Opinions wanted: keep rental vs. sell

[MrGreen]

When we moved out of the first house we ever bought, we kept it as a rental because the move was out of state and we weren't sure if it was going to stick. We're past that now. It's been a rental for almost 7 years so we fully understand what being in the landlord business entails. It's been managed by a company all this time and we've had a good experience with them.

The ROI on the house has never been fantastic. Our current tenant's lease is up this summer. They've been paying $1,900/month on an 18-month lease, which is waaaay under market with the inflation we've experienced these last two years. Market rate on our place is about $2,300 now. Maybe $2,400 because there is practically nothing available in our zip code.

If we were listing the house right now I'd say the sale price would be 350-360k. I know the numbers for the area well so that's a solid expectation with recent sales to comp. If interest rates edged down this year and demand picked up this summer, who knows, maybe it would push up to 380k. Again, the key consideration is that there is basically nothing for sale in our zip code.

My primary reason for selling would be to access our equity. We had refinanced to a 15 year mortgage before we moved and there's only a few years left on it. We have 275-300k of equity, depending on the exact particulars of a sale, that I wouldn't mind making liquid. We currently have ~400k in brokerage accounts that we can pull from and we're halfway through the first 5 years of our Roth conversion pipeline. Capital gains, including depreciation recapture, on a sale would be 80-100k. We have set ourselves up so that this would be the bulk of our income in 2024 if we sell.

Before upkeep and vacancies, the house will net 17k at $2,150/month. Our current tenant has been there almost 4 years and my guess is they would stay because everything else is more expensive. Plus they have two young kids and the middle and elementary school are right behind our house. The management company has done a good job of minimizing vacancies and I understand enough now to know that keeping a tenant in place a bit under market rate more than pays for itself via no vacancy or turnover costs. When this tenant leaves we likely need to replace most of the carpets and the flooring on the entire main level. It's a small townhouse (1,200 sq. ft. above grade) but it'll still be a few thousand dollars at minimum.

Comparing 17k net rental income to 280k from a sale is a 6.0% rate of return. Not particularly great. I feel like we are always lagging market rate so I don't think that return will ever be 8%. The house is 26 years old. One nice thing about being a middle unit is minimal exterior maintenance. Roof was replaced in 2021. Gas furnace is original but we replaced a control board in 2016 and it's run without a hitch. It's an extremely high efficiency furnace (92-93%) and it's possible it could run for 40 years. Or it could die next year. A/C was replaced in 2008 from a lightning strike. At least we're not dealing with freon but the system is 16 years old now. Fridge 2011. Dishwasher 2018. Stove 2020. Washer 2022. Dryer 2023. When appliances die we replace them. I feel like we've faired better than average there.

If we keep the house, there will inevitably be some larger repairs in the near future and that will cut into the middling ROI. Then again, both home prices and rents in our Maryland suburb lagged the broader inflationary trend these last two years and the area seems to be catching up now. I'm seeing some larger townhomes pushing 3k in rent. I'd guess if we wanted to commit to new carpet and flooring, updating vanities, doorknobs, and that sort of thing to what is currently trendy we could very well pull in $2500-2600/month.

The one thing the area has going for it is its solid long-term prospects for stability. Hurricane, wildfire, and flood risk are all as minimal as it gets. As an interior unit townhome constructed with newer building standards its very inexpensive to heat and cool. Water resources are fairly abundant (Potomac river). The immediate area is going to experience moderate growth and the larger Baltimore/DC metro area will be stable as long as government work is plentiful.

The only real reason I'd like to have the equity in the house liquid is for the possibility of moving west in the future. We could see ourselves relocating to the front range eventually and home prices there are considerably higher than all the East Coast areas we've lived. We'd likely need the cash to make a purchase there feasible. Though we have no imminent plans to relocate and I don't have great confidence in whether we'd actually move or not. Both my wife's and my entire families are in Maryland. Denver makes visiting much tougher.

Part of me would like to sell while RE prices are up and there's no ACA subsidy cliff. Capital gains would put us over. Part of me sees the appeal in continuing to own an RE asset that will likely be a solid, middle of the road performer for decades to come, especially if there is no serious reason to need that liquidity right now. However, the lesson the Great Recession taught me was that liquidity should be planned for ahead of time.

We have one other rental here in Wilmington. The ROI on it (12-13%) is considerably better because our equity is lower. It's also a new (2022) house so expected upkeep is minimal in the near future. However, I have some concerns about the long-term viability of rentals in this area. Insurance companies are asking the state insurance commission for a 75% increase in insurance this year. It'll end up being much lower than that but this is the new reality of these coastal areas where hurricanes can strike every year.

Perhaps I'm underestimating the viability of a 1031 exchange in the future, were we to relocate out west. We have enough equity in our two rentals that we could do an exchange and then rent our new place on the front range for a couple years before moving in. The time constraints on a 1031 exchange might not be for us though. We'd probably be pretty picky about where we wanted to live. It'd likely end up being a reverse exchange where we buy a place first and then sell our current rentals. I don't know what the costs associated with doing something like that are but maybe it's not that much better than just paying some capital gains and having complete freedom of operation.

Any thoughts from other RE investors here? Maybe there are factors others think about regarding keeping a rental or not that I haven't really considered.

[GilesMM]

We were in a vaguely similar situation and decided we did not want to be landlords forever so we cashed out after ten years.  Good renters and good return.  Speaking of returns, how much do you have in the house (down payment, principal and capital investments)?  That would be your denominator for the return not the full equity in a sale situation.   Your $17k numerator needs an estimate of net proceeds after all costs (mortgage interest, insurance, taxes, repairs, maintenance, prop agent fees, etc).

[MrGreen]

We were in a vaguely similar situation and decided we did not want to be landlords forever so we cashed out after ten years.  Good renters and good return.  Speaking of returns, how much do you have in the house (down payment, principal and capital investments)?  That would be your denominator for the return not the full equity in a sale situation.   Your $17k numerator needs an estimate of net proceeds after all costs (mortgage interest, insurance, taxes, repairs, maintenance, prop agent fees, etc).

Exactly what we have in it is a difficult figure to know. We bought it with 100% financing back in 2006 and rolled the closing costs into the loan by offering 5k over asking. So no down payment essentially. But then we lived there for 12 years, refinancing for a better interest rate twice during that time. I have all the capital investments included in the 280k-300k figure we'd clear if we sold. That's the best way I can think to approach it at this point. If we sold and invested that money, what rate of return might we get on those investments elsewhere?

The 17k is net of all the expenses we deduct on Schedule E, save the ones that are unknown. If a tenant vacates, turnover costs are unknown and we'll pay a significant re-lease fee to the management company for the next tenant. As it stands we've only had one turnover in 7 years so a month of vacancy. Pretty dang good.

As for the question, "if I had 280k right now would I buy this house with this mortgage and rent it?" That's a tough question and I honestly don't know. I like the idea of having some diversification. Other than these two rentals were all VTSAX and VBTLX. Long term climate prognosis for the property is as good as it gets. Good school district. It's the cheapest thing you can buy in the zip code. All of those factors make for a stable long term investment. The return isn't stellar but we also know intimate details about the quality of the area that we wouldn't know about somewhere else if we were just chasing yield. The house is old but not that old. It has current construction, high efficiency appliances, PEX plumbing, etc. All things that will have as long a lifetime as things have these days. It's a tough call.

[waltworks]

IMO if you have no imminent relocation plans, there's no reason to cash out now. It's not an amazing return but it'll be a hassle to sell it and you'll pay all those capital gains and depreciation back with no immediate need for the money. Given that your eventual plan for the cash is to use it to buy another house, stick that money in VTSAX or something similar seems ill-advised. So you'd probably want to compare to money market funds or t-bills or something, and you're beating those returns handily right now.

It's hands-off and seems likely to make you steady if unspectacular returns. I'd sit on it until you're ready to actually move.

