Author Topic: Keep to Rent or Sell? Looking Forward  (Read 1531 times)

Flyingstache

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Keep to Rent or Sell? Looking Forward
« on: October 13, 2020, 12:29:15 PM »
Hello!

My wife & I are 29yr old teachers in OH. We have been in our home for 2.5yrs & expect to stay for another 2-3yrs. We bought the house knowing it wasn't a "forever" home & with the thought that we could rent it (it previously was a rental) when we were ready to move. Trying to start planning ahead & figuring out what would make the most sense for us financially.

More about us - Both teach & I coach football also. I spent 4 years in business & now in my 3rd year teaching. We have been lucky enough to have two wonderful boys. A 2yr old & a 5 month old. We are hoping to add 1-2 more kids in the near future if we are lucky enough.

The House - Bought for $167,500 in 2018. Refinanced at in March at 2.75% for 15yrs. We have about $100k left on the payment. We pay $1,100/month for the mortgage plus taxes/insurance. The house is a 1,200sq ft ranch in a desirable neighborhood. We were approached by a realtor this summer who said we could likely get $220k for the house currently. Our community is one of the fastest growing in the state & midwest. The home was being rented for $1,400/month before we bought it. We have been told we could likely get $1,500 - $1,600 based off similar properties nearby.

Our Finances - Our salaries are about $125k combined. We have no debts other than our house. Currently have about $190k between our savings/checking/investments. We have $65k sitting in a savings account currently with the thought that it will go towards the downpayment on our next house but it annoys me that we just have that money sitting there. We also know that we will need a new car at some point though the plan is to buy used & pay cash. Our monthly expenses including mortgage are around $3,500 though we have had some more expensive months during quarantine as the addition of kid #2 resulted in us ordering food more often (we have fixed it now). I would love to have financial flexibility to not be dependent on my job & to explore other interests/just have more freedom.

Questions -

1) Looking at our current financial status, do you think we should have such a large amount in our savings in anticipation for a downpayment in the next 2-3 years?

2) Would it make more sense based off our age & financial standing to sell & invest the money from the house or keep the house & rent it assuming we could get $1,500/month.

3) Is there a certain point or standard rule of thumb that shows you should sell a house if you can achieve a certain price vs. keeping it for rental?

I will acknowledge that I am not super handy (aka I can't fix anything) & the that side of landlording makes me nervous. I do think that the price point we would be renting for would attract quality renters in our area & we have done some renovations to the house that should reduce major expenses moving forward (ex: new roof, HVAC, water heater, etc). We will likely be staying in the same area when we move but looking for more space for our growing family.

Any insights or advice would be appreciated!

sammybiker

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Re: Keep to Rent or Sell? Looking Forward
« Reply #1 on: October 13, 2020, 01:43:07 PM »
@Flyingstache  If you end up buying a new house in 2-3 years, your current house rented at $1500-1600/mo is not a bad rental if you self managed.

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You didn't ask but what I would do - you're in one of the best states for cash flow rental property and you have great DTI.  I would take advantage of this, refi your primary residence now at 80% LTV of $220k less the $100k owed, take that cash + part of your savings and go buy a few cashflowing properties in nearby C+ to B neighborhoods (putting 20% down), fixed for 30yrs and self-manage.

Not being handy is mostly a mental fear and there is very little that you cannot learn on youtube and/or subcontract out.

srad

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Re: Keep to Rent or Sell? Looking Forward
« Reply #2 on: October 14, 2020, 04:16:40 PM »
Keep this property.  You are able to cashflow on a 15 year mortgage, that is pretty hard to come by now a days. Look at it this way, you move out in 2-3 years.  10 years from then, this thing is paid off by the tenant.  You are early 40's with a paid off house that will probably be bringing in over 2k a month rent.  That's a great addition to anyone's portfolio. 

Now if you want to go big(er), do as Sammybiker said, cashout refi and buy more.  Money is as cheap as its ever been, you pick up 2 more properties like this on 15 year notes, you won't cashflow at all for several years buy by the time you are 45, you will have 3 paid off rentals bringing in 6k a month.  You could scale this to no ends with 30 year mortgages, but it then gets a little busy.  My first 2 properties were very easy to self manage, but once I began adding more I started losing a lot more nights and weekends.

And I second the mental fear for not being handy.   I literally couldn't paint a wall on my first house, but between books, internet, hardware stores (seriously the associates that know what they are doing can be real resource), and lots and lots of trial and error, I was able to figure darn near anything out.  Now if a fix comes up that I don't want to work on, or i flat out can't do it, I'll just hire someone to do it.


waltworks

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Re: Keep to Rent or Sell? Looking Forward
« Reply #3 on: October 14, 2020, 07:14:42 PM »
With management, maintenance, and vacancy, this doesn't produce much. But it's on a 15 year loan, so you're paying it off pretty fast with someone else's money if you rent it out.

I'd refi it to a 30 (you can always pay more if you want to) but you just did a refi, so I'm guessing you don't want to do that.

I'm on the fence on it, but it would be a good first property to try out landlording, at the least.

