Author Topic: Refi and rent, or just sell?  (Read 4360 times)

huzar

  • 5 O'Clock Shadow
  • *
  • Posts: 55
  • Age: 45
  • Location: Bellevue, WA
  • Pastor of Muppets
Refi and rent, or just sell?
« on: February 07, 2015, 10:40:44 PM »
I'm currently taking a serious facepunch on living costs. Long story. I originally bought the house back in 2004, for 362K. It last appraised (for a refi) at 491K in the fall of 2013. The market has appreciated since, and is continuing to do so. Zillow currently estimates it at 558K. Bellevue has an excellent school district, there's lots of well-paying IT jobs, and I am in easy walking distance to parks, an elementary, and a junior high. It is a family/kid-friendly neighborhood. The house is built in 1956, six (mostly small) bedrooms (three of those in a daylight basement), 2560sq ft over two stories. There's 10K of deferred maintenance on the house -- new fencing, some minor roofing work. Otherwise, the house is a little tired, but absolutely usable. No HOA costs. I am living in the house currently, but it is just me and my dog. At present, I am in a 15y/3.875 fixed mortgage, with 282K/13.5y remaining (300K at refi time). All in, this is costing me almost 2700/month (PITI).

I am contemplating a refi into a 30y fixed. Let's say similar rates, 280K@3.8%, puts me at about 1750/mo PITI (1300 PI, 450 TI). From there, I can go one of two ways... I can continue to live there, now freeing up 1K/mo in cash. Or I can rent it out. Expected rent would be 2300/mo. Based on the fact that three of the houses within a block of me are renting in that range, it seems realistic. I would plan on being a hands-off landlord. Probably leave this in the hands of a property manager (I have a line on a very good one -- my good friends have six properties managed through them), and at least in the near future any money in excess of PITI and management fees would be directed into an emergency repair fund for the property, so at least for the first couple of years I don't think this would meaningfully contribute to my actual free cash flow.

Or I can just sell the house. The house is not appropriate for my needs. I would like a much smaller house, with a large outbuilding or detached garage. I can currently telecommute, though, being in IT, the immediate Seattle area is a great place for me, and I'm a long way from FI so I don't think I can hem myself in and move to somewhere with very low COL if it cuts into my earning abilities. I will have certain non-trivial expenses (child support) for at least another 11 years. I have ~25K of unsecured debt, which really, really needs to die, and I currently make 150K.

What say ye?
« Last Edit: February 07, 2015, 11:07:49 PM by huzar »

bigalsmith101

  • Pencil Stache
  • ****
  • Posts: 520
  • Age: 32
  • Location: Lake Stevens, WA
  • Yes, that's really my face.
    • No Jobs, No Responsibilities, No Better Time then Now
Re: Refi and rent, or just sell?
« Reply #1 on: February 08, 2015, 12:26:51 AM »
Huzar, nice to see you taking action! I'll be the first to submit my opinion (I only know as much as I read and have no personal experience with this).

It seems that the pertinent facts are as follows:
 
Market Value: ~$558,000
Original Purchase price: $362,000
Original Mortgage Amount: ??
Interest Rate: 3.875%
Mortgage Term: 15yrs 
Term remaining: 13.5yrs
Amount remaining on mortgage: $282,000k
Gross Rents: ~$2300 (if rented)
PITI : $2700
HOA costs: None
Deferred maintenance notes: ~$10k
Anything else special or unique: Located in Bellevue, Washington in excellent school district near to well paying IT jobs, easy walking distance to parts, elementary and junior high school. Kid/Family friendly neighborhood.

I think that it is pretty clear from an investment stand point to simply sell your home. If you can indeed get a full $558k for the home, it stands to reason that you will net $276k. This is your new viewpoint for decision making purposes.

If you rent out your home after refinancing you stand to clear $550 a month or, $6600/yr. Reduce by 10% for property management and your left with $5940. Following the generalized 50/50 rule to account for vacancy and repairs that becomes, $2970/yr.

Your home, valued as a $276k equity investment is now returning 1.07% as an investment, and only after your previously stated emergency fund is fully funded after a few years. NO FUCKING WAY MAN. Even if you have full occupancy and no problems, you'll earn 2.15%. That's absolutely terrible. Sure you might earn some equity if the market appreciation continues, but that stinks of timing the market and STILL won't likely generate the same income. And this only if your deferred maintenance remains deferred.

Seeing as you intend to move out anyway into a smaller house with an outbuilding for your toys/hobbies, you now have a few choices. If you choose to remain in the Bellevue area, you can fund the majority of your new to you, much smaller home with the proceeds of your current home sale leaving you with either no mortgage or a drastically reduced one.