-W

[clarkfan1979]

My primary reason for selling would be to access our equity. We had refinanced to a 15 year mortgage before we moved and there's only a few years left on it. We have 275-300k of equity, depending on the exact particulars of a sale, that I wouldn't mind making liquid. We currently have ~400k in brokerage accounts that we can pull from and we're halfway through the first 5 years of our Roth conversion pipeline. Capital gains, including depreciation recapture, on a sale would be 80-100k. We have set ourselves up so that this would be the bulk of our income in 2024 if we sell.


Would you be willing to share more specifics on your mortgage payment? Interest rate? Remaining balance? Percentage going toward principle and interest.

If you are only a few years away from paying off a 15-year mortgage, I'm guessing your payments are mostly principle and very little interest. When your payment is mostly principle, I think it is important to factor that into the analysis.

Without knowing the specifics, I would keep the rental another 2-3 years until the mortgage is paid off. Once the mortgage is paid off, I would then sell.

[MrGreen]

@clarkfan1979 there's about 50k left on the mortgage. Payoff is February 2028. Interest rate is 2.875%. Yes, the bulk of the profit right now it going into the mortgage. P&I is $1,200 a month and we're under 2k per year now in interest payments, maybe under 1k in 2024. 90+% is going to principal.

If we wanted to juice the return I could self-manage. Honestly, we could have done what the management company has done in the last 7 years and they've taken almost 13% of gross rent. That would change moving forward though because their take of monthly rent is dropping from 9% to 6% (the extra beyond 9% has been the leading fee they take at least signing). When an appliance goes or a plumber needs to be called I could do that just as easily as they can. Half the time I need to decide on the resolution anyway. The biggest thing would be eviction. Maryland is a more tenant-friendly state so that would take some time. The management company would handle all that and cover some of the cost as part of their perks. I understand that with the right tenant screening this probably wouldn't be an issue. If the current tenant wants to stay, sans management company, with a decent rent increase that gets us closer to market rate but while recognizing the benefit of no turnover that would be the best outcome for cash flow.

[srad]

The biggest thing would be eviction. Maryland is a more tenant-friendly state so that would take some time. The management company would handle all that and cover some of the cost as part of their perks. I understand that with the right tenant screening this probably wouldn't be an issue.

You do know you can hire an attorney for this?  Why pay a management fee every month for something that rarely. Just pay an attorney to do it if it does happen.  Unless you are in an area where it happens a lot?  if that's the case, then I'd sell the property yesterday.

fyi - All of my properties are in Oregon a very pro tenant state. And I am very pro self manage. In 18 years of self managing, I"ve had to call an attorney once.  And that was for an inherited tenant, whom I would not of rented to if I were doing the screening...

[MrGreen]

The biggest thing would be eviction. Maryland is a more tenant-friendly state so that would take some time. The management company would handle all that and cover some of the cost as part of their perks. I understand that with the right tenant screening this probably wouldn't be an issue.

You do know you can hire an attorney for this?  Why pay a management fee every month for something that rarely. Just pay an attorney to do it if it does happen.  Unless you are in an area where it happens a lot?  if that's the case, then I'd sell the property yesterday.

fyi - All of my properties are in Oregon a very pro tenant state. And I am very pro self manage. In 18 years of self managing, I"ve had to call an attorney once.  And that was for an inherited tenant, whom I would not of rented to if I were doing the screening...

I was just looking at Maryland's landlord/tenant laws and it's actually not much different than North Carolina. If one follows the process properly and promptly, an eviction can be fairly quick.

I would definitely hire an attorney to handle it since multiple court appearances are possible. Self-managing would be an improvement over using a management company for maintenance purposes. There are a few small things that I'd do at each 6 month inspection that would reduce the risk of small maintenance issues. Self-management would save a minimum of $1,500 per year. Then there's the tenant placement fee of 80% of the first month's rent every time there's a new tenant. It would go a long way toward covering regular upkeep like replacing carpet and flooring over time.

[srad]

Yep - Lease up fees are a rip off.  I'm like you take 8-12% every month for doing very little for most months.  Then every year or three when its time to fill a vacancy, which consists of putting up an add online and open the door to a couple of people, you wack me for another months rent?  You can not tell me filling a vacancy costs the PM $1500.

The older I get, the less I personally want to work on my properties. I hire almost everything out now. Hiring a PM comes to mind every now and then, but every time I do the math, its a no. The amount I'm saving in fees each year is more than enough to pay for any major repair that's coming down the pipe. 

[clarkfan1979]

Yep - Lease up fees are a rip off.  I'm like you take 8-12% every month for doing very little for most months.  Then every year or three when its time to fill a vacancy, which consists of putting up an add online and open the door to a couple of people, you wack me for another months rent?  You can not tell me filling a vacancy costs the PM $1500.

The older I get, the less I personally want to work on my properties. I hire almost everything out now. Hiring a PM comes to mind every now and then, but every time I do the math, its a no. The amount I'm saving in fees each year is more than enough to pay for any major repair that's coming down the pipe.

I also self-manage, but hire out most repairs. I think it's a common misconception when you tell people that you self-manage they assume that you also do all the repairs. Management and repairs are two separate things.

I got a call yesterday from my tenant in Florida that the A/C went out. The call took about 90 seconds. I then texted my A/C guy, which took about 30 seconds. When my A/C guy is done with the repair he emails me a bill and I mail him a check. The repair cost me about 3 minutes of my time. It's not worth it to me to pay an 8% management fee to hire this out.

The A/C guy installed my unit in 2014. I have known him since 2012 and he lives about 1.5 miles away from the rental property. He is way better and cheaper than any A/C guy from a PM company, in my opinion.

 

[EchoStache]

Pretend you are looking back with hindsight, and do not currently own that house.  Would you currently make the decision to go purchase this house out of state for the purpose of being landlords?

[MrGreen]

@EchoStache Let's say we sold that house in 2017 when we moved to North Carolina. For whatever reason we now have 280k that we want to put into real estate for diversification. Normally, I'd never dump all that into one rental but with interest rates where they are it doesn't make sense to hold it back, especially since rates for an investment property would be even higher.

We already have a rental here in the Wilmington area. I don't think I would want another one here because of the hurricane risk. That would give us three houses including our residence all within the same area of devastation if a bad one hit. That would be very uncomfortable financially. It would be easy to look at the area where our townhouse is because we know it well and we pass through there every time we go to visit our family in Maryland. We still have some land in the same town so there are reasons to visit periodically. Being based near family also means it's easier to visit/work on the house when it needs something like floors or whatever.

Alternatively, we could pursue a pure yield rental but from what I've read, that pretty much rules out anywhere on the East or West Coast. You're pretty much looking exclusively at the Midwest or the rust belt. I don't think I could bring myself to do that. I'd want to know more about the area, want to be able to go there, etc. Being a complete absentee landlord just isn't my thing.

Realistically, if I had the cash I'd probably just leave it in VTSAX because the hassle of finding a rental that I felt comfortable with would be too much inertia to overcome. But in the back of my mind I'd still wish we had a little more diversification. I've done REITs and RealtyShares/RealtyMogul type funds in the past and I would not consider them again because of their potential liquidity problems.

[MrGreen]

Here's the track record of our townhouse. With the 15 year mortgage it's just now starting to cash flow. It jumps almost three fold when the mortgage is paid off in four years, with some solid rent assumptions and no more management company. The ROI based on what we could sell and pocket (before taxes) hovers right around 6.5% before any major repairs/upkeep or higher-than-inflation rent adjustments.

[GilesMM]

Here's the track record of our townhouse. With the 15 year mortgage it's just now starting to cash flow. It jumps almost three fold when the mortgage is paid off in four years, with some solid rent assumptions and no more management company. The ROI based on what we could sell and pocket (before taxes) hovers right around 6.5% before any major repairs/upkeep or higher-than-inflation rent adjustments.

6.5% is the annualized ROI over all the years you have owned it accounting for everything you invested into it vs all it returned including net from sale?

