Author Topic: Keeping Current Home as Rental  (Read 525 times)

badassprof

  • Stubble
  • **
  • Posts: 150
Keeping Current Home as Rental
« on: September 11, 2019, 12:26:12 PM »
My partner and I have a home with two units in a desirable school district  and very close to a large university. While we love the area, we are wanting a bit more outdoor space and are considering buying another home north of where we live, but still commutable to our jobs. We  are trying to figure out if we should keep our current home as a rental.

We owe about 650,000 on our current mortgage and our payments are 3400. Taxes are around 14,000 per year.

We probably could sell the home for, conservatively, around 1, 400, 000.  We could rent both units out for about 6700 a month total (we have been renting one of the units and have a good sense of price and demand in our area).

Right now the numbers probably favor selling, but longterm we wonder if we should hold on to the property as the rentals seem to continue to climb in our area, which not only has good schools, but is a walkable neighborhood close to great transportation options.  We do have a downpayment already for the second home, and don't need the equity out of the first to buy. And our stock portfolios are in good shape.

Any thoughts appreciated.We are about 10 years from retirement.

FINate

  • Handlebar Stache
  • *****
  • Posts: 1347
Re: Keeping Current Home as Rental
« Reply #1 on: September 11, 2019, 12:32:33 PM »
Sell. Don't become an accidental landlord.

Pretend for a moment that you don't already own the duplex. Based on the numbers you provided and your time horizon, would you purchase this as an investment today? Do you really want to risk your retirement on the hope that RE and/or rent continues to increase?

Sonos

  • 5 O'Clock Shadow
  • *
  • Posts: 53
Re: Keeping Current Home as Rental
« Reply #2 on: September 11, 2019, 01:38:57 PM »
Posting to follow.

Jon Bon

  • Pencil Stache
  • ****
  • Posts: 862
  • Location: Midwest
Re: Keeping Current Home as Rental
« Reply #3 on: September 11, 2019, 01:48:54 PM »
Well you can walk away with approximately 700k cash.*

OR

Make a tiny amount of rental income

(6700-3400-1000(tax)-1000(management/maintenance)*12 months/700k

For a return of ~2% a year.  You would be better off buying T-bills. I kind of feel like many folks on here you already won the speculation lottery, congratulations!  Cash in your investment and be happy!

*perhaps a little less due to tax/transaction costs




Papa bear

  • Handlebar Stache
  • *****
  • Posts: 1175
  • Location: Ohio
Re: Keeping Current Home as Rental
« Reply #4 on: September 11, 2019, 06:38:08 PM »
Numbers tell you to sell.  The rents do not justify the market value.  Do you expect rents to double? Because thatís where you need to be to have this make sense.

Even in my LCOL area, we have houses with rents in the 6-7k/ month range (big houses near a college). But those sell for 700-800k. 

Unless youíre already so rich you can afford to keep an underperforming business asset because of sentimental reasons, get this place ready to list!




Sent from my iPhone using Tapatalk

SeattleCPA

  • Handlebar Stache
  • *****
  • Posts: 1424
  • Age: 59
  • Location: Redmond, WA
    • Evergreen Small Business
Re: Keeping Current Home as Rental
« Reply #5 on: September 11, 2019, 07:10:28 PM »
I'd make sure you understand the Section 121 tax benefit you lose if you're turning a principal residence into a rental.

clifp

  • Pencil Stache
  • ****
  • Posts: 540
Re: Keeping Current Home as Rental
« Reply #6 on: September 21, 2019, 06:04:45 PM »
I'd make sure you understand the Section 121 tax benefit you lose if you're turning a principal residence into a rental.

I think this is the critical factor, the $500k capital gain exclusion is worth at least $100K in forgiven taxes. That's a  big deal.  The rules are complicated if you turn into a rental, there is good chance you'll screw up your $500K capital gains exclusion.

I don't agree that rent being so low in relationships to the price is a good reason to sell by themselves.
It sounds like you don't have an immediate need for the money

If you sell you need to invest the ~$600k  in something. None of the options out there seem particularly compelling.
You can buy 10-year T-bond collect your 1.5%, knowing there is zero chance the interest will increase, or you'll get more money at the end of 10 years.
You could buy Vanguard total bond market BND get an additional 1% in interest, have very modest prospects for capital gains, and but risk losing money if interest rates increase significantly.
You could Amazon stock (0% yield), Apple (1.4%) or the SP 500 (1.8%) and probably see gradually increase in dividend payments.  But what you are really hoping for is at some point you can sell the stock to some other fool at a higher price.  But after 10 years of a bull market you also face the prospect that we've run out of fools and Central Bankers money and the stocks could go down. Possibly a lot.

So the real question is what is going to be worth more in 10 years when you to want retire, the house or a bundle of stocks?  I know my crystal ball is too fuzzy to give you a definitive answer.  But there are some benefits for diversification outside of the stock market.


FINate

  • Handlebar Stache
  • *****
  • Posts: 1347
Re: Keeping Current Home as Rental
« Reply #7 on: September 21, 2019, 06:14:11 PM »
So the real question is what is going to be worth more in 10 years when you to want retire, the house or a bundle of stocks?  I know my crystal ball is too fuzzy to give you a definitive answer.  But there are some benefits for diversification outside of the stock market.

Indeed, diversification would be a good reason to invest in RE. But OP didn't mention this as a motivating factor. In any case, the house you happen to already live in isn't necessarily an good investment property, and the inertia of the status quo is biases the decision making process. Often people are better of selling their primary residence, taking the cap gains exclusion, and then making a separate unrelated investment in whatever makes sense for their individual situation. Besides, there are other ways to diversify into RE, such as certain REIT funds.

clifp

  • Pencil Stache
  • ****
  • Posts: 540
Re: Keeping Current Home as Rental
« Reply #8 on: September 21, 2019, 06:56:45 PM »
So the real question is what is going to be worth more in 10 years when you to want retire, the house or a bundle of stocks?  I know my crystal ball is too fuzzy to give you a definitive answer.  But there are some benefits for diversification outside of the stock market.

Indeed, diversification would be a good reason to invest in RE. But OP didn't mention this as a motivating factor. In any case, the house you happen to already live in isn't necessarily an good investment property, and the inertia of the status quo is biases the decision making process. Often people are better of selling their primary residence, taking the cap gains exclusion, and then making a separate unrelated investment in whatever makes sense for their individual situation. Besides, there are other ways to diversify into RE, such as certain REIT funds.

I basically agree, as I said I think the $100k+ in tax saving is big saving and I'd be loath to walk away from that with a very compelling reason.  I personally, only invest in real estate that's near or above the 1% rule.  But plenty of people have a made a ton of money buying real estate on the coasts that has awful rent to price ratios.   You avoid transaction cost but keeping the house, but generally speaking I think you can make more money in low-mid price housing.