Author Topic: Private Home to Rental Property-stick it out?  (Read 1655 times)

EngineerYogi

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Private Home to Rental Property-stick it out?
« on: February 04, 2016, 12:11:48 PM »
My husband and I purchased our first home in 2007 when we were 18 and 22 years old for $115,000. We were young and broke and used a VA loan and financed the closing costs too so our first mortgage was $117,500 at 6.75% interest. We refinanced in 2010 to a 4.75% interest rate but added in closing costs again and ended up with a fresh 30 year loan for $113,320.

The military sent us several states away so we put the home on the market in March 2014 for $129,000(we put more than 30k in improvements too so this is a loss), we had very little interest, namely because there are so many homes on the market in our town (mostly due to changes in personnel at the air force base that sent a lot of people away at the same time). We were fortunate to find our own tenants and moved them into our home in July 2 weeks after we moved for a rent of $900 per month, we left the home on the market as an "investment property" but by March 2015 we still had no buyer so we pulled it off the market. In July 2015 our tenants moved out and the home has been sitting empty since. We put the home back on the market for $125,000 in early December 2015 (6 month contract with the realtor) and we have still had no interest, I believe the home was shown once and the feedback was "living room is too small" and they're right, it's a little living room and there's nothing that can be done about that.

I had some interest from tenants if we're willing to drop the rent to $750 per month but my mortgage/taxes/interest/insurance total $756 per month plus I'm paying a 10% cut to the property manager (if it's actively rented).

So, it's a bad situation all around. I don't even know if I can get it to sell without dropping the price way down, we owe $104,755 right now. We could start making extra principal payments and have it paid off early, but investing the money could be a better decision as well.

Right now the biggest advantage I have to keeping it as a rental is the reduction in taxable income I'm getting from claiming a loss (but there's a limit to the number of years you can do that, right?).

Any recommendations? Hold out for a buyer, rent it at a loss, drop the cost and sell it for a loss? Hope for a better situation in the future?

Here is a case study I completed:
CategoryMonthly
Comments
Annual
Salary/Wages for earner #1$7,635$91,624
Salary/Wages for earner #2$2,917$34,999
Pretax Vision/Dental Ins.$36$427
Healthcare Flex Savings Acct. (FSA)$208$2,500
FICA base salary/wages$10,308$123,696
401(k) / 403(b) / TSP / etc.$764Room to increase?$9,162
Employer Match$305$3,665
Income subject to IRS tax$9,545$114,534
Life/LTD Insurance$52$621
Paycheck income before tax$9,493$113,913
Rental real expenses$765$9,178
Rental depreciation expense$267$3,200
Rental taxable income-$1,031-$12,378
Federal Total Income$8,513$102,156
Federal tax$9952015 rates, MFJ, stand. ded., 2 exempt.$11,940
State/City tax$232Guess, using 6.00% * Fed. Taxable$2,785
Soc. Sec.$706Assumes 2 earners paying$8,467
Medicare$149$1,794
Total income taxes$2,082$24,985
Add Health + Daycare reimb.$208$2,500
Untaxed Income$2,234$26,808
Income before other expenses  $9,088$109,058
Monthly Average Expenses:
Mortgage$591$7,094
Rent$1,998$23,976
Property Tax$78$941
Home/Rent Insurance$85$1,024
Cable TV$183$2,196
Car Insurance$151$1,812
Car Maintenance, Registration, etc.$50$600
Charitable contributions$20$240
Christmas/Holidays$25$300
Clothing/Shoes$25$300
Computer (paper/software/etc.)$10$120
Dining (Pizza, Restaurant, etc.)$200$2,400
Electricity$10$120
Emergency Fund$250$3,000
Entertainment$50$600
Financial Fees$5$60
Fuel/Public Transport$250$3,000
Groceries$700$8,400
Hair Care$10$120
Household; Maintenance$75$900
Internet$70$840
Medicine (OTC + Prescription)$75$900
Miscellaneous$100$1,200
Pets$100$1,200
Phone (cell)$225$2,700
School Tutition/Books/Etc.$20$240
Sports/Recreation$200$2,400
Subscriptions (paper/magazines/etc.)$20$240
Non-mortgage total$4,986$59,829
Loans:
Southwest Rewards Visa$1,493$17,916
Student Loan$55$655
Personal Loan$449$5,393
Truck Loan$616$7,387
Other tax-advantaged investments:
Roth IRA$385Room to increase?$4,615
Roth 401k/403b$515Room to increase?$6,174
Total Expense$9,089$109,062
Total to invest$0-$4
Summary:
"Gross" income$12,021$144,253
Income taxes$2,082$24,985
After-tax income$9,939$119,268
IRA+401k/403b/TSP/457 (Savers' credit)$1,663$19,952
Living expenses$5,664$67,970
Non-mortgage loans$2,613$31,351
After-tax investable$0-$4
Time to FIRE?:
Extra income after RE (pension, SS, etc.)30000/year
Time to FIRE10years
Safe Withdrawal Rate4.00%percent
Real return on tax-deferred investments1.50%percent
Real, after tax, return on taxable investments1.28%percent
Current Savings
Roth + HSA$74,000
Projected Savings at Retirement
Taxable$290,319
Tax-deferred (e.g. trad. IRA/401k)$137,288
Roth + HSA$201,354
Total projected stash$628,961
Projected Expenses in Retirement
Non-loan, non-work expenses$59,829
Annual non-tax retirement expense$59,829
Income taxes$3,937
Total$63,766
Total loan principal due at FI$77,715
Stash needed for retirement @4.0% SWR$921,867
Need $292,907 more.