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Flyingstache

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Re: Keep to Rent or Sell? Looking Forward
« Reply #4 on: October 15, 2020, 11:44:25 AM »
Thank you so much for the insights! It is funny you talk about refinancing because my old bank just called & said they currently could refinance our mortgage to 2% for 15yrs. Estimated closing costs around $2,500

We refinanced in March of this year to 15yrs at 3.75% We have about $100k left on the loan & the house is worth between $200-$220k depending on who you talk to.

Do you think it is worth it to refinance to the 2%? I know you mentioned that you would refinance to 30yrs so you may not like this idea. Is the reasoning for the 30yr simply to reduce expenses now & have someone else pay for it?

Dicey

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Re: Keep to Rent or Sell? Looking Forward
« Reply #5 on: October 16, 2020, 11:31:27 AM »
Thank you so much for the insights! It is funny you talk about refinancing because my old bank just called & said they currently could refinance our mortgage to 2% for 15yrs. Estimated closing costs around $2,500

We refinanced in March of this year to 15yrs at 3.75% We have about $100k left on the loan & the house is worth between $200-$220k depending on who you talk to.

Do you think it is worth it to refinance to the 2%? I know you mentioned that you would refinance to 30yrs so you may not like this idea. Is the reasoning for the 30yr simply to reduce expenses now & have someone else pay for it?
Ask what they'll give you on a 30 year fixed mortgage. If it's anything less than what you're currently paying, grab it. The cash flow on your potential rental will increase enough that you can afford to use a property manager and still make a decent return on your investment. You won't be able to touch those rates once you've moved out.

If you really, really want to, you can double up on your payments until it becomes a rental, thus shortening the repayment period of the loan, but that's not optimal. I'm saying you *could* do that, but I'm absolutely not advising it. Get the long, low, cheap money and hang on to it until the very last day is the way to go.

srad

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Re: Keep to Rent or Sell? Looking Forward
« Reply #6 on: October 16, 2020, 01:52:09 PM »
Do you think it is worth it to refinance to the 2%?

YES... 

And do the math on the difference between this 2% 15 and whatever rate they will give you for the 30 year.    30 year will give you more cashflow but 15 more years of payments.    So you determine what you are comfortable with.

Payments 15 vs 30 year:

2% on a 15 for 100k loan is $643, total interest for life of loan $15,831
2.5% on a 30 for 100k is $395, total interest for life of loan $42,243  (30 is usually around half a point higher)


waltworks

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Re: Keep to Rent or Sell? Looking Forward
« Reply #7 on: October 16, 2020, 02:53:18 PM »
Here's the thing - the property is basically going to produce nothing for 15 years. And extracting the equity is expensive. So you need a long term plan. You can say, "fine, no income for 15 years, no big deal, we'll have it paid off at that point and let the cash roll in". If your FIRE plan involves 15+ years more work, that might make sense. It will also mean you have a LOT of money tied up in one asset (ie, you are doing something risky by not being more diversified).

If you refi to a 30 year, you'll have cash flow going immediately. You can use that to pay your expenses, invest in other things, etc. Or you can use that extra cash flow to just pay down the mortgage, if you want, and essentially treat the loan as a 15 year - you have a lot more flexibility. If you plan to FIRE sooner than 15 years from now, you'll be in better shape to do that, and you'll have less money tied up in one place.

IMO you always should go for the longest term possible/max leverage, as long as the rates are close, if you're treating this as an investment, because that gives you the ability to put more money into other properties/stocks/etc. There is nothing that compares with gov't backed owner occupied mortgages - it's literally free money. Take as much as they will give you, for as long as possible.

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Flyingstache

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Re: Keep to Rent or Sell? Looking Forward
« Reply #8 on: October 19, 2020, 06:28:09 AM »
Do you think it is worth it to refinance to the 2%?

YES... 

And do the math on the difference between this 2% 15 and whatever rate they will give you for the 30 year.    30 year will give you more cashflow but 15 more years of payments.    So you determine what you are comfortable with.

Payments 15 vs 30 year:

2% on a 15 for 100k loan is $643, total interest for life of loan $15,831
2.5% on a 30 for 100k is $395, total interest for life of loan $42,243  (30 is usually around half a point higher)

So when you say "do the math" do you just base that off of what you kind of return you can get on the extra cash you will have on hand each month vs. how much interest you will pay over the course of the loan?

Flyingstache

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Re: Keep to Rent or Sell? Looking Forward
« Reply #9 on: October 19, 2020, 06:46:42 AM »
Here's the thing - the property is basically going to produce nothing for 15 years. And extracting the equity is expensive. So you need a long term plan. You can say, "fine, no income for 15 years, no big deal, we'll have it paid off at that point and let the cash roll in". If your FIRE plan involves 15+ years more work, that might make sense. It will also mean you have a LOT of money tied up in one asset (ie, you are doing something risky by not being more diversified).

If you refi to a 30 year, you'll have cash flow going immediately. You can use that to pay your expenses, invest in other things, etc. Or you can use that extra cash flow to just pay down the mortgage, if you want, and essentially treat the loan as a 15 year - you have a lot more flexibility. If you plan to FIRE sooner than 15 years from now, you'll be in better shape to do that, and you'll have less money tied up in one place.