If you leave the high cost of living area that represents Bellevue, you can find a much cheaper home that meets your requirements and buy it outright, or damn near to it depending on property size. This leaves the vast majority of your extremely high personal income of $150k to assassinate your $25k unsecured debt, and then invest the remaining after expenses amount into higher yielding portfolios such as a vanguard fund or a much better rental (though I don't recommend the rental in your case as you prefer to be a hands off land-lord).

Considering that with the best case scenario you will now find yourself with a greatly reduced cost of living and zero unsecured debt, you will now be able to focus more clearly on reducing your other anti-mustachian expenses. Paired together with your very high earning capacity you could easily find yourself in a position to drastically decrease your time frame to reach FI while enjoying a much simpler lifestyle.

My two cents? Take your money and run man.

Edited for P.S: Or, instead of running, mount up a new KTM1190ADV and ride like a bandit into the glorious sunset!!!
« Last Edit: February 08, 2015, 12:37:08 AM by bigalsmith101 »

huzar

  • 5 O'Clock Shadow
  • *
  • Posts: 55
  • Age: 45
  • Location: Bellevue, WA
  • Pastor of Muppets
Re: Refi and rent, or just sell?
« Reply #2 on: February 08, 2015, 01:22:25 AM »
Thanks for that, Alex. The 1190 is probably not for me, however. I'm kind of waiting to see what if anything comes of Honda's new Africa Twin replacement. Might be a good time to get rid of the V-Strom and the Husky, and collapse two bikes into one. But that's wishful thinking while I'm taking such hits... One of these days I'll get my motorcycle helmet on to better withstand the slaps upside the head and post a full budget...

I guess for now I'm so focused on just freeing up cash flow that I'm thinking that if the house goes from costing me ~33K/y to 0, and I rent something suitable (and dog-friendly) for, say 1200/mo, I come out 1.5K/mo ahead, which is huge in the short term. Of course I can get close to that and free up 1K/mo just by doing a refi, and not dealing with the headaches of renting, etc.

Taking a realistic view of the sale situation, I could probably sell the house with the deferred maintenance for, say 500K this summer. I've always thought estimates (especially Zillow's) to be on the high side. I'm anticipating taxes/fees/commissions to chew up about 10%, so that leaves 450K. Minus the 275K I will still then owe on the loan leaves me with 175K. There's sweet fuck-all I can buy in this region that meets requirements such as a good-sized outbuilding, very high speed internet (needed for work) and suitably far away from a meth lab for much less than about 250K, maybe 275K? Moving to some place like North Bend, Auburn, or Granite Falls leaves me with a terrible commute if the telecommuting gig falls through at any point. I had been leaning towards a sale prior to floating this refi/rental trial balloon, but I need to have a much better idea of what I do as far as new accommodations and where I put any proceeds from this sale.
« Last Edit: February 08, 2015, 01:37:22 AM by huzar »

escolegrove

  • Stubble
  • **
  • Posts: 164
    • Reluctant Landlord
Re: Refi and rent, or just sell?
« Reply #3 on: February 12, 2015, 12:27:28 AM »
Everyone has their own opinion. I wrote an article for bigger pockets on the rent versus sell issue.
http://www.biggerpockets.com/renewsblog/2014/12/29/sell-or-rent-out-home-factors-to-consider/

That being said, what are you goals. Yes you could sell the house and get an immediate profit but are you able to reinvest it in an investment that would be producing better returns than your house.

Have you thought about renting out the rooms. This would allow you to live rent free, have others pay off your mortgage and preserve the capital. Not have to do a refinance and have your house paid off in 15 years :)

The key is too look at your plan. I love managing houses (we self manage). It is fun for me and the money we save is even more awesome. Our goal is to use the houses cash flow to fund early retirement in 15 years.

Good Luck! Its awesome to have options :)

huzar

  • 5 O'Clock Shadow
  • *
  • Posts: 55
  • Age: 45
  • Location: Bellevue, WA
  • Pastor of Muppets
Re: Refi and rent, or just sell?
« Reply #4 on: February 12, 2015, 12:42:49 AM »
Thanks, Elizabeth.

You hit on a big part of my problem with just selling the place -- I don't have a clear idea of where I'd plow the money into. Bellevue is predicted to appreciate another 5% or so this year, at least according to Zillow. And really, what I want in a house is not obtainable in the Seattle area at a reasonable price level. A small house with a big garage or a barn automatically means a good sized lot, which is expensive. A terrific advantage of my current place is that at least for an IT worker, the location is superb -- easy access to all the tech companies on the Eastside, like Microsoft, and also easy access to the innovation hub that Pioneer Square has turned into. Heck, it's even within biking distance (ok, Pioneer Square is 12 miles or so).