Filing Status21=S, 2=MFJ, 3=HOH
# Exempt.2
Earner #1Earner #2
Ages2630
# of earners2
Total Income$102,156
Std. Deduct.$12,600
Act. Deduct.$12,600
Exemption$8,000
SL int. (approx.)$148
AGI$102,008
MAGI$102,156
Taxable$81,408
1040 Tax$11,940
Saver's credit$0
Tax after n-r credit$11,940
Child Tax Cred.$0
EIC$0
Net Tax$11,940
Monthly$995
Mtg. Int. (approx.)$4,926
State tax$2,7856.00%
Prop tax$941
Charity$240
Item. Deduct.$8,891
VersionV7.06

Loans:Orig. Prin.Orig. LengthCurr. Prin.Yrs leftRate
Mortgage$113,32030$104,755264.750%
American Express Credit Card$2,0000.0833333333333333$0015.000%
Southwest Rewards Visa$4,4228$4,4220.166666666666667.000%
Student Loan$5,50010$4,93383.150%
Personal Loan$25,0005$13,0122.52.990%
Truck Loan$35,2065$15,6592.166666666666671.900%

Drifterrider

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Re: Private Home to Rental Property-stick it out?
« Reply #1 on: February 04, 2016, 01:13:10 PM »
I'll give a short answer to a long question.

At present you are paying the mortgage and receiving nothing.  If you rent for $750 and pay 10% fee you net $675 less the $756 it cost you = you lose $81 per month.  You are behind $972 per year.  Factor your value of $125,000 over 27.5 years (depreciation) is $4,545 depreciation.  Don't think of offsetting against depreciation because depreciation is a "non-cash" expense.  You get to count it but it doesn't help you in a loss situation.  You can't take a passive loss against earned salary unless you are an "active participant".  If you can qualify as an "active participant" (carefully read ALL of the instructions for form 1040e)  you can offset the loss against salary (but only for a time before the IRS takes notice).

You might want to consider renting now to reduce your outflow of cash and periodically re-evaluate.  Most insurance companies get "concerned" insuring a vacant house.

Edit.  Your house isn't producing a positive cash flow.  Sitting empty it is costing you $9,072 per year.  If you cannot sell it at break even, and don't want to sell it at a loss, try to minimize your loss.  What does the management agency say your house should rent for?
« Last Edit: February 04, 2016, 01:22:32 PM by Drifterrider »

EngineerYogi

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Re: Private Home to Rental Property-stick it out?
« Reply #2 on: February 05, 2016, 11:56:51 AM »
I'll give a short answer to a long question.

At present you are paying the mortgage and receiving nothing.  If you rent for $750 and pay 10% fee you net $675 less the $756 it cost you = you lose $81 per month.  You are behind $972 per year.  Factor your value of $125,000 over 27.5 years (depreciation) is $4,545 depreciation.  Don't think of offsetting against depreciation because depreciation is a "non-cash" expense.  You get to count it but it doesn't help you in a loss situation.  You can't take a passive loss against earned salary unless you are an "active participant".  If you can qualify as an "active participant" (carefully read ALL of the instructions for form 1040e)  you can offset the loss against salary (but only for a time before the IRS takes notice).

You might want to consider renting now to reduce your outflow of cash and periodically re-evaluate.  Most insurance companies get "concerned" insuring a vacant house.

Edit.  Your house isn't producing a positive cash flow.  Sitting empty it is costing you $9,072 per year.  If you cannot sell it at break even, and don't want to sell it at a loss, try to minimize your loss.  What does the management agency say your house should rent for?