IMO you always should go for the longest term possible/max leverage, as long as the rates are close, if you're treating this as an investment, because that gives you the ability to put more money into other properties/stocks/etc. There is nothing that compares with gov't backed owner occupied mortgages - it's literally free money. Take as much as they will give you, for as long as possible.

-W

While I would love to FIRE before 15yrs, the likelihood of doing so isn't high! I guess I should've thought about this before we refinanced last time. I had always been taught to try & pay off your mortgage as soon as possible so that was always my focus.  What I am learning from this is that most of you feel the best option is to get a 30yr & increase monthly cashflow so we can invest that money elsewhere?

I will get rates today for 30yr

waltworks

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Re: Keep to Rent or Sell? Looking Forward
« Reply #10 on: October 19, 2020, 07:29:22 AM »
Actually, at >50% savings rates (according to your numbers) with some money already invested, you are on track for FIRE in the ballpark of 10 years.

-W

Jon Bon

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Re: Keep to Rent or Sell? Looking Forward
« Reply #11 on: October 19, 2020, 08:17:22 AM »
I feel like this is a good one. You have legit rental optimization qustions, but you also have phase of life questions.

Rental Advice:

1. Your house is a SFH correct? Not sure exactly where you are but I am surrounded by duplexes and triplexes these generally make much better rentals.
2. The 1% rule is what you are looking for  however, it should be renamed the .8% rule these days. So a $150,000 house should rent for $1,500 a month. However with endless QE by the fed this rule has become uncoupled in my area and investors are paying much higher prices for worse rent. YMMV.
3. DP, you only need 20% down. Keep that in cash plus your EF you don't need to put 40% down on a house, that is not the best use of cash.
4. Handiness - you learn through experience like everything else. It's not that hard. Your best bet is to find a RE mentor/friend. Or just a guy who is into DIY. We are all over the place.
5. Were you cold called by a realtor? I might knock 10-20% off their selling/renting prices. Realtors are basically used car salesmen. They will say exactly what you want to hear to make a sale.

Life Advice:
I feel like you are in the same situation I was in about 8 years ago.
1. Your kids are going to get bigger, they are goign to have more stuff and make bigger messes. They will need their own space. You are talking about adding 2 more. You might want a bigger house in the future. .
2. Your income will likely continue to rise and unless you need to start driving German luxury cars your savings will at minimum stay at the nice healthy rate you have now.
3. Bathrooms - Sometimes It feels like you need as many bathrooms as you have kids plus 1 for adults. So just something to keep in mind as your tiny humans grow.

TLDR If you want a bigger/better house, you should just sell yours and buy said house. If you want to get into rentals buy a property that is intended to be a rental. I would not buy new house solely to put yours on the market as a rental.





PMJL34

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Re: Keep to Rent or Sell? Looking Forward
« Reply #12 on: October 19, 2020, 10:50:35 AM »
Hello Flyingstache,

Jon Bon is correct. This is a lifestyle question and you and your partner have to answer the question: Do you want to be landlords?

You seem to be killing it in terms of income and savings rate. Huge congrats! Whether you sell or rent, I doubt this rental will have significant impact on your FIRE goals. If anything, it will just diversify you a little bit.

Is it a smoking rental? probably not. However, it will most likely be a easy rental to manage that brings in some monthly cash should you want to dip your feet in rentals.

EDIT: forgot to answer your questions: I personally wouldn't refinance. Not worth that time, effort, or cost IMO. Your loan is so small. I'm surprised you locked in 2.75% let alone being offered 2%. I would only do it to cash out refi like Sammybiker said with the intent of purchasing more rentals. It also sounds like you are a busy family (full time teachers + coaching + expanding family) with little desire to DIY, I would most likely sell unless you really wanted to own/value rentals.

Best of luck!
« Last Edit: October 19, 2020, 10:57:39 AM by lilbenny34 »

exige

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Re: Keep to Rent or Sell? Looking Forward
« Reply #13 on: October 19, 2020, 02:03:31 PM »
We are planning on something similar in the next year to 15 months. We are in our "starter" home and have just outgrown it we were down to about 8 years left on a 15 year and refinanced to a 30 year with .5% rate lower then the 15 year. our payment now with PITI is only 880$ and our exact model is renting around us for 2200 a month. We will be here at least a year to satisfy the refinance agreements but then we will most likely rent and move. Worst case we start making our old payment and pay it off. I should mention we always though about renting this and have always wanted to get into RE so its not just an accident.

PMJL34

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Re: Keep to Rent or Sell? Looking Forward
« Reply #14 on: October 19, 2020, 04:40:13 PM »
Sorry to get off topic.

Exige, was increasing your cashflow the sole reason to refinance into a 30 year mortgage when you only had 8 years left? That means that in another year when you move out, you would have only had 7 years or less left on the note to be free and clear. Now you will have 29 years more to go. Saving .5% doesn't sound like much considering the cost to refinance.

Perhaps you needed to refi to a 30 year because your debt to income was too high to qualify for the next mortgage? Or you have variable income and needed the flexibility moving forward?

Even if you paid your old mortgage amount starting at year 2 of the 30 year loan, you would end up extending the original loan a full year and 8 months (or thereabouts) plus the cost of refi.

As a side note, 7+ years ago, real estate was much cheaper and AFAIK Colorado has appreciated considerably since then. All that to say renting your home for $2200/month, even if PITI is 880, may not be wise. 