I'm looking at refi and rent as a solution to a short to medium term problem, which is my cash flow issue. I have a line on an in law studio in a friend's back yard that I can rent for $650/mo that is pretty conveniently located, which means that my house needs to be rented at $2300 for 5 months of the year to break even on cash flow, assuming no major expenses. And the Seattle Metro area is really a place where it is becoming difficult to meet the regular rules of Real Estate investing -- the house prices are climbing too high. Not quite Bay Area levels, but still.

Renting out rooms is tricky -- at 40, I'm pretty set in my ways, and I have a firm idea of what I like and I don't like. I have rented in the past, but it has been to people I have known for a long time prior to renting, and with whom I as (and still am) friends. A straight-up rental to someone from craigslist, with a commensurate level of vetting, seems like a recipe for disaster. It is nevertheless an idea I have looked at more closely.

escolegrove

  • Stubble
  • **
  • Posts: 164
    • Reluctant Landlord
Re: Refi and rent, or just sell?
« Reply #5 on: February 12, 2015, 04:03:03 AM »
I understand exactly where you are coming from! I do like craigslist because it's very easy to set very clear distinction for what you are looking for! That being said of you can just move into an in law suite even better!

Are you in the position to just buy another "smaller" house that fits your needs! Than you could keep this one and have someone else pay the mortgage down. You can reduce your living cost buy living in a smaller home? Personal property only requires 5% down. Just a thought as a way to continue to build equity while still owning a house!

I understand exactly what you mean about cash flow! I downsized this past year to a friend empty house. It worked great because it allowed us to save the downpayment for our home! Turning homes into great investments is a key part of our early retirement goal!

Good luck

ncornilsen

  • Pencil Stache
  • ****
  • Posts: 904
Re: Refi and rent, or just sell?
« Reply #6 on: February 12, 2015, 09:22:28 AM »
Keep in mind you may not be able to re-fi AND rent it out...  they tend to have a 1 year occupancy requirement that is renewed when you refinance.


waltworks

  • Magnum Stache
  • ******
  • Posts: 3354
Re: Refi and rent, or just sell?
« Reply #7 on: February 12, 2015, 09:50:04 AM »
As SOP, I now post this on every sell/rent thread:
http://forum.mrmoneymustache.com/real-estate-and-landlording/examples-of-rentals-you-own-that-perform-well-financially/

Your house sucks as a rental. Sell it.

I'll ask again, Escolegrove - at what price would you advise the OP to sell?

-W

huzar

  • 5 O'Clock Shadow
  • *
  • Posts: 55
  • Age: 45
  • Location: Bellevue, WA
  • Pastor of Muppets
Re: Refi and rent, or just sell?
« Reply #8 on: February 12, 2015, 10:40:52 AM »
As SOP, I now post this on every sell/rent thread:
http://forum.mrmoneymustache.com/real-estate-and-landlording/examples-of-rentals-you-own-that-perform-well-financially/

Your house sucks as a rental. Sell it.

I'll ask again, Escolegrove - at what price would you advise the OP to sell?

-W

Yeah, but you'll notice that in that thread Seattle gets mentioned specifically and repeatedly as a market where the numbers just don't pencil out. Two years ago was a different story, but the market has rebounded here tremendously. As I said, my realistic equity in the house assuming 10% costs associated with sale is probably about 175K. I'm sure there are parts of the country where that will get me a rental property that ticks off all the check marks, but I have not done enough research to know where such places may exist, and I'm not sure I want to be a long-distance landlord. So this leaves me with the option of taking that money and investing it in something else...

waltworks

  • Magnum Stache
  • ******
  • Posts: 3354
Re: Refi and rent, or just sell?
« Reply #9 on: February 12, 2015, 11:08:39 AM »
Sure, but ANY investment will beat your house. Nice safe no-work no-stress bonds!

It could appreciate a bunch more, of course. It could also drop. So I'd leave that consideration out of the decision.

"My area sucks to own rental real estate" is not a good reason to keep it!

-W

As SOP, I now post this on every sell/rent thread:
http://forum.mrmoneymustache.com/real-estate-and-landlording/examples-of-rentals-you-own-that-perform-well-financially/

Your house sucks as a rental. Sell it.

I'll ask again, Escolegrove - at what price would you advise the OP to sell?