$925 is the fair market rental rate, but we had interest from two separate tenants if we were willing to lower rent to $750, that was over a period of 4 months. I guess our "break even" as in we'd walk away at least without still owing money would be selling at $114,000 (to cover current loan, closing costs and realtor fees). I don't know that even if we dropped the price that low if it would sell. http://www.alamogordorealty.com/homes-for-sale-details/1206-TWENTY-FOURTH-ST-ALAMOGORDO-NM-88310/153469/299/

So keep it sitting empty: $9k cost per year
Rent it at $750/month: $1k cost per year
Hold out and hope for a vast market improvement: still probably a cost associated, may never reach the level currently invested (~$150k with improvements)
Sell it and just settle for a small loss: $1-9k loss? acceptable?

Drifterrider

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Re: Private Home to Rental Property-stick it out?
« Reply #3 on: February 05, 2016, 12:15:54 PM »
1.  The real answer is "what is going to let you sleep well at night"?

2.  If the property qualifies as a second home (you need to check the rules) you can deduct the mortgage interest against your earnings but not the home owners' insurance.  If you have rented it then you've started depreciation and you will eventually have to "recapture" that even if you are not presently taking because it is an "idle" property (not earning rent).

3.  Who told you $925 is the fair market rent?  An agent or a web-site?  If it is an agent, why haven't they found you a tenant?

4.  What is going to let you sleep well at night?  This is perhaps the most important thing for you.

lhamo

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Re: Private Home to Rental Property-stick it out?
« Reply #4 on: February 05, 2016, 12:25:59 PM »
If it has been sitting empty since July then $925 is not the fair market rent.  Fair market rent is closer to the $750 that two people have offered you.

What are recent comps in the neighborhood?  And are comps going up or down?  If down, would reprice it at 10% below recent comps and be done with it.  If comps are going up, then it is probably worth renting it at $750 for another year or two and seeing if the market gets better.
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EngineerYogi

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Re: Private Home to Rental Property-stick it out?
« Reply #5 on: February 05, 2016, 12:52:18 PM »
1.  The real answer is "what is going to let you sleep well at night"?

2.  If the property qualifies as a second home (you need to check the rules) you can deduct the mortgage interest against your earnings but not the home owners' insurance.  If you have rented it then you've started depreciation and you will eventually have to "recapture" that even if you are not presently taking because it is an "idle" property (not earning rent).

3.  Who told you $925 is the fair market rent?  An agent or a web-site?  If it is an agent, why haven't they found you a tenant?

4.  What is going to let you sleep well at night?  This is perhaps the most important thing for you.

I need to revisit number 2, I haven't filed taxes yet this year so I definitely need to make sure I do that part right.

If it has been sitting empty since July then $925 is not the fair market rent.  Fair market rent is closer to the $750 that two people have offered you.

What are recent comps in the neighborhood?  And are comps going up or down?  If down, would reprice it at 10% below recent comps and be done with it.  If comps are going up, then it is probably worth renting it at $750 for another year or two and seeing if the market gets better.

Yeah calculator said $925, it successfully rented at $900 previously, agency hasn't been incredibly helpful... but they only get paid when it's rented so you'd think they'd try harder? $750 is probably the better answer right now, there are just so many homes sitting vacant either as rental properties or for sale right now: lots of supply and no demand.

The $125,000 was the realtor suggested price based on the current comps, but the comps have arguably been doing down each year. We listed at $135,00 based on comparable homes in 2014. :/

Off loading it, even at a loss is probably the "sleep well at night" answer... Will need to further consider. Thanks for the discussion!

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Re: Private Home to Rental Property-stick it out?
« Reply #6 on: February 05, 2016, 01:02:51 PM »
Looking through Zillow, I see a lot of houses for sale and rent in your square footage range for $125k and less.  What I don't see, however, is your house.  That makes me wonder if your agent is doing the best marketing job.  The house is on Realtor.com, so it is on MLS.

It looks like the money you put in went into bathrooms, flooring and stainless steel appliances.  The updates are nice, but they don't improve the house as a whole.  There are still a lot of updates to be made.  Not much you can do to fix the floorplan.  The living room size is a huge impediment to a sale. 

Unless the military or another major employer has plans to increase personnel in this city, I would look to cut my losses and move on.  It's clear that the house is not worth $125k or you would have had offers.  In your shoes, I would look carefully at a current market analysis in the neighborhood to see what is selling and the sale prices for those properties that sold.  I would drop the price to the point where the house would sell, even if I had to bring money to the table.  Unless employment in the area is slated to increase dramatically, I don't see the argument for holding on until the market improves, because only demand from new employed folks will overcome the current oversupply.  You will bleed until the market turns, assuming it does, if you don't sell.

EngineerYogi

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Re: Private Home to Rental Property-stick it out?
« Reply #7 on: February 05, 2016, 01:43:18 PM »
Looking through Zillow, I see a lot of houses for sale and rent in your square footage range for $125k and less.  What I don't see, however, is your house.  That makes me wonder if your agent is doing the best marketing job.  The house is on Realtor.com, so it is on MLS.