I know you mean well, but perhaps your situation was a little bit different from the OP?

Dicey

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Re: Keep to Rent or Sell? Looking Forward
« Reply #15 on: October 20, 2020, 04:54:15 AM »
We are planning on something similar in the next year to 15 months. We are in our "starter" home and have just outgrown it we were down to about 8 years left on a 15 year and refinanced to a 30 year with .5% rate lower then the 15 year. our payment now with PITI is only 880$ and our exact model is renting around us for 2200 a month. We will be here at least a year to satisfy the refinance agreements but then we will most likely rent and move. Worst case we start making our old payment and pay it off. I should mention we always though about renting this and have always wanted to get into RE so its not just an accident.
Congratulations! You are putting yourselves in an excellent position, whether you become landlords or not. Comments like the one between yours and mine merely illustrate the perils of looking at a mortgage solely as a debt albatross and not as the powerful tool for the creation of wealth that it actually is.

As for the head scratching "I know you mean well" comment, you gave the OP a solid, real world example that clearly answers their third question.

We own three rentals and are about to start the refinance process to save about 50 basis points on each. You bet we are going to reset to 30 years! We have a solid understanding of tax codes, leverage, etc. At the current mortgage rates,  it's the smart money play. We have no intention of paying any of them off early. From an investment standpoint, it just doesn't make sense.


srad

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Re: Keep to Rent or Sell? Looking Forward
« Reply #16 on: October 20, 2020, 09:47:31 AM »
FIRE is a number, there are several ways to get there.   save in a 401k, IRA, Roth, VTSAX, Stocks, bonds, start a business, buy rental properties.. 

While i absolutely agree, 30 year mortgage and take the money saved and invest will beat a 15 year mortgage in the long run.  My FIRE is in the next few years.  The quickest way for me to hit my number is to have a few of my properties paid off.  What would you rather have when you hang up your day job,  10 properties free and clear or 30 properties with mortgages?  Yes,  in 30 years our old ass self's will be 10x more richer if we go the 30 property route but who wants that work in retirement? plus we'll be old af so what would would we do with that income for anyway?  This is why when people like the OP start asking me about real estate I point out the fact that if they keep it on a 15 year mortgage, the tenant pays it off and then they have a nice check at the end of the month for perpetuity, with very little of their time spent.  Nothing wrong with going the 30 year route and investing the difference, but they have to invest the difference to come out ahead.

I currently don't hold any 15 year mortgages, i used to though.  One is paid off now, the other i did a cashout refi 3 years ago and bought more properties.  And i just refinanced all of those with new 30 year mortgages (except for the paid off one),  That added just under 1k in additional cash flow for me.  Rates are great right now :)

exige

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Re: Keep to Rent or Sell? Looking Forward
« Reply #17 on: October 20, 2020, 01:17:20 PM »
We are planning on something similar in the next year to 15 months. We are in our "starter" home and have just outgrown it we were down to about 8 years left on a 15 year and refinanced to a 30 year with .5% rate lower then the 15 year. our payment now with PITI is only 880$ and our exact model is renting around us for 2200 a month. We will be here at least a year to satisfy the refinance agreements but then we will most likely rent and move. Worst case we start making our old payment and pay it off. I should mention we always though about renting this and have always wanted to get into RE so its not just an accident.
Congratulations! You are putting yourselves in an excellent position, whether you become landlords or not. Comments like the one between yours and mine merely illustrate the perils of looking at a mortgage solely as a debt albatross and not as the powerful tool for the creation of wealth that it actually is.

As for the head scratching "I know you mean well" comment, you gave the OP a solid, real world example that clearly answers their third question.

We own three rentals and are about to start the refinance process to save about 50 basis points on each. You bet we are going to reset to 30 years! We have a solid understanding of tax codes, leverage, etc. At the current mortgage rates,  it's the smart money play. We have no intention of paying any of them off early. From an investment standpoint, it just doesn't make sense.

Thanks we are excited, I am not sure why the previous poster thinks it would be a bad idea? it had nothing to do with DTI we make 160k combined and this is our only debt. We max both Roth IRA accounts both 401k accounts both HSA accounts and started a taxable this year. The refi is raising the principal on our home by 4400$ however we are getting 1950 back at closing.

As far as why we did it one was cash flow we were paying 1700 before but also its a nice buffer in the event we have trouble placing a tenant etc. I could easily float the new payment and this one if we had to not even factoring in that we plan to keep the first 6-10 months of cash flow as emergency money for the rental. We figure worst case we rent it for a few years and hate it and can still sell and take the gains (if the market does not explode) tax free since we have lived here for 11 years.

Or it works great and it pays itself off and funds more retirement accounts or more rentals. And if all shit hits the fan we make the same payment we were making before and pay it off. But at 2.75% I don't see any point at all to pay it off. I can go work at a bicycle store and pay the mortgage if I have to.