-W

Yeah, but you'll notice that in that thread Seattle gets mentioned specifically and repeatedly as a market where the numbers just don't pencil out. Two years ago was a different story, but the market has rebounded here tremendously. As I said, my realistic equity in the house assuming 10% costs associated with sale is probably about 175K. I'm sure there are parts of the country where that will get me a rental property that ticks off all the check marks, but I have not done enough research to know where such places may exist, and I'm not sure I want to be a long-distance landlord. So this leaves me with the option of taking that money and investing it in something else...

escolegrove

  • Stubble
  • **
  • Posts: 164
    • Reluctant Landlord
Re: Refi and rent, or just sell?
« Reply #10 on: February 12, 2015, 11:11:23 AM »
As SOP, I now post this on every sell/rent thread:
http://forum.mrmoneymustache.com/real-estate-and-landlording/examples-of-rentals-you-own-that-perform-well-financially/

Your house sucks as a rental. Sell it.

I'll ask again, Escolegrove - at what price would you advise the OP to sell?

Walt- We think differently regarding the use of rentals.

As I have said repeadily, its not the price or number, its what you can "do" with the income! If one has a grand idea but needs 10k for start up costs and knows he can turn that into a million he should sell the house to get that downpayment. If another person is going to sell the house and make 100k but use it for consumer spending. They should keep it in the house, even if there are better opportunity costs.

All of our houses are "awful" rentals based on the advise that you provide. On the other hand, our rentals produce 40% + return (when you include principle pay down) based on the cash I put into the home, not the price they are worth. The cash out of pocket in my mind is what's important! That doesn't include appreciation which our houses have sustained alot and will continue to due to the locations and areas. There is no other investment that I could produce these returns with less than 2 hours a month of maintenance not including installing or buying. I am awful at stocks and have done well in real estate, because its my "thing". That being said, I am not advocating everyone to "follow" my method. I am simply providing food for thought.

I had the opportunity to be feature on bigger pockets podcast. Here is my story and method http://www.biggerpockets.com/renewsblog/2015/01/01/bp-podcast-103/.



waltworks

  • Magnum Stache
  • ******
  • Posts: 3354
Re: Refi and rent, or just sell?
« Reply #11 on: February 12, 2015, 11:18:26 AM »
Your experience is counter to that of EVERY experienced landlord I know, but good luck. 40% (hell, 10-15%) returns are only going to happen, in the long run, on properties with VERY high rent/value numbers.

Everyone thinks they're a freaking genius right now because houses have appreciated from the bottom in 2009/10 or so. Same story with stocks. Party will be over eventually, though.

-W

stickynotes

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Re: Refi and rent, or just sell?
« Reply #12 on: February 12, 2015, 11:29:07 AM »
Agree with the previous posters. Take your equity and run. It's not a good rental and if you think the place is a little tired now, wait til you get a family of four in there for 2 years. Pull your money out, find a cheap apartment to rent and wait for this market craziness to settle down.

huzar

  • 5 O'Clock Shadow
  • *
  • Posts: 55
  • Age: 45
  • Location: Bellevue, WA
  • Pastor of Muppets
Re: Refi and rent, or just sell?
« Reply #13 on: February 12, 2015, 11:57:07 AM »


"My area sucks to own rental real estate" is not a good reason to keep it!

-W


Fair point.

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5104
Re: Refi and rent, or just sell?
« Reply #14 on: February 12, 2015, 12:11:55 PM »
Based on what you have said, it looks like you are trying to make a decision with little to no information.  Before you do anything, you need to have accurate numbers.

Start by looking around your neighborhood to find the agents that work in the area.  Pick two or three and call them.  Tell them you are thinking about selling, but you need an estimate of the selling price - a competitive market analysis.  Explain the unique characteristics of your home and show it to them if they want to see it.  They should gladly prepare an analysis, hoping to get the listing.

Second, do some real rental research.  Zillow, Craigslist, Hotpads, whatever websites are used most in your area, check them.  Get some references to property management companies and look at their listings.  Call a couple of them and ask for rental comps.  Describe your house and ask them to estimate market rent.  Pin down the fees for leasing and managing the property in the same conversation.  The resale agents you talk to should be able to generate a list of rent comps from the MLS as well.

Third, get some referrals to banks and mortgage brokers and call them.  Rates have gone up in the last week and you may be unpleasantly surprised here.  Tell them you are not sure what you want to do - rent or stay.  Give them your basic income and debt info and your best estimate of your credit score.  Don't let them pull your credit at this point.  They should be able to give you current rates and terms for owner-occupied and investment property mortgages with the basic information. 

