Author Topic: Rent Out, Sell, or Do Something Crazy?  (Read 4149 times)

lv2glrfy

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Rent Out, Sell, or Do Something Crazy?
« on: November 07, 2019, 01:30:08 PM »
Hello, fellow Mustachians! In the nearish future, should we rent our house (only property, primary residence) out to go more Mustachian, sell it, or do something else creative I haven't thought of? Forgive me for the dumb scenario, but I'm really starting to turn in circles about what to do. Here's the situation:

-Bought in 06/2018 for 195k, 30 yr fixed
-Current value around 210k
-182k left on mortgage
-1,224 monthly payment
-Making DIY, shoestring budget updates that will increase value
-4% projected value growth for the next year
-Roughly 1,600 potential monthly rent income
-1,900 sqft of space and huge yard for 2 people
-A whopping 45 minutes+ of medium to heavy traffic from work, church, and everywhere we want to be

I'm pretty sure that renting out (or selling) right now would be a bad financial move--every calculation and percentage rule I've looked at seems to say we should stay put and build equity right now. I understand that. But what should we do once it's profitable?

We bought this place before we went Mustachian and assumed we'd soon be filling it to the brim with kids, friends, and visiting family members. That last thing has happened and it's been fun, but the first two things not so much. We also didn't know at the time where we'd be working or doing most of our life activities, but now, we work at the same in-town agency that's a world away from home but 2 minutes from our church (that is itself 2 minutes from where all our friends live.) It seems as though the wise thing would be to move in-town at some point.

We love this quiet house dearly and really enjoy being away from the in-town Atlanta craziness, but it's gotten to the point where we're just sleeping in an older suburban neighborhood and doing literally everything else in an area that's 45 minutes away. It's just not very Mustachian of us at all.

Should we wait until this house passes the 1% rule and rent it out (thus saving it to maybe move back into in a later life stage), wait until it's profitable and sell, or something else entirely? Also, I welcome any recommendations for how to get to a profitable point sooner (we've recently started overpaying our monthly payment by 200 or so.)

« Last Edit: November 11, 2019, 08:26:09 AM by lv2glrfy »

dandarc

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #1 on: November 07, 2019, 02:24:57 PM »
You should not buy a house if you know you'll be looking to move in the near future, but that is neither here nor there for your situation. You also don't have any clear plan for when you might move back in to the house.

Moving into town is clearly the right move for you knowing what you know now. I'd sell the house - the $400 / month spread from payment to the likely rent isn't giving you much cash-flow to handle unexpected things that will come up. Doesn't read like you have $50K lying around so you can easily afford to play the appreciation game on the value and rent.

After selling, you might get a little money out of the house, at the very least shouldn't need to bring too much to closing. May sting a little, but you did live in the house for 18 months or more by the time this deal is done - chalk any financial loss on the house to learning and "I needed to pay for a place to live somewhere".

lv2glrfy

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #2 on: November 07, 2019, 02:41:03 PM »
You should not buy a house if you know you'll be looking to move in the near future, but that is neither here nor there for your situation. You also don't have any clear plan for when you might move back in to the house.

Yeah, I take the blame for that. To be fair to me 17 months ago, we knew we were going to be staying in this same metro area for a long time, 45 minutes is a tiny commute for this car-dependent hellscape (seriously, 90 minutes+ is very common), and the only financial advice I had consistently heard was "you darn millennials never buy homes and it's ruining you!"

May sting a little, but you did live in the house for 18 months or more by the time this deal is done - chalk any financial loss on the house to learning and "I needed to pay for a place to live somewhere".

Sigh. I was afraid I'd hear this. I've gotten really emotionally attached to this place, but I guess that's the least of the issues with the situation.
So are you saying you think that even a financial loss would be better than staying put and building some equity? A year or so more would at least earn us back our down payment and a small profit...

dandarc

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #3 on: November 07, 2019, 02:52:22 PM »
You're saying your commute could be 5 minutes each way instead of 45. For me, that is almost a "Money is no object" difference. You may feel differently about the situation, but getting an hour and a half back every day will make your life better in a lot of ways.

lv2glrfy

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #4 on: November 07, 2019, 03:19:02 PM »
Interesting. Thank you for the advice.
Re: renting, I dont know if I quite understood the cash cushion point you madeyoure just saying that wed need to meet the 1% rule plus have more money in the bank to make renting out a stable investment?

MKinVA

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #5 on: November 