Mustache ride

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Re: Keep to Rent or Sell? Looking Forward
« Reply #18 on: October 20, 2020, 05:03:12 PM »
We are planning on something similar in the next year to 15 months. We are in our "starter" home and have just outgrown it we were down to about 8 years left on a 15 year and refinanced to a 30 year with .5% rate lower then the 15 year. our payment now with PITI is only 880$ and our exact model is renting around us for 2200 a month. We will be here at least a year to satisfy the refinance agreements but then we will most likely rent and move. Worst case we start making our old payment and pay it off. I should mention we always though about renting this and have always wanted to get into RE so its not just an accident.
Congratulations! You are putting yourselves in an excellent position, whether you become landlords or not. Comments like the one between yours and mine merely illustrate the perils of looking at a mortgage solely as a debt albatross and not as the powerful tool for the creation of wealth that it actually is.

As for the head scratching "I know you mean well" comment, you gave the OP a solid, real world example that clearly answers their third question.

We own three rentals and are about to start the refinance process to save about 50 basis points on each. You bet we are going to reset to 30 years! We have a solid understanding of tax codes, leverage, etc. At the current mortgage rates,  it's the smart money play. We have no intention of paying any of them off early. From an investment standpoint, it just doesn't make sense.

Thanks we are excited, I am not sure why the previous poster thinks it would be a bad idea? it had nothing to do with DTI we make 160k combined and this is our only debt. We max both Roth IRA accounts both 401k accounts both HSA accounts and started a taxable this year. The refi is raising the principal on our home by 4400$ however we are getting 1950 back at closing.

As far as why we did it one was cash flow we were paying 1700 before but also its a nice buffer in the event we have trouble placing a tenant etc. I could easily float the new payment and this one if we had to not even factoring in that we plan to keep the first 6-10 months of cash flow as emergency money for the rental. We figure worst case we rent it for a few years and hate it and can still sell and take the gains (if the market does not explode) tax free since we have lived here for 11 years.

Or it works great and it pays itself off and funds more retirement accounts or more rentals. And if all shit hits the fan we make the same payment we were making before and pay it off. But at 2.75% I don't see any point at all to pay it off. I can go work at a bicycle store and pay the mortgage if I have to.

I believe the point trying to be made was just because the property has great cash flow doesn't mean it's a great rental. If the mortgage payment is $800 and you can rent it for $2200 that's great cash flow, but if the house is now worth $400K you're probably better off selling it.

Dicey

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Re: Keep to Rent or Sell? Looking Forward
« Reply #19 on: October 20, 2020, 05:55:02 PM »
We are planning on something similar in the next year to 15 months. We are in our "starter" home and have just outgrown it we were down to about 8 years left on a 15 year and refinanced to a 30 year with .5% rate lower then the 15 year. our payment now with PITI is only 880$ and our exact model is renting around us for 2200 a month. We will be here at least a year to satisfy the refinance agreements but then we will most likely rent and move. Worst case we start making our old payment and pay it off. I should mention we always though about renting this and have always wanted to get into RE so its not just an accident.
Congratulations! You are putting yourselves in an excellent position, whether you become landlords or not. Comments like the one between yours and mine merely illustrate the perils of looking at a mortgage solely as a debt albatross and not as the powerful tool for the creation of wealth that it actually is.

As for the head scratching "I know you mean well" comment, you gave the OP a solid, real world example that clearly answers their third question.

We own three rentals and are about to start the refinance process to save about 50 basis points on each. You bet we are going to reset to 30 years! We have a solid understanding of tax codes, leverage, etc. At the current mortgage rates,  it's the smart money play. We have no intention of paying any of them off early. From an investment standpoint, it just doesn't make sense.

Thanks we are excited, I am not sure why the previous poster thinks it would be a bad idea? it had nothing to do with DTI we make 160k combined and this is our only debt. We max both Roth IRA accounts both 401k accounts both HSA accounts and started a taxable this year. The refi is raising the principal on our home by 4400$ however we are getting 1950 back at closing.

As far as why we did it one was cash flow we were paying 1700 before but also its a nice buffer in the event we have trouble placing a tenant etc. I could easily float the new payment and this one if we had to not even factoring in that we plan to keep the first 6-10 months of cash flow as emergency money for the rental. We figure worst case we rent it for a few years and hate it and can still sell and take the gains (if the market does not explode) tax free since we have lived here for 11 years.

Or it works great and it pays itself off and funds more retirement accounts or more rentals. And if all shit hits the fan we make the same payment we were making before and pay it off. But at 2.75% I don't see any point at all to pay it off. I can go work at a bicycle store and pay the mortgage if I have to.

I believe the point trying to be made was just because the property has great cash flow doesn't mean it's a great rental. If the mortgage payment is $800 and you can rent it for $2200 that's great cash flow, but if the house is now worth $400K you're probably better off selling it.
Sorry, I don't follow the logic here. Can you explain further?

Mustache ride

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Re: Keep to Rent or Sell? Looking Forward
« Reply #20 on: October 20, 2020, 06:19:07 PM »
In this hypothetical and simplistic example, the cap rate would be 1400*12/400K= 4.2%. The cash flow is great, but I'd rather free up my money/equity and get a better return elsewhere. This also isn't taking into account giving up the capital gains exemption when selling a primary residence.