[MrGreen]

Here's the track record of our townhouse. With the 15 year mortgage it's just now starting to cash flow. It jumps almost three fold when the mortgage is paid off in four years, with some solid rent assumptions and no more management company. The ROI based on what we could sell and pocket (before taxes) hovers right around 6.5% before any major repairs/upkeep or higher-than-inflation rent adjustments.

6.5% is the annualized ROI over all the years you have owned it accounting for everything you invested into it vs all it returned including net from sale?

No the ROI each year is just the annual net income divided by the net income from a sale.

Having owned the house for 12 years as a residence before moving, we paid tons of mortgage interest, property taxes, utility bills, etc. that we can't add in. We do account for all capital improvements by adding them to basis. And then once the house became a rental all expenses are accounted for in the business of renting.

I guess I'm not understanding the desire to calculate total ROI in this scenario? I understand the concept of "if I sold this and and invest the proceeds elsewhere, what return might I get" and I think the way I'm looking at it is an apples to apples comparison but your response makes me think I'm discounting something.

[GilesMM]

Here's the track record of our townhouse. With the 15 year mortgage it's just now starting to cash flow. It jumps almost three fold when the mortgage is paid off in four years, with some solid rent assumptions and no more management company. The ROI based on what we could sell and pocket (before taxes) hovers right around 6.5% before any major repairs/upkeep or higher-than-inflation rent adjustments.

6.5% is the annualized ROI over all the years you have owned it accounting for everything you invested into it vs all it returned including net from sale?

No the ROI each year is just the annual net income divided by the net income from a sale.

Having owned the house for 12 years as a residence before moving, we paid tons of mortgage interest, property taxes, utility bills, etc. that we can't add in. We do account for all capital improvements by adding them to basis. And then once the house became a rental all expenses are accounted for in the business of renting.

I guess I'm not understanding the desire to calculate total ROI in this scenario? I understand the concept of "if I sold this and and invest the proceeds elsewhere, what return might I get" and I think the way I'm looking at it is an apples to apples comparison but your response makes me think I'm discounting something.

The ROI is the return you get from an investment.  The amount you have invested in this house is all the dollars you put in from day 1.  Since you lived there, perhaps it would be fair to leave out the costs during those years.  Instead, start tracking when you started the rental but include the down payment plus principle payments and any further capex up until then.


Example, Joe buys a house for $100,000 in 2014, putting 20% down and living there 10 years.  Year 11, 2024, he decides to rent it out.  Maybe it is now worth $200,000.  But Joe has put $20,000 down in 2014 plus paid another $20,000 on his mortgage principal, 2014-2023, and $5,000 on new carpeting in 2012 so he has $45,000 invested in the house. He rents it the first year for $2000/month and has monthly operating expenses (mortgage, insurance, property taxes, maintenance, etc) of $1200/month so he nets $800/mo or $9,600 for year one.  His ROI year one is $9,600/45,000 or 21%.  Each subsequent year his investment basis increases by his mortgage principal paid and any capital investments in the property.


By your method, if Joe sold the house for $200,000 he would give the bank $60,000 and the realtor and title company maybe $15,000 leaving him $125,000.  Your ROI would be $9,600/$125,000 = 7.7%.  But this is not ROI as Joe has not invested $125,000 in the house, he has only invested $45,000.

[MrGreen]

Here's the track record of our townhouse. With the 15 year mortgage it's just now starting to cash flow. It jumps almost three fold when the mortgage is paid off in four years, with some solid rent assumptions and no more management company. The ROI based on what we could sell and pocket (before taxes) hovers right around 6.5% before any major repairs/upkeep or higher-than-inflation rent adjustments.

6.5% is the annualized ROI over all the years you have owned it accounting for everything you invested into it vs all it returned including net from sale?

No the ROI each year is just the annual net income divided by the net income from a sale.

Having owned the house for 12 years as a residence before moving, we paid tons of mortgage interest, property taxes, utility bills, etc. that we can't add in. We do account for all capital improvements by adding them to basis. And then once the house became a rental all expenses are accounted for in the business of renting.

I guess I'm not understanding the desire to calculate total ROI in this scenario? I understand the concept of "if I sold this and and invest the proceeds elsewhere, what return might I get" and I think the way I'm looking at it is an apples to apples comparison but your response makes me think I'm discounting something.

The ROI is the return you get from an investment.  The amount you have invested in this house is all the dollars you put in from day 1.  Since you lived there, perhaps it would be fair to leave out the costs during those years.  Instead, start tracking when you started the rental but include the down payment plus principle payments and any further capex up until then.


Example, Joe buys a house for $100,000 in 2014, putting 20% down and living there 10 years.  Year 11, 2024, he decides to rent it out.  Maybe it is now worth $200,000.  But Joe has put $20,000 down in 2014 plus paid another $20,000 on his mortgage principal, 2014-2023, and $5,000 on new carpeting in 2012 so he has $45,000 invested in the house. He rents it the first year for $2000/month and has monthly operating expenses (mortgage, insurance, property taxes, maintenance, etc) of $1200/month so he nets $800/mo or $9,600 for year one.  His ROI year one is $9,600/45,000 or 21%.  Each subsequent year his investment basis increases by his mortgage principal paid and any capital investments in the property.


By your method, if Joe sold the house for $200,000 he would give the bank $60,000 and the realtor and title company maybe $15,000 leaving him $125,000.  Your ROI would be $9,600/$125,000 = 7.7%.  But this is not ROI as Joe has not invested $125,000 in the house, he has only invested $45,000.

While true, is that the best way for Joe to determine if he should retain his rental? Perhaps I should have called my calculation "Equivalent Yearly Return." If he can sell his house today and pocket 125k, but keeps it and earns 9.6k this year, his return on that choice assuming no change in house value is 7.7% right? That's how I would want to measure whether to keep the house or seek an alternate investment vehicle. I get what you mean about ROI though. I'm really misusing that term, by definition.

[GilesMM]

The ROI is the return you get from an investment.  The amount you have invested in this house is all the dollars you put in from day 1.  Since you lived there, perhaps it would be fair to leave out the costs during those years.  Instead, start tracking when you started the rental but include the down payment plus principle payments and any further capex up until then.


Example, Joe buys a house for $100,000 in 2014, putting 20% down and living there 10 years.  Year 11, 2024, he decides to rent it out.  Maybe it is now worth $200,000.  But Joe has put $20,000 down in 2014 plus paid another $20,000 on his mortgage principal, 2014-2023, and $5,000 on new carpeting in 2012 so he has $45,000 invested in the house. He rents it the first year for $2000/month and has monthly operating expenses (mortgage, insurance, property taxes, maintenance, etc) of $1200/month so he nets $800/mo or $9,600 for year one.  His ROI year one is $9,600/45,000 or 21%.  Each subsequent year his investment basis increases by his mortgage principal paid and any capital investments in the property.


By your method, if Joe sold the house for $200,000 he would give the bank $60,000 and the realtor and title company maybe $15,000 leaving him $125,000.  Your ROI would be $9,600/$125,000 = 7.7%.  But this is not ROI as Joe has not invested $125,000 in the house, he has only invested $45,000.

While true, is that the best way for Joe to determine if he should retain his rental? Perhaps I should have called my calculation "Equivalent Yearly Return." If he can sell his house today and pocket 125k, but keeps it and earns 9.6k this year, his return on that choice assuming no change in house value is 7.7% right? That's how I would want to measure whether to keep the house or seek an alternate investment vehicle. I get what you mean about ROI though. I'm really misusing that term, by definition.

EYR sounds good to me as a term but you need to include the amount you could have left over to invest if you sold the house which means cap gains tax and depreciation recapture.


In Joe's case, his $125,000 post-sale is pretax.  His cap gains tax would be on $200,000-$105,000=$95,000. Let's say 20% tax (state and fed combined) or $19,000. There is no depreciation recapture since he had not rented it before (Lucky Joe!).  So, $125,0000 after tax is  $106,000.  Invested to return $9600 annually would require 9.0%.  That is quite a tall order for a low risk investment.