If I decided to keep the house, I would refinance as an owner-occupant and then decide if I needed to move.  You do not have to stay a year to get an owner-occupant loan, you just have to intend to occupy it as your primary residence. 

Fourth, realize this is not a great rental.  At best it will be breakeven.  However, if you are considering reoccupying the house in a few years, it will likely be less expensive to keep the house than it would be to incur the costs of selling and buying again.  We do not know the future direction of the market, but there is also the risk of being priced out in a few years.  I have seen a lot of people here in Silicon Valley that have gotten priced out over the years and it could easily happen in Seattle.  It should not be the sole determinant of your decision, but you should keep that in mind.

If you do all this, you will be in a much better position to make the best decision for you.

huzar

  • 5 O'Clock Shadow
  • *
  • Posts: 55
  • Age: 45
  • Location: Bellevue, WA
  • Pastor of Muppets
Re: Refi and rent, or just sell?
« Reply #15 on: February 12, 2015, 12:56:03 PM »
Based on what you have said, it looks like you are trying to make a decision with little to no information.  Before you do anything, you need to have accurate numbers.

Start by looking around your neighborhood to find the agents that work in the area.  Pick two or three and call them.  Tell them you are thinking about selling, but you need an estimate of the selling price - a competitive market analysis.  Explain the unique characteristics of your home and show it to them if they want to see it.  They should gladly prepare an analysis, hoping to get the listing.

Second, do some real rental research.  Zillow, Craigslist, Hotpads, whatever websites are used most in your area, check them.  Get some references to property management companies and look at their listings.  Call a couple of them and ask for rental comps.  Describe your house and ask them to estimate market rent.  Pin down the fees for leasing and managing the property in the same conversation.  The resale agents you talk to should be able to generate a list of rent comps from the MLS as well.

Third, get some referrals to banks and mortgage brokers and call them.  Rates have gone up in the last week and you may be unpleasantly surprised here.  Tell them you are not sure what you want to do - rent or stay.  Give them your basic income and debt info and your best estimate of your credit score.  Don't let them pull your credit at this point.  They should be able to give you current rates and terms for owner-occupied and investment property mortgages with the basic information. 

If I decided to keep the house, I would refinance as an owner-occupant and then decide if I needed to move.  You do not have to stay a year to get an owner-occupant loan, you just have to intend to occupy it as your primary residence. 

Fourth, realize this is not a great rental.  At best it will be breakeven.  However, if you are considering reoccupying the house in a few years, it will likely be less expensive to keep the house than it would be to incur the costs of selling and buying again.  We do not know the future direction of the market, but there is also the risk of being priced out in a few years.  I have seen a lot of people here in Silicon Valley that have gotten priced out over the years and it could easily happen in Seattle.  It should not be the sole determinant of your decision, but you should keep that in mind.

If you do all this, you will be in a much better position to make the best decision for you.

On the sale comps, fair enough. I'm going off zillow value minus some discount, but that is definitely not the only source.

On the monthly rental side, I feel pretty good about the $2300/mo. Maybe $2500/mo. This is based on talking with my immediate neighbors, where three houses are currently rented, on craigslist comps, and on speaking with my friends who have six rental properties in the Seattle area. I should confirm those numbers with a rental listing agent.

Property management will be about $150/mo. One agent quoted a fixed fee of $125/mo for any rent over 2K, and the other agent, the one my friends use with great success and satisfaction, would be $175. I'd lean towards her because she comes with a good track record and a strong recommendation from someone I trust.

I understand that this will not be a great rental. I expect that any positive cash flow it generates will go towards a rehab/repair fund, which would either be consumed while the place was rented, or for renovations so that I could sell it and still get the 2 in 5 owner occupied tax exemption. At best, this would yield about 20K over three years, assuming full occupancy and no major fuckups... so, maybe not enough?

Lots to still consider here. I appreciate the feedback.

sokoloff

  • Handlebar Stache
  • *****
  • Posts: 1193
Re: Refi and rent, or just sell?
« Reply #16 on: February 21, 2015, 07:21:41 AM »
One thing I haven't seen mentioned is that you can exclude up to $250K of the gain on the sale of your house, so long as you don't convert it to a rental. That's the clean story.

If you do convert it to a rental, things get murkier (what's the basis for the rental, which drives depreciation), and you still have to sell it while you've lived there as your primary residence for 2 of the last 5 years. Plus, you have 2-3 years of renters tearing it up and then a rush to sell to capture the 0% capital gains exclusion within the 3 year period from moving out.

That's another pretty big point to say "Sell it now and bank the capital gains exclusion" in my book.