Dicey

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Re: Keep to Rent or Sell? Looking Forward
« Reply #21 on: October 20, 2020, 09:45:03 PM »
In this hypothetical and simplistic example, the cap rate would be 1400*12/400K= 4.2%. The cash flow is great, but I'd rather free up my money/equity and get a better return elsewhere. This also isn't taking into account giving up the capital gains exemption when selling a primary residence.
Well, the exemption doesn't go away immediately, so the OP could still rent it out for a couple of years and then decide if being a LL works for them.

exige

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Re: Keep to Rent or Sell? Looking Forward
« Reply #22 on: October 21, 2020, 08:38:55 AM »
In this hypothetical and simplistic example, the cap rate would be 1400*12/400K= 4.2%. The cash flow is great, but I'd rather free up my money/equity and get a better return elsewhere. This also isn't taking into account giving up the capital gains exemption when selling a primary residence.
Well, the exemption doesn't go away immediately, so the OP could still rent it out for a couple of years and then decide if being a LL works for them.


This was our thinking we have lived in it for 11 years and know every in and out of the house. Most big ticket items were done within the last 4 years etc. It is in a great neighborhood close to schools and parks, we also already max both 401k's both Roth IRA and both HSA accounts. We also started a taxable account this year as well. If we sold it after fee's we would walk away with a good chunk we owe 140 and they are selling for 400k. But we have always wanted a rental and honestly with the way the market is now I cant imagine trying to take the money and buy a different one to rent. Another perk is this rental would be within about 5 miles of our new home making it even easier to manage.

PMJL34

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Re: Keep to Rent or Sell? Looking Forward
« Reply #23 on: October 22, 2020, 11:06:42 AM »
Thanks Exige for the reply. I just want to start off by saying that you are killing it as well with your high income, maxing tax sheltered space + taxable and of course the valuable asset (the home). Sounds like you are on your way to FIRE. It's hard to go wrong with any decision you make.

With that said, here is how my mind thinks:

First I want to clarify that I prefer 30 year loans over 15 when starting out  , not when I am halfway through a mortgage that is very affordable ($1700 @ 160k income), especially when rent will being in $2200. I am also a proponent of buy and hold and I like to make decisions with the long game in mind.
 
Let's play this out. Now, I have no clue what your taxes and insurance costs are, but i'm just gonna throw a number out there that it is $200 of the $880 PITI you mentioned. Also, I am making gross oversimplifications (no vacancy, rent increase, repairs, etc. but all of those factors would apply to both scenarios so they cancel each other out for this purpose).

The payoff amount for the 15 year loan with 7 years left is 142K plus tax+insurance for the remainder of the 22 years (58K) is roughly 195k
The payoff amount for the 30 year loan with 29 years left (tax+insurance already included) is over 306K+

Total rent collected over 29 years for the 15 year note will be 570K
Total rent collected over 29 years for the 30 year note will be 459K

Total profit for 15 year loan over the 29 years will be 375k profit + value of house
total profit for 30 year loan over 29 years will be 153k profit + value of house- the cost and time of refi

Obviously after the 29 years, both houses are paid off and they will be equal moving forward. But I see a 220K profit difference between keeping the 15 year loan and refinancing to the 30 year. Not the mention, being mortgage free after 7 years. Now life is much more complicated and there are a million variables, but if all variables stay the same, this is the cost. With the 30 year, you gain a little bit of flexibility, but I don't see how or why you would need the flexibility with a high income and positive cash flow.

Now, if you plan to put every penny of the 30 & 15 year mortgage difference (1700 - 880 = 820) into the market religiously, then I can see that being better, but I don't sense that from your replies.

Finally, the reason I wouldn't rent out a 400k+ house for $2200 is because alternatively, I would sale and take the tax free proceeds and put it in taxable. Sounds like you would clear 250K. 250K in a taxable over 29 years at a reasonable 5% is over $1,000,000. That is without lifting a finger.

Sorry for the long post and I hope the #s make sense. Like I said, you are doing great and you will be fine with any decision you choose to make. Best of luck!


 

PMJL34

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Re: Keep to Rent or Sell? Looking Forward
« Reply #24 on: October 22, 2020, 11:16:56 AM »
We are planning on something similar in the next year to 15 months. We are in our "starter" home and have just outgrown it we were down to about 8 years left on a 15 year and refinanced to a 30 year with .5% rate lower then the 15 year. our payment now with PITI is only 880$ and our exact model is renting around us for 2200 a month. We will be here at least a year to satisfy the refinance agreements but then we will most likely rent and move. Worst case we start making our old payment and pay it off. I should mention we always though about renting this and have always wanted to get into RE so its not just an accident.
Congratulations! You are putting yourselves in an excellent position, whether you become landlords or not. Comments like the one between yours and mine merely illustrate the perils of looking at a mortgage solely as a debt albatross and not as the powerful tool for the creation of wealth that it actually is.

As for the head scratching "I know you mean well" comment, you gave the OP a solid, real world example that clearly answers their third question.

We own three rentals and are about to start the refinance process to save about 50 basis points on each. You bet we are going to reset to 30 years! We have a solid understanding of tax codes, leverage, etc. At the current mortgage rates,  it's the smart money play. We have no intention of paying any of them off early. From an investment standpoint, it just doesn't make sense.