But also consider that not only is Joe's ROI currently a whopping 21%, over time rents should rise while mortgage costs are flat, so ROI will rise. Once mortgage is paid off, ROI will leap.  Joe should be getting a 30-50% ROI then.

[MrGreen]

The ROI is the return you get from an investment.  The amount you have invested in this house is all the dollars you put in from day 1.  Since you lived there, perhaps it would be fair to leave out the costs during those years.  Instead, start tracking when you started the rental but include the down payment plus principle payments and any further capex up until then.


Example, Joe buys a house for $100,000 in 2014, putting 20% down and living there 10 years.  Year 11, 2024, he decides to rent it out.  Maybe it is now worth $200,000.  But Joe has put $20,000 down in 2014 plus paid another $20,000 on his mortgage principal, 2014-2023, and $5,000 on new carpeting in 2012 so he has $45,000 invested in the house. He rents it the first year for $2000/month and has monthly operating expenses (mortgage, insurance, property taxes, maintenance, etc) of $1200/month so he nets $800/mo or $9,600 for year one.  His ROI year one is $9,600/45,000 or 21%.  Each subsequent year his investment basis increases by his mortgage principal paid and any capital investments in the property.


By your method, if Joe sold the house for $200,000 he would give the bank $60,000 and the realtor and title company maybe $15,000 leaving him $125,000.  Your ROI would be $9,600/$125,000 = 7.7%.  But this is not ROI as Joe has not invested $125,000 in the house, he has only invested $45,000.

While true, is that the best way for Joe to determine if he should retain his rental? Perhaps I should have called my calculation "Equivalent Yearly Return." If he can sell his house today and pocket 125k, but keeps it and earns 9.6k this year, his return on that choice assuming no change in house value is 7.7% right? That's how I would want to measure whether to keep the house or seek an alternate investment vehicle. I get what you mean about ROI though. I'm really misusing that term, by definition.

EYR sounds good to me as a term but you need to include the amount you could have left over to invest if you sold the house which means cap gains tax and depreciation recapture.


In Joe's case, his $125,000 post-sale is pretax.  His cap gains tax would be on $200,000-$105,000=$95,000. Let's say 20% tax (state and fed combined) or $19,000. There is no depreciation recapture since he had not rented it before (Lucky Joe!).  So, $125,0000 after tax is  $106,000.  Invested to return $9600 annually would require 9.0%.  That is quite a tall order for a low risk investment.


But also consider that not only is Joe's ROI currently a whopping 21%, over time rents should rise while mortgage costs are flat, so ROI will rise. Once mortgage is paid off, ROI will leap.  Joe should be getting a 30-50% ROI then.

True, we will have to deduct taxes from what we'd earn on the sale and that would make the equivalent return higher. I estimate that a sale in mid-2024 would consist of ~$22,000 in depreciation recapture at ordinary income tax rates and the remaining $60,000-80,000 would be taxed at capital gains rates. Total taxation would be about $15,000, with the majority of that being increased ACA insurance premiums. Adding in the tax cost raises the "Equivalent Yearly Return" about a third of a point.

In our case, our "up front" investment in the house at the time we turned it into a rental was $140,000. Our mortgage balance at the end of 2017 was $126,429. We purchased the house for $259,900 with 100% financing and rolled in all the closing costs except for about $1,000. I don't have the exact amount we paid at closing anymore. So we paid down $133,471 of the mortgage while we lived there. Add in the $5,760 we spent preparing the house for rent and we're at $139,231. Call it an even $140,000 with closing costs.

Our ROI was technically negative until 2023. From 2018 through 2022 the house was cash flow negative because of the heavy expense of the 15 year mortgage. I didn't mind this because I knew the mortgage was being paid down over $10,000 every year. So we're still making money, the cash just isn't in my pocket yet. This is where I feel like ROI is a bit misleading. If you were looking at that aspect alone, we've done nothing but lose money through 2022. However, during that time the mortgage balance fell from $126,429 to $68,302, largely paid by our tenants.

At the end of 2023, our total investment is now $210,787, the original $140,000 plus $70,787 in principal pay off over the last 6 years. We've made no capital improvements to the house that aren't already reflected in each year's earnings. In 2023, we are cash flow positive $337 for an ROI of 0.16%. Do I have that right? Something about this does not feel right at all.

[Jon Bon]

We all do our own mental accounting. It is fine, just like we all do our own budgeting and spending and everything else. However I feel often in REI folks mix up ROI and Net Worth

Yes your net worth is going up from principal paydown, but in my mental accounting there is zero Return on Investment. ROI is money that returns to your bank account. Any principal paydown or appreciation is gonna be literally locked into your walls and cannot be touched without a decent amount of work and transaction costs.

Depending on how you count my RE portfolio is either providing solid (cash) returns, or crazy impressive returns if you count appreciation, principal pay down etc. It just matters how you count.

So in my opinion your ROI of <1% is terrible, its not worth keeping. If your counting the appreciation and debt paydown in your return then sell the place! You don't recognize that until the sale anyways, you cant eat appreciation. So if reason your keeping this place is the unrealized gain, keeping it for 0% realized gain is silly. But hey its your money, I would assume your opportunity cost is killing you on this but I don't see enough of your numbers to make that call.

Good luck!

[MrGreen]

@Jon Bon I'm assuming by opportunity cost you mean what our equity in the house could otherwise be earning if we sold the place and invested it. That's the determining factor for me. With the solid rent increase I would expect were we to keep the place, and by parting ways with the management company, ROI rises to 3-4%. In four years when the mortgage is paid off, ROI rises to 8% and will continue rising thereafter because there is no more ongoing investment cost.

I recognize that there are transaction costs to selling RE and part of the reason I'm considering this now is that the lowest capital gains brackets are 0% for now and the ACA subsidy cliff is suspended. If these change in the future the cost of selling will rise quite a bit since we have enough capital gains in the house to put us over the cliff.

[Mustache ride]

I prefer to look at return on equity rather than ROI in scenarios like this. ROI doesn’t tell the whole story and completely leaves out opportunity cost, which can have a major impact on decision making.

[Jon Bon]

@Jon Bon I'm assuming by opportunity cost you mean what our equity in the house could otherwise be earning if we sold the place and invested it. That's the determining factor for me. With the solid rent increase I would expect were we to keep the place, and by parting ways with the management company, ROI rises to 3-4%. In four years when the mortgage is paid off, ROI rises to 8% and will continue rising thereafter because there is no more ongoing investment cost.

I recognize that there are transaction costs to selling RE and part of the reason I'm considering this now is that the lowest capital gains brackets are 0% for now and the ACA subsidy cliff is suspended. If these change in the future the cost of selling will rise quite a bit since we have enough capital gains in the house to put us over the cliff.

Correct opportunity cost is what you could be earning on the equity in the house. So for example you have 150,000 (my completely made up number) in equity after taxes and transaction costs you are losing what 150,000 x .08 = $12,000 a year? So in 4 years when its paid off (and you lose another 48k) then you make a little bit of money?

I don't understand why one would keep an asset that requires that kind of buy in.

Maybe I'm reading this wrong, I did not really see your P&L listed here so I could make more informed observations.

Really why RE kicks so much ass as it is allowed to use the magic of leverage to increase ROI. Your house is almost paid off which is great, but really drags down your return.

[MrGreen]

@Jon Bon I'm assuming by opportunity cost you mean what our equity in the house could otherwise be earning if we sold the place and invested it. That's the determining factor for me. With the solid rent increase I would expect were we to keep the place, and by parting ways with the management company, ROI rises to 3-4%. In four years when the mortgage is paid off, ROI rises to 8% and will continue rising thereafter because there is no more ongoing investment cost.

