Author Topic: Newbie Case Study- Sell or Rent?  (Read 1568 times)

poppi4

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Newbie Case Study- Sell or Rent?
« on: May 21, 2014, 02:36:03 PM »
Hi Folks,

I have been a regular information absorber (sounds better than lurker) on this site for a while now and have come to respect a lot of the opinions put forth.   It's been great to find a source for financial opinions where people are reasonable/intelligent and subscribe to a similar philosophy on money.   Anyways,  were trying to make a decision on a rental property so I thought Id throw it out here and see if any of you could offer a perspective that I havent thought of.   

The backstory:  We bought our first house at the end of 2007 for $290K.    My husband (an Architect) & I poured a lot of sweat and about $20K into completely renovating it with designer-esque details (slab granite counters, swatch cable railing on the stairs, strand woven bamboo, etc).   

After a few years, the house was finished, the husband was bored, and we were both tired of living on top of our neighbors.  We stumbled into a steal on a short-sale fixer with 2.5acres, adjacent to state land, an easier commute to work, & a ridiculously low 3.125% interest rate.  Score!   At that time, the real estate prices were also so low (1/3 less!) that we chose to rent out our first house to a tenant who wanted a 2 year lease.   So we were all set... 

It's now 1.75 years later,  we finally evicted our tenant (story for another post) and real estate prices have rebounded enough that we're considering selling:
   
Market Value:  $310K
Original Purchase price: $290K
Original Mortgage Amount: $230K
Interest Rate: 4.25% (refi Jan 2011)
Mortgage Term: 30years
Term remaining: 27yrs
Amount remaining on mortgage:  $216K
Gross Rents: $18,700 ($1700 x 11 months we have a strong rental market and one of the nicer options in this price range so I dont expect it to be empty for longer than a month)
Principal and Interest (the P&I of your PITI - should match with the above info): $13824 (LYs #)
Taxes and Insurance (the T&I of your PITI):  $3379 (LYs #)
HOA costs: $0
Deferred maintenance notes:  Will need a new roof in a few years, otherwise house is in VERY good condition.  The roof wed contract out but all other maintenance we do ourselves.
Finances outside of this rental:
   $410K in various investments & retirement accounts
   $140K annual income
   No debt except mortgages- $333K on main house (market value: $550K), $216K on rental

Additional considerations:
1.   If we sell within the next year, we would fall within the 5/2 rule so no taxes
2.     Half of equity would go towards finishing the upstairs of the detached garage on our main property.   Since were planning on having a rugrat in the next few years & our family lives on the other side of the country, this idea has some real appeal for quality of life improvements.    Our (retired) parents have already said they would be willing to come for extended stays if they had their own space.  Otherwise, we could rent it and get some additional income.   Other 1/2 would go into index funds of some sort.
3.     For the first year of renting, we made $4670 on the rental- (includes super low expenses, 12months rent, tax deductions & principal payments).   But on average, Im calculating that wed only make about $200/year on it (expenses at 2% of house value, rents for 11 months, etc).   Neither of those account for changes in the market value of the house.   So basically it would be slightly cash flow positive & the real gain would be if the house appreciated in value significantly. 
4.     The finishes were really chosen for someone who cares about the condition of the house & values craftsmanship- they definitely were not chosen for a rental where there's more abuse.  We know its a sunk cost (both in money & effort), but neither of us can seem to emotionally separate from it- which is why I mention it.  Were thinking that wed see a better return selling now when everything is nice & new-ish than after its been abused by tenants?  (Also would save us the heartache of seeing it banged up?)   
5.      Before any of you ask it:   Would we buy this house now to use a rental?  No.

mooreprop

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Re: Newbie Case Study- Sell or Rent?
« Reply #1 on: May 21, 2014, 04:53:04 PM »
I think you just answered your own question.  If you would not buy it as a rental, then sell and buy something that does make sense for a rental if you want to be landlords.  I feel your pain.  I held onto rental properties that were break even rentals from 2000 to 2007 because I thought that eventually we would make money on them.  Finally saw the light and sold in 2007 (great timing, I know)  and purchased property that makes money.  Best decision I ever made.

poppi4

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Re: Newbie Case Study- Sell or Rent?
« Reply #2 on: May 22, 2014, 09:06:19 AM »
Ha.  Yeah,  I think I answered it just by writing that out :).   The funny thing is that Iran multiple scenarios via spreadsheet & keeping it seemed like it would be reasonable also (assuming appreciation on the house).

Thanks for the response.

frugaliknowit

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Re: Newbie Case Study- Sell or Rent?
« Reply #3 on: May 22, 2014, 10:32:08 AM »
Dump it.  Based on your scenario, you are making up the equity on the purchase.  Be happy!