Hi Dicey,

Hello neighbor! You are clearly in a different life stage of FIRE if your stated age is accurate (62). I am mid-30s with plans to be debt free and FIRE by 40. My FIRE plans do not include holding mortgages past FIRE let alone taking out 30 year mortgages at age 62. I think we just employ different real estate strategies. I will continue to respect your opinions even if I don't always agree with them (I mostly do :) ).

exige

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Re: Keep to Rent or Sell? Looking Forward
« Reply #25 on: October 22, 2020, 03:05:47 PM »
Thanks Exige for the reply. I just want to start off by saying that you are killing it as well with your high income, maxing tax sheltered space + taxable and of course the valuable asset (the home). Sounds like you are on your way to FIRE. It's hard to go wrong with any decision you make.

With that said, here is how my mind thinks:

First I want to clarify that I prefer 30 year loans over 15 when starting out  , not when I am halfway through a mortgage that is very affordable ($1700 @ 160k income), especially when rent will being in $2200. I am also a proponent of buy and hold and I like to make decisions with the long game in mind.
 
Let's play this out. Now, I have no clue what your taxes and insurance costs are, but i'm just gonna throw a number out there that it is $200 of the $880 PITI you mentioned. Also, I am making gross oversimplifications (no vacancy, rent increase, repairs, etc. but all of those factors would apply to both scenarios so they cancel each other out for this purpose).

The payoff amount for the 15 year loan with 7 years left is 142K plus tax+insurance for the remainder of the 22 years (58K) is roughly 195k
The payoff amount for the 30 year loan with 29 years left (tax+insurance already included) is over 306K+

Total rent collected over 29 years for the 15 year note will be 570K
Total rent collected over 29 years for the 30 year note will be 459K

Total profit for 15 year loan over the 29 years will be 375k profit + value of house
total profit for 30 year loan over 29 years will be 153k profit + value of house- the cost and time of refi

Obviously after the 29 years, both houses are paid off and they will be equal moving forward. But I see a 220K profit difference between keeping the 15 year loan and refinancing to the 30 year. Not the mention, being mortgage free after 7 years. Now life is much more complicated and there are a million variables, but if all variables stay the same, this is the cost. With the 30 year, you gain a little bit of flexibility, but I don't see how or why you would need the flexibility with a high income and positive cash flow.

Now, if you plan to put every penny of the 30 & 15 year mortgage difference (1700 - 880 = 820) into the market religiously, then I can see that being better, but I don't sense that from your replies.

Finally, the reason I wouldn't rent out a 400k+ house for $2200 is because alternatively, I would sale and take the tax free proceeds and put it in taxable. Sounds like you would clear 250K. 250K in a taxable over 29 years at a reasonable 5% is over $1,000,000. That is without lifting a finger.

Sorry for the long post and I hope the #s make sense. Like I said, you are doing great and you will be fine with any decision you choose to make. Best of luck!

This makes total sense thanks for taking the time to lay it all out. We do plan to use the cash flow on either paying off the rental or paying off our new primary residence (after we have a sufficient E-Fund built for the rental) so it was more of a security to refinance incase we have our primary and do not have tenants. It is a hard decision to rent vs sell it and take the money but there is no way I would take the equity and put it in the market it would end up going to a down payment on the new house. Our initial plan was actually to do a cash out refi and get enough for a 20% down on our new house but since the market is so insane we dont know when we will even move or find something and I really did not want 100k sitting around for possibly a year or more making .6% haha

Dicey

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Re: Keep to Rent or Sell? Looking Forward
« Reply #26 on: October 23, 2020, 04:40:13 AM »
We are planning on something similar in the next year to 15 months. We are in our "starter" home and have just outgrown it we were down to about 8 years left on a 15 year and refinanced to a 30 year with .5% rate lower then the 15 year. our payment now with PITI is only 880$ and our exact model is renting around us for 2200 a month. We will be here at least a year to satisfy the refinance agreements but then we will most likely rent and move. Worst case we start making our old payment and pay it off. I should mention we always though about renting this and have always wanted to get into RE so its not just an accident.
Congratulations! You are putting yourselves in an excellent position, whether you become landlords or not. Comments like the one between yours and mine merely illustrate the perils of looking at a mortgage solely as a debt albatross and not as the powerful tool for the creation of wealth that it actually is.

As for the head scratching "I know you mean well" comment, you gave the OP a solid, real world example that clearly answers their third question.

We own three rentals and are about to start the refinance process to save about 50 basis points on each. You bet we are going to reset to 30 years! We have a solid understanding of tax codes, leverage, etc. At the current mortgage rates,  it's the smart money play. We have no intention of paying any of them off early. From an investment standpoint, it just doesn't make sense.



Hi Dicey,

Hello neighbor! You are clearly in a different life stage of FIRE if your stated age is accurate (62). I am mid-30s with plans to be debt free and FIRE by 40. My FIRE plans do not include holding mortgages past FIRE let alone taking out 30 year mortgages at age 62. I think we just employ different real estate strategies. I will continue to respect your opinions even if I don't always agree with them (I mostly do :) ).
Hahaha! I just spoke to my CPA yesterday. He's about five years older than I am. He bought a place in a similar, but much more expensive retirement community about 18 months ago and moved in, so it's his primary home. He just did a re-fi and got slightly under 2.5 percent, lowering his payment by $350/month. I asked him if that was a fifteen or a thirty year rate. His response? "Thirty, of course! What do I care if I never pay it off?" Mind you, he has always been smart with money (see: CPA) and is worth millions. He likes his work and owns his own firm. His hours are flexible, so he plans to work as much as he wants for the rest of his life. He golfs a lot and has a place in Hawaii. He's never married, and has no dependants. His estate will go to his favorite charities. He knows the math intricately, so yeah, I'm paying attention to the smart guy.