I recognize that there are transaction costs to selling RE and part of the reason I'm considering this now is that the lowest capital gains brackets are 0% for now and the ACA subsidy cliff is suspended. If these change in the future the cost of selling will rise quite a bit since we have enough capital gains in the house to put us over the cliff.

Correct opportunity cost is what you could be earning on the equity in the house. So for example you have 150,000 (my completely made up number) in equity after taxes and transaction costs you are losing what 150,000 x .08 = $12,000 a year? So in 4 years when its paid off (and you lose another 48k) then you make a little bit of money?

I don't understand why one would keep an asset that requires that kind of buy in.

Maybe I'm reading this wrong, I did not really see your P&L listed here so I could make more informed observations.

Really why RE kicks so much ass as it is allowed to use the magic of leverage to increase ROI. Your house is almost paid off which is great, but really drags down your return.

If we sell in mid-2024, we'll clear 280k from the sale before taxes. If rates drop and it nudges prices higher that could become 300k but I think 280k is a strong figure to plan for. The tax bite (15k) drops us to 265k in the brokerage account when said and done. Comparatively, if we held on to it and our tenant renews at significant-but-still-under-market rent, which I think is highly likely, we'll see a total gain of 16k between cash flow and mortgage pay down before any maintenance. I'd want to do a year lease so we had an opportunity to raise rent again closer to market rate. Previously our tenants were in 24 and 20 month so we're under market probably close to $500/month right now. Our area has lagged the inflation crazy rent increases of the last two years so it seems like things are just heating up there within the last year.

16k on 265k is a 6% return. We'd throw that money in VTSAX no doubt. Projecting another rent increase in 2025 would nudge the return up to 7%. We're getting pretty close to the long-term market average there so it doesn't seem quite as bad moving forward as the ROI picture would suggest. Of course we're trading liquidity and no doubt a few future years with a lower return when there are significant upkeep costs for some diversification. I mentioned above that if we kept it it would likely be a combination of laziness, comfort, and diversification in what I expect will be a very stable rental market for a long time. It's not a stellar rental property for returns by any means, hence why I'm seriously considering selling. There are better yielding properties out there in places I've never been to and probably never will. I'm not sure that kind of rental is my game. I think if we didn't hang on to it I'd toss the cash in VTSAX and call it a day.

[Jon Bon]

This rental does not make any money, so you should sell it and buy VTSAX.

Even if you pay it off, it still will not make any money (opportunity cost) you should sell it and buy VTSAX.

[GilesMM]

The ROI is the return you get from an investment.  The amount you have invested in this house is all the dollars you put in from day 1.  Since you lived there, perhaps it would be fair to leave out the costs during those years.  Instead, start tracking when you started the rental but include the down payment plus principle payments and any further capex up until then.


Example, Joe buys a house for $100,000 in 2014, putting 20% down and living there 10 years.  Year 11, 2024, he decides to rent it out.  Maybe it is now worth $200,000.  But Joe has put $20,000 down in 2014 plus paid another $20,000 on his mortgage principal, 2014-2023, and $5,000 on new carpeting in 2012 so he has $45,000 invested in the house. He rents it the first year for $2000/month and has monthly operating expenses (mortgage, insurance, property taxes, maintenance, etc) of $1200/month so he nets $800/mo or $9,600 for year one.  His ROI year one is $9,600/45,000 or 21%.  Each subsequent year his investment basis increases by his mortgage principal paid and any capital investments in the property.


By your method, if Joe sold the house for $200,000 he would give the bank $60,000 and the realtor and title company maybe $15,000 leaving him $125,000.  Your ROI would be $9,600/$125,000 = 7.7%.  But this is not ROI as Joe has not invested $125,000 in the house, he has only invested $45,000.

While true, is that the best way for Joe to determine if he should retain his rental? Perhaps I should have called my calculation "Equivalent Yearly Return." If he can sell his house today and pocket 125k, but keeps it and earns 9.6k this year, his return on that choice assuming no change in house value is 7.7% right? That's how I would want to measure whether to keep the house or seek an alternate investment vehicle. I get what you mean about ROI though. I'm really misusing that term, by definition.

EYR sounds good to me as a term but you need to include the amount you could have left over to invest if you sold the house which means cap gains tax and depreciation recapture.


In Joe's case, his $125,000 post-sale is pretax.  His cap gains tax would be on $200,000-$105,000=$95,000. Let's say 20% tax (state and fed combined) or $19,000. There is no depreciation recapture since he had not rented it before (Lucky Joe!).  So, $125,0000 after tax is  $106,000.  Invested to return $9600 annually would require 9.0%.  That is quite a tall order for a low risk investment.


But also consider that not only is Joe's ROI currently a whopping 21%, over time rents should rise while mortgage costs are flat, so ROI will rise. Once mortgage is paid off, ROI will leap.  Joe should be getting a 30-50% ROI then.

True, we will have to deduct taxes from what we'd earn on the sale and that would make the equivalent return higher. I estimate that a sale in mid-2024 would consist of ~$22,000 in depreciation recapture at ordinary income tax rates and the remaining $60,000-80,000 would be taxed at capital gains rates. Total taxation would be about $15,000, with the majority of that being increased ACA insurance premiums. Adding in the tax cost raises the "Equivalent Yearly Return" about a third of a point.

In our case, our "up front" investment in the house at the time we turned it into a rental was $140,000. Our mortgage balance at the end of 2017 was $126,429. We purchased the house for $259,900 with 100% financing and rolled in all the closing costs except for about $1,000. I don't have the exact amount we paid at closing anymore. So we paid down $133,471 of the mortgage while we lived there. Add in the $5,760 we spent preparing the house for rent and we're at $139,231. Call it an even $140,000 with closing costs.

Our ROI was technically negative until 2023. From 2018 through 2022 the house was cash flow negative because of the heavy expense of the 15 year mortgage. I didn't mind this because I knew the mortgage was being paid down over $10,000 every year. So we're still making money, the cash just isn't in my pocket yet. This is where I feel like ROI is a bit misleading. If you were looking at that aspect alone, we've done nothing but lose money through 2022. However, during that time the mortgage balance fell from $126,429 to $68,302, largely paid by our tenants.

At the end of 2023, our total investment is now $210,787, the original $140,000 plus $70,787 in principal pay off over the last 6 years. We've made no capital improvements to the house that aren't already reflected in each year's earnings. In 2023, we are cash flow positive $337 for an ROI of 0.16%. Do I have that right? Something about this does not feel right at all.

The cash ROI is just one way to look at it (and an important one for investors).  Another typical view is to include mortgage principal payments.  So, say you are making say $12,000 in mortgage principal payments in 2024 (via rent from tenants), then you would add that to your "total return".  So $12,377 / $210,787 = 5.9% "total ROI".   

[MrGreen]

EYR sounds good to me as a term but you need to include the amount you could have left over to invest if you sold the house which means cap gains tax and depreciation recapture.


In Joe's case, his $125,000 post-sale is pretax.  His cap gains tax would be on $200,000-$105,000=$95,000. Let's say 20% tax (state and fed combined) or $19,000. There is no depreciation recapture since he had not rented it before (Lucky Joe!).  So, $125,0000 after tax is  $106,000.  Invested to return $9600 annually would require 9.0%.  That is quite a tall order for a low risk investment.


But also consider that not only is Joe's ROI currently a whopping 21%, over time rents should rise while mortgage costs are flat, so ROI will rise. Once mortgage is paid off, ROI will leap.  Joe should be getting a 30-50% ROI then.

True, we will have to deduct taxes from what we'd earn on the sale and that would make the equivalent return higher. I estimate that a sale in mid-2024 would consist of ~$22,000 in depreciation recapture at ordinary income tax rates and the remaining $60,000-80,000 would be taxed at capital gains rates. Total taxation would be about $15,000, with the majority of that being increased ACA insurance premiums. Adding in the tax cost raises the "Equivalent Yearly Return" about a third of a point.