It looks like the money you put in went into bathrooms, flooring and stainless steel appliances.  The updates are nice, but they don't improve the house as a whole.  There are still a lot of updates to be made.  Not much you can do to fix the floorplan.  The living room size is a huge impediment to a sale. 

Unless the military or another major employer has plans to increase personnel in this city, I would look to cut my losses and move on.  It's clear that the house is not worth $125k or you would have had offers.  In your shoes, I would look carefully at a current market analysis in the neighborhood to see what is selling and the sale prices for those properties that sold.  I would drop the price to the point where the house would sell, even if I had to bring money to the table.  Unless employment in the area is slated to increase dramatically, I don't see the argument for holding on until the market improves, because only demand from new employed folks will overcome the current oversupply.  You will bleed until the market turns, assuming it does, if you don't sell.

Good points. I called my realtor earlier this month to find out he'd been terminated from the realty company and my listing was handed over to another realtor within the company and no one ever called and told me. >:| I need to be proactive and get ahold of the head broker. I see a house 4 doors down from me was sold in October http://www.zillow.com/homedetails/1304-24th-St-Alamogordo-NM-88310/75032999_zpid/ for $125,000. My house is slightly smaller but with a much larger lot. The one 3 doors down from me sold in August for $144,000. There is another in the neighborhood currently listed for $120,000 with a more updated kitchen.

Maybe we'll drop the price to $119,000 and offer a buyer's incentive like paying closing costs?

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Re: Private Home to Rental Property-stick it out?
« Reply #8 on: February 05, 2016, 02:29:03 PM »
The house that sold for $125k is a single story that is larger and has an enclosed patio room.  Your lot size is not helpful to your sale because the yard is not landscaped.  Buyers see a project, not extra space for the kids and the dog.  One story houses also generally sell for more per square foot.

I would be all over that broker if my agent were terminated and I was not told.  It sounds like they are making little or no effort to sell your house, and the listing has almost 5 months to go.  Once you get them to cough up a current market analysis, I would decide about dropping the price.  $119,000 with a $3,000 closing allowance might overcome the living room and yard objections, but look at the comparable sales as if you were buying the house and then decide.

EngineerYogi

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Re: Private Home to Rental Property-stick it out?
« Reply #9 on: February 05, 2016, 03:31:15 PM »
The house that sold for $125k is a single story that is larger and has an enclosed patio room.  Your lot size is not helpful to your sale because the yard is not landscaped.  Buyers see a project, not extra space for the kids and the dog.  One story houses also generally sell for more per square foot.

I would be all over that broker if my agent were terminated and I was not told.  It sounds like they are making little or no effort to sell your house, and the listing has almost 5 months to go.  Once you get them to cough up a current market analysis, I would decide about dropping the price.  $119,000 with a $3,000 closing allowance might overcome the living room and yard objections, but look at the comparable sales as if you were buying the house and then decide.

*sigh* it was partially landscaped, built in sprinkler system and sod, but the tenants didn't take care of it. Sprinklers still function, also put in the 6 foot privacy fence (which no other home has, 4 1/2 foot is standard) but that was more for our convenience.

Another Reader

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Re: Private Home to Rental Property-stick it out?
« Reply #10 on: February 05, 2016, 05:22:52 PM »
Fortunately you have a relatively high income and you can absorb the loss. 

The broker and the property manager don't seem to be doing the job for you, and I think I would have a pointed discussion with both of them.  However, I see a number of houses in your zip code for rent in the $700's, and as you get close to $1,000, the houses are newer and nicer.  Without a solid knowledge of the area, my guess is market rent for your house is under $900, and the $750 might be reasonable. 

In your shoes, I would take the loss and get this one sold.    Some people do well by buying a house at each duty station and converting it into a rental when they are reassigned, but unless you are assigned to a strong housing market with a diversity of large employers, the strategy has a good chance of failing at some point.

EngineerYogi

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Re: Private Home to Rental Property-stick it out?
« Reply #11 on: February 05, 2016, 08:26:44 PM »
Fortunately you have a relatively high income and you can absorb the loss. 

The broker and the property manager don't seem to be doing the job for you, and I think I would have a pointed discussion with both of them.  However, I see a number of houses in your zip code for rent in the $700's, and as you get close to $1,000, the houses are newer and nicer.  Without a solid knowledge of the area, my guess is market rent for your house is under $900, and the $750 might be reasonable. 

In your shoes, I would take the loss and get this one sold.    Some people do well by buying a house at each duty station and converting it into a rental when they are reassigned, but unless you are assigned to a strong housing market with a diversity of large employers, the strategy has a good chance of failing at some point.

Yep, I totally agree. Phone call being made on Monday. Time to cut our losses. Thanks for the discussion!