I used to think paying off the mortgage was important. I was probably about your age when someone very gently pounded the math into my stubborn head.

BTW, for different reasons, we paid cash for our primary home, which is worth more than double the value of all three rentals combined. We're no slumlords: the rentals are in a fancier community than where we actually live, it's just a less expensive area. Also, I'm happy to learn that we're looking at shaving 75 basis points off all three mortgages, which makes it worth the headache. Having mortgages on rental properties, especially at these insanely low interest rates, makes total financial sense, particularly in light of the original question.

I love that you're agreeing to disagree. This is a forum about achieving FIRE as efficiently as possible and my comments are in keeping with that aim. It's fine if you choose a different path to FIRE, but please consider where this conversation is taking place.

And why would my stated age not be accurate? I'm proud of what I have achieved as a single person living in a HCOLA on an income that never exceeded $100k pre-FIRE. I say "I" because I was FI before I got married. Together, my also not high wage earning husband and I are richer than we ever imagined. This shit really works!

Flyingstache

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Re: Keep to Rent or Sell? Looking Forward
« Reply #27 on: October 23, 2020, 11:57:47 AM »
Really appreciate all the insights & the different ideas for how to proceed.

It seems like there is a group that says refi to 30yrs to increase cashflow

A group that says stay put at the 15yrs at 2.75% because the refi isn't worth the hassle & closing costs

& a group that feels like it is worth it to refinance to 2% for 15yrs if possible even with the $2,500-$3k closing costs.

Lots of great opinions & thoughts! I am sufficiently confused on what to do haha just kidding it is all great stuff to think about. I lean more towards the keeping it as is or refinancing to a lower rate but staying at 15yrs but will do my due diligence & continue to research what is the best option for us.

I think we are pretty sure that after moving in the next few years we will likely keep the property to rent & try out being landlords. The nice thing in our area is at that rent price point, it should limit the pool to quality renters (though I know there is no sure thing). We figure if we don't like it we can sell & our community is one of the fastest growing in not just the state but the country so prices have been increasing.

Dicey

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Re: Keep to Rent or Sell? Looking Forward
« Reply #28 on: October 23, 2020, 09:30:21 PM »
Years ago my brother and his wife were going to re-fi their first house into a 15. I asked them if they were going to stay in it. He replied that they would probably upgrade in a year or two, then keep it as a rental.  I advised him not to do it and he did it anyway. Couple years later they found a hot deal on a foreclosure. They had to scramble to re-fi their house to a 30. Seems his friends had tipped him off that it was the smart move to make *before* they bought the new house. Luckily, this was in during the Great Recession, when it took forever to close a deal, so they got the re-fi done in time, but barely. Hmmm, he believed it when he heard it from his friends...I coulda saved him a bunch of closing costs...

OP, I hope you know that the cheapest money you can get is at time of acquisition for your own residence. The second cheapest money is for an owner occupied re-fi with no cash out. Also the re-fi penalty that was supposed to go in effect in October(?) was pushed back, but only for a couple of months. Now might well be your perfect opportunity.

Remember that if you choose to keep it and you have no rental income history, your lender will count that mortgage against you for qualifying purposes on your next property. Another reason to crank that payment down as low as possible.
« Last Edit: October 27, 2020, 12:07:38 AM by Dicey »

exige

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Re: Keep to Rent or Sell? Looking Forward
« Reply #29 on: October 26, 2020, 01:36:57 PM »
Years ago my brother and his wife were going to re-fi their first house into a 15. I asked them if they were going to stay in it. He replied that they would probably upgrade in a year or two, then keep it as a rental.  I advised him not to do it and he did it anyway. Couple years later they found a hot deal on a foreclosure. They had to scramble to re-fi their house to a 30. Seems his friends had tipped him off that it was the smart move to make *before* they bought the new house. Luckily, this was in during the Great Recession, when it took forever to close a deal, so they good the re-fi done in time, but barely. Hmmm, he believed it when he heard it from his friends...I coulda saved him a bunch of closing costs...

OP, I hope you know that the cheapest money you can get is at time of acquisition for your own residence. The second cheapest money is for an owner occupied re-fi with no cash out. Also the re-fi penalty that was supposed to go in effect in October(?) was pushed back, but only for a couple of months. Now might well be your perfect opportunity.

Remember that if you choose to keep it and you have no rental income history, your lender will count that mortgage against you for qualifying purposes on your next property. Another reason to crank that payment down as low as possible.

You bring up great points I had not even thought about this your lender will count that mortgage against you for qualifying purposes on your next property.. We did push ours pretty quick to avoid the .5 basis points increase that is coming... and interesting enough we were pre approved for the amount on a new house we want with them using our 1700$ payment vs the new one.