In our case, our "up front" investment in the house at the time we turned it into a rental was $140,000. Our mortgage balance at the end of 2017 was $126,429. We purchased the house for $259,900 with 100% financing and rolled in all the closing costs except for about $1,000. I don't have the exact amount we paid at closing anymore. So we paid down $133,471 of the mortgage while we lived there. Add in the $5,760 we spent preparing the house for rent and we're at $139,231. Call it an even $140,000 with closing costs.

Our ROI was technically negative until 2023. From 2018 through 2022 the house was cash flow negative because of the heavy expense of the 15 year mortgage. I didn't mind this because I knew the mortgage was being paid down over $10,000 every year. So we're still making money, the cash just isn't in my pocket yet. This is where I feel like ROI is a bit misleading. If you were looking at that aspect alone, we've done nothing but lose money through 2022. However, during that time the mortgage balance fell from $126,429 to $68,302, largely paid by our tenants.

At the end of 2023, our total investment is now $210,787, the original $140,000 plus $70,787 in principal pay off over the last 6 years. We've made no capital improvements to the house that aren't already reflected in each year's earnings. In 2023, we are cash flow positive $337 for an ROI of 0.16%. Do I have that right? Something about this does not feel right at all.

The cash ROI is just one way to look at it (and an important one for investors).  Another typical view is to include mortgage principal payments.  So, say you are making say $12,000 in mortgage principal payments in 2024 (via rent from tenants), then you would add that to your "total return".  So $12,377 / $210,787 = 5.9% "total ROI".   

That makes more sense to me as an accounting. If someone never put cash in their pocket but the asset was entirely paid off by someone else, there's still an earned value there. Maybe not a great one, but looking at it like no return on the investment makes me think the expectation is the asset itself is worthless.

As @Jon Bon points out, the returns on this rental significantly underperform the market over the last few years. Though the market has been significantly outperforming its long-term average. In hindsight, we should have sold in 2022 when our tenant's last lease was up and picked up the amazing 25% return the market gave in 2023 but...hindsight. A few years ago I would not have been willing to sell because we weren't sure if we'd return to MD.

[Car Jack]

There's a very simple rent vs sell test.  Is the monthly rent at least 1% of the value of the house.  It's not.  I'd even suggest that 1% should include management fees.  If you can't get $3500 a month, it's not a good rental.  Over on Bogleheads, someone mentioned that they could get more from an SPIA which surprised me but that payment is going to be age dependent.  But probably worth looking into using your net monthly.  I've rented a house before, from another state and it was a horrible experience.  And yes, I was getting 1%.  This was while I moved away for my company to pay me to go to grad school.  There, rents were 5% of value.  I suppose that's what happens in a town where the number of students is more than the number of full time residents.

[cheapskate]

Could I get the forums opinion on my own keep rental vs. sell dilemma I have every year? It seems like the rental is sorta a thorn in my side and I always get cold feet when I'm mentally ready to sell, run the numbers and ultimately I can't figure out what number to use to determine decide if it's financially smart to sell. With a decade of outstanding stock market performance it seems a lot easier to hold vtsax and chill than it is to hold any type of business, even a basic single unit condo rental side hustle.

Details:
Studio Condo in San Francisco
Rental Income = $2,200 monthly
Maintenance ~$1,000 per year
Mortgage Principal $285.07
Mortgage Interest $570.91
HOA $650
Self Managed $0
Insurance $1,500
Property taxes $4,200

Total Yearly Cost 20,625
Total yearly rental income = $26,400
Net Profit = $5,775

Equity in the property is around $330k, Condo is probably worth around $500k to make an easy round number, but that wouldn't include selling fees, tax recapture, capital gains. It has been a rental for around 15 years. 

[clarkfan1979]

There's a very simple rent vs sell test.  Is the monthly rent at least 1% of the value of the house.  It's not.  I'd even suggest that 1% should include management fees.  If you can't get $3500 a month, it's not a good rental.  Over on Bogleheads, someone mentioned that they could get more from an SPIA which surprised me but that payment is going to be age dependent.  But probably worth looking into using your net monthly.  I've rented a house before, from another state and it was a horrible experience.  And yes, I was getting 1%.  This was while I moved away for my company to pay me to go to grad school.  There, rents were 5% of value.  I suppose that's what happens in a town where the number of students is more than the number of full time residents.

The 1% rule is a very simple rent vs. sell test, but it's not a very good test. The 1% rule ignores mortgage rates, insurance, property taxes and like you said management fees. Management fees are higher for lower tier rentals that have more problems. If someone has had a property for 10-15 years, has a mortgage rate around 4%, is deep into the amortization schedule with large principle payments, low insurance, low property taxes and an area with low vacancy, I would accept .5%

Building wealth in real estate is much more common with appreciation than cash flow. Over the past 10 years, there are very few stories on this forum of MMM members building wealth with real estate cash flow. If they are out there, let's hear them. 



 

[GilesMM]

Could I get the forums opinion on my own keep rental vs. sell dilemma I have every year? It seems like the rental is sorta a thorn in my side and I always get cold feet when I'm mentally ready to sell, run the numbers and ultimately I can't figure out what number to use to determine decide if it's financially smart to sell. With a decade of outstanding stock market performance it seems a lot easier to hold vtsax and chill than it is to hold any type of business, even a basic single unit condo rental side hustle.

Details:
Studio Condo in San Francisco
Rental Income = $2,200 monthly
Maintenance ~$1,000 per year
Mortgage Principal $285.07
Mortgage Interest $570.91
HOA $650
Self Managed $0
Insurance $1,500
Property taxes $4,200

Total Yearly Cost 20,625
Total yearly rental income = $26,400
Net Profit = $5,775

Equity in the property is around $330k, Condo is probably worth around $500k to make an easy round number, but that wouldn't include selling fees, tax recapture, capital gains. It has been a rental for around 15 years.

If you sold and had maybe $300k left over to invest it would need to return 2% per year to exceed the property return. I would sell.

[GilesMM]

There's a very simple rent vs sell test.  Is the monthly rent at least 1% of the value of the house.  It's not.  I'd even suggest that 1% should include management fees.  If you can't get $3500 a month, it's not a good rental.  Over on Bogleheads, someone mentioned that they could get more from an SPIA which surprised me but that payment is going to be age dependent.  But probably worth looking into using your net monthly.  I've rented a house before, from another state and it was a horrible experience.  And yes, I was getting 1%.  This was while I moved away for my company to pay me to go to grad school.  There, rents were 5% of value.  I suppose that's what happens in a town where the number of students is more than the number of full time residents.

The 1% rule is a very simple rent vs. sell test, but it's not a very good test. The 1% rule ignores mortgage rates, insurance, property taxes and like you said management fees. Management fees are higher for lower tier rentals that have more problems. If someone has had a property for 10-15 years, has a mortgage rate around 4%, is deep into the amortization schedule with large principle payments, low insurance, low property taxes and an area with low vacancy, I would accept .5%

Building wealth in real estate is much more common with appreciation than cash flow. Over the past 10 years, there are very few stories on this forum of MMM members building wealth with real estate cash flow. If they are out there, let's hear them.

1% is just a rule of thumb, not the be all end all.  A property at 1% may be a good rental. One a lot higher than 1% probably is, one a great deal lower may not be, from a cash flow perspective.


I thought Arebelspy retired at age 29 on prolific rental cash flow which he documented. It made it look really easy.

[clarkfan1979]

There's a very simple rent vs sell test.  Is the monthly rent at least 1% of the value of the house.  It's not.  I'd even suggest that 1% should include management fees.  If you can't get $3500 a month, it's not a good rental.  Over on Bogleheads, someone mentioned that they could get more from an SPIA which surprised me but that payment is going to be age dependent.  But probably worth looking into using your net monthly.  I've rented a house before, from another state and it was a horrible experience.  And yes, I was getting 1%.  This was while I moved away for my company to pay me to go to grad school.  There, rents were 5% of value.  I suppose that's what happens in a town where the number of students is more than the number of full time residents.

