2016, 09:08:34 AM »
Here's what you should be asking:

"Would I pay $270k today for a property that I could rent out for $1,200/mo"?

This is not the question you should ask, since you don't have an interest in real estate that you don't already own. 

The question should be: what is the opportunity cost of staying in this investment, and is that a price you're willing to pay for the chance that you will move back?

When figuring the opportunity cost, you shouldn't count on appreciation, but I think you should consider it a possibility.  Just like when thinking about a stock investment, you can't count on any appreciation over the short term, but you also shouldn't ignore the possibility.  You also shouldn't ignore the possibility of a decline in housing prices, since you do plan to sell it at some point.

Sorry - realized i never responded to this.
I do ultimately have an interest in real estate.  I envision having rental propert(ies) as part of my FIRE strategy.  However, after a period of geographic stability the next ~3 years for us are fairly uncertain.  We may stay in the same city, move to a location that's a few hours away (by car), or move across the country.  That's why I'm not looking to pick up rental properties now.

In the meantime I do have the property I own.  I already rent out a room of it, and my decision now is "sell it or keep renting it".  When I bought it I didn't put much consideration of its value as a rental, only the value it gave to us to live there. In a way it's easier in the short term to rent it out entirely instead of going through the entire sale. On the other hand we could sell it, cash out the equity and favor simplicity.

Thanks all for giving me things to think about.