The 1% rule is a very simple rent vs. sell test, but it's not a very good test. The 1% rule ignores mortgage rates, insurance, property taxes and like you said management fees. Management fees are higher for lower tier rentals that have more problems. If someone has had a property for 10-15 years, has a mortgage rate around 4%, is deep into the amortization schedule with large principle payments, low insurance, low property taxes and an area with low vacancy, I would accept .5%

Building wealth in real estate is much more common with appreciation than cash flow. Over the past 10 years, there are very few stories on this forum of MMM members building wealth with real estate cash flow. If they are out there, let's hear them.

1% is just a rule of thumb, not the be all end all.  A property at 1% may be a good rental. One a lot higher than 1% probably is, one a great deal lower may not be, from a cash flow perspective.


I thought Arebelspy retired at age 29 on prolific rental cash flow which he documented. It made it look really easy.

I think he might be the only one on this forum with that type of story. Good for him. He did really well. I think there is a common misconception that his FIRE story is common from a real estate cash flow perspective. It is my belief that it is not.

Some other things to consider is that he used 300K of W2 income to buy the rentals. He also did an interview two years ago in which he said many of his tenants stopped paying rent during COVID-19 and took a big hit. When you have rentals that meet the 1% rule with lower income tenants, that can happen. It's reasonable to categorize 1% rentals as more risky. Your good looking cash flow on the spreadsheet doesn't mean anything when your tenant stops paying the rent.   

[GilesMM]

There's a very simple rent vs sell test.  Is the monthly rent at least 1% of the value of the house.  It's not.  I'd even suggest that 1% should include management fees.  If you can't get $3500 a month, it's not a good rental.  Over on Bogleheads, someone mentioned that they could get more from an SPIA which surprised me but that payment is going to be age dependent.  But probably worth looking into using your net monthly.  I've rented a house before, from another state and it was a horrible experience.  And yes, I was getting 1%.  This was while I moved away for my company to pay me to go to grad school.  There, rents were 5% of value.  I suppose that's what happens in a town where the number of students is more than the number of full time residents.

The 1% rule is a very simple rent vs. sell test, but it's not a very good test. The 1% rule ignores mortgage rates, insurance, property taxes and like you said management fees. Management fees are higher for lower tier rentals that have more problems. If someone has had a property for 10-15 years, has a mortgage rate around 4%, is deep into the amortization schedule with large principle payments, low insurance, low property taxes and an area with low vacancy, I would accept .5%

Building wealth in real estate is much more common with appreciation than cash flow. Over the past 10 years, there are very few stories on this forum of MMM members building wealth with real estate cash flow. If they are out there, let's hear them.

1% is just a rule of thumb, not the be all end all.  A property at 1% may be a good rental. One a lot higher than 1% probably is, one a great deal lower may not be, from a cash flow perspective.


I thought Arebelspy retired at age 29 on prolific rental cash flow which he documented. It made it look really easy.

I think he might be the only one on this forum with that type of story. Good for him. He did really well. I think there is a common misconception that his FIRE story is common from a real estate cash flow perspective. It is my belief that it is not.

Some other things to consider is that he used 300K of W2 income to buy the rentals. He also did an interview two years ago in which he said many of his tenants stopped paying rent during COVID-19 and took a big hit. When you have rentals that meet the 1% rule with lower income tenants, that can happen. It's reasonable to categorize 1% rentals as more risky. Your good looking cash flow on the spreadsheet doesn't mean anything when your tenant stops paying the rent.

It's probably better to discuss over on BiggerPockets as they include more serious rental investors.  Most of the MMM crowd are stuck in techy day jobs and mostly a bit reluctant to venture too far into rental territory.

[clarkfan1979]

There's a very simple rent vs sell test.  Is the monthly rent at least 1% of the value of the house.  It's not.  I'd even suggest that 1% should include management fees.  If you can't get $3500 a month, it's not a good rental.  Over on Bogleheads, someone mentioned that they could get more from an SPIA which surprised me but that payment is going to be age dependent.  But probably worth looking into using your net monthly.  I've rented a house before, from another state and it was a horrible experience.  And yes, I was getting 1%.  This was while I moved away for my company to pay me to go to grad school.  There, rents were 5% of value.  I suppose that's what happens in a town where the number of students is more than the number of full time residents.

The 1% rule is a very simple rent vs. sell test, but it's not a very good test. The 1% rule ignores mortgage rates, insurance, property taxes and like you said management fees. Management fees are higher for lower tier rentals that have more problems. If someone has had a property for 10-15 years, has a mortgage rate around 4%, is deep into the amortization schedule with large principle payments, low insurance, low property taxes and an area with low vacancy, I would accept .5%

Building wealth in real estate is much more common with appreciation than cash flow. Over the past 10 years, there are very few stories on this forum of MMM members building wealth with real estate cash flow. If they are out there, let's hear them.

1% is just a rule of thumb, not the be all end all.  A property at 1% may be a good rental. One a lot higher than 1% probably is, one a great deal lower may not be, from a cash flow perspective.


I thought Arebelspy retired at age 29 on prolific rental cash flow which he documented. It made it look really easy.

I think he might be the only one on this forum with that type of story. Good for him. He did really well. I think there is a common misconception that his FIRE story is common from a real estate cash flow perspective. It is my belief that it is not.

Some other things to consider is that he used 300K of W2 income to buy the rentals. He also did an interview two years ago in which he said many of his tenants stopped paying rent during COVID-19 and took a big hit. When you have rentals that meet the 1% rule with lower income tenants, that can happen. It's reasonable to categorize 1% rentals as more risky. Your good looking cash flow on the spreadsheet doesn't mean anything when your tenant stops paying the rent.

It's probably better to discuss over on BiggerPockets as they include more serious rental investors. Most of the MMM crowd are stuck in techy day jobs and mostly a bit reluctant to venture too far into rental territory.

I agree that if you make 150K/year at your techy day job, rentals might not be worth it. If you are looking to get to 2-3 million to FIRE, it might be best to just stick with your day job.

For people like me that make 60K/year as a full-time college instructor, with a Ph.D. and 13 years of full-time experience, rentals are worth it.

However, I don't understand why we shouldn't talk about real estate and landlording on a discussion thread labeled "real estate and landlording"

[monarda]

There's a very simple rent vs sell test.  Is the monthly rent at least 1% of the value of the house.  It's not.  I'd even suggest that 1% should include management fees.  If you can't get $3500 a month, it's not a good rental.  Over on Bogleheads, someone mentioned that they could get more from an SPIA which surprised me but that payment is going to be age dependent.  But probably worth looking into using your net monthly.  I've rented a house before, from another state and it was a horrible experience.  And yes, I was getting 1%.  This was while I moved away for my company to pay me to go to grad school.  There, rents were 5% of value.  I suppose that's what happens in a town where the number of students is more than the number of full time residents.

The 1% rule is a very simple rent vs. sell test, but it's not a very good test. The 1% rule ignores mortgage rates, insurance, property taxes and like you said management fees. Management fees are higher for lower tier rentals that have more problems. If someone has had a property for 10-15 years, has a mortgage rate around 4%, is deep into the amortization schedule with large principle payments, low insurance, low property taxes and an area with low vacancy, I would accept .5%

Building wealth in real estate is much more common with appreciation than cash flow. Over the past 10 years, there are very few stories on this forum of MMM members building wealth with real estate cash flow. If they are out there, let's hear them.

1% is just a rule of thumb, not the be all end all.  A property at 1% may be a good rental. One a lot higher than 1% probably is, one a great deal lower may not be, from a cash flow perspective.


I thought Arebelspy retired at age 29 on prolific rental cash flow which he documented. It made it look really easy.

I think he might be the only one on this forum with that type of story. Good for him. He did really well. I think there is a common misconception that his FIRE story is common from a real estate cash flow perspective. It is my belief that it is not.

Some other things to consider is that he used 300K of W2 income to buy the rentals. He also did an interview two years ago in which he said many of his tenants stopped paying rent during COVID-19 and took a big hit. When you have rentals that meet the 1% rule with lower income tenants, that can happen. It's reasonable to categorize 1% rentals as more risky. Your good looking cash flow on the spreadsheet doesn't mean anything when your tenant stops paying the rent.

It's probably better to discuss over on BiggerPockets as they include more serious rental investors. Most of the MMM crowd are stuck in techy day jobs and mostly a bit reluctant to venture too far into rental territory.

I agree that if you make 150K/year at your techy day job, rentals might not be worth it. If you are looking to get to 2-3 million to FIRE, it might be best to just stick with your day job.

For people like me that make 60K/year as a full-time college instructor, with a Ph.D. and 13 years of full-time experience, rentals are worth it.

However, I don't understand why we shouldn't talk about real estate and landlording on a discussion thread labeled "real estate and landlording"

Me, too,  an academic who has counted on rental income to supplement U. salary.

Our rentals don't meet the 1% rule, but they're AB rentals in a great area. We still live off of the cash flow.

FWIW, the folks over at Bigger Pockets (as a rule) aren't mustachian at all. Quite the contrary. But I have learned stuff over there. I find BP is full of greedy types. More more more more more.

[clarkfan1979]

There's a very simple rent vs sell test.  Is the monthly rent at least 1% of the value of the house.  It's not.  I'd even suggest that 1% should include management fees.  If you can't get $3500 a month, it's not a good rental.  Over on Bogleheads, someone mentioned that they could get more from an SPIA which surprised me but that payment is going to be age dependent.  But probably worth looking into using your net monthly.  I've rented a house before, from another state and it was a horrible experience.  And yes, I was getting 1%.  This was while I moved away for my company to pay me to go to grad school.  There, rents were 5% of value.  I suppose that's what happens in a town where the number of students is more than the number of full time residents.

The 1% rule is a very simple rent vs. sell test, but it's not a very good test. The 1% rule ignores mortgage rates, insurance, property taxes and like you said management fees. Management fees are higher for lower tier rentals that have more problems. If someone has had a property for 10-15 years, has a mortgage rate around 4%, is deep into the amortization schedule with large principle payments, low insurance, low property taxes and an area with low vacancy, I would accept .5%

Building wealth in real estate is much more common with appreciation than cash flow. Over the past 10 years, there are very few stories on this forum of MMM members building wealth with real estate cash flow. If they are out there, let's hear them.

1% is just a rule of thumb, not the be all end all.  A property at 1% may be a good rental. One a lot higher than 1% probably is, one a great deal lower may not be, from a cash flow perspective.


I thought Arebelspy retired at age 29 on prolific rental cash flow which he documented. It made it look really easy.

I think he might be the only one on this forum with that type of story. Good for him. He did really well. I think there is a common misconception that his FIRE story is common from a real estate cash flow perspective. It is my belief that it is not.

Some other things to consider is that he used 300K of W2 income to buy the rentals. He also did an interview two years ago in which he said many of his tenants stopped paying rent during COVID-19 and took a big hit. When you have rentals that meet the 1% rule with lower income tenants, that can happen. It's reasonable to categorize 1% rentals as more risky. Your good looking cash flow on the spreadsheet doesn't mean anything when your tenant stops paying the rent.

It's probably better to discuss over on BiggerPockets as they include more serious rental investors. Most of the MMM crowd are stuck in techy day jobs and mostly a bit reluctant to venture too far into rental territory.

I agree that if you make 150K/year at your techy day job, rentals might not be worth it. If you are looking to get to 2-3 million to FIRE, it might be best to just stick with your day job.

For people like me that make 60K/year as a full-time college instructor, with a Ph.D. and 13 years of full-time experience, rentals are worth it.

However, I don't understand why we shouldn't talk about real estate and landlording on a discussion thread labeled "real estate and landlording"

Me, too,  an academic who has counted on rental income to supplement U. salary.

Our rentals don't meet the 1% rule, but they're AB rentals in a great area. We still live off of the cash flow.

FWIW, the folks over at Bigger Pockets (as a rule) aren't mustachian at all. Quite the contrary. But I have learned stuff over there. I find BP is full of greedy types. More more more more more.

I have had a similar experience over at bigger pockets. I'm not sure if I would use the word "greedy", but the people over at bigger pockets are more interested in scaling a business into 10-100 million worth of assets. I'm not really looking to scale and increase my working hours on real estate, so I don't connect with many of the people on bigger pockets for lifestyle reasons. I like having 3-4 rentals in good areas with good tenants and low maintenance. I use the cash flow to afford things I can't afford on my W-2 salary alone. After taxes, health insurance and mandatory contributions to retirement accounts, my take home paycheck is $3300/month. I really like being a college instructor. I only work 4 days/week and 32 weeks a year. Twenty weeks of vacation is plenty of time for me to pursue my hobbies and interests outside of my day job. 

[cheapskate]

GilesMM how do you come to being able to earn 2% on $300k would beat holding onto the property? Thanks for the reply.

[GilesMM]

GilesMM how do you come to being able to earn 2% on $300k would beat holding onto the property? Thanks for the reply.

$6000 per year is more than the quoted net income of $5775 per year.

[clarkfan1979]

GilesMM how do you come to being able to earn 2% on $300k would beat holding onto the property? Thanks for the reply.

$6000 per year is more than the quoted net income of $5775 per year.

Add another $3,420 for principal pay down. This analysis also ignores appreciation in San Francisco. 

[GilesMM]

GilesMM how do you come to being able to earn 2% on $300k would beat holding onto the property? Thanks for the reply.

$6000 per year is more than the quoted net income of $5775 per year.

Add another $3,420 for principal pay down. This analysis also ignores appreciation in San Francisco.

I never include transfers to equity in cash flow, but if you want to your $300,000 now has to return a whopping 3% to beat your condo investment.  The appreciation is not ignored, it is in the $300K equity.  If you know what future appreciation will be and are timing real estate, best of luck. Median condo prices peaked in April 22 in SF and are down 25% as of Jan 2024 (Redfin).

[clarkfan1979]

GilesMM how do you come to being able to earn 2% on $300k would beat holding onto the property? Thanks for the reply.

$6000 per year is more than the quoted net income of $5775 per year.

I think it would also be helpful if we knew the interest rate on the mortgage and the age of the mortgage. Just because SF is down 25% is not a turn-off for me or other savy investors. Some of the best appreciation plays are in markets with good fundamentals and are temporarily down.

I bought a house in Fort Myers, FL in 2012 for 95K that was worth 250K in 2006. It appreciated to 180K in 2015, 250K in 2019 and now 375K in 2024. It's difficult if not impossible to find the absolute bottom. However, buying on a decline can often be a very good play. If the mortgage is around 4% or lower, I personally wouldn't sell the condo. 

Add another $3,420 for principal pay down. This analysis also ignores appreciation in San Francisco.

I never include transfers to equity in cash flow, but if you want to your $300,000 now has to return a whopping 3% to beat your condo investment.  The appreciation is not ignored, it is in the $300K equity.  If you know what future appreciation will be and are timing real estate, best of luck. Median condo prices peaked in April 22 in SF and are down 25% as of Jan 2024 (Redfin).

I think it would also be helpful if we knew the interest rate on the mortgage and the age of the mortgage. Just because SF is down 25% is not a turn-off for me or other savy investors. Some of the best appreciation plays are in markets with good fundamentals and are temporarily down.

I bought a house in Fort Myers, FL in 2012 for 95K that was worth 250K in 2006. It appreciated to 180K in 2015, 250K in 2019 and now 375K in 2024. It's difficult if not impossible to find the absolute bottom. However, buying on a decline can often be a very good play. If the mortgage is around 4% or lower, I personally wouldn't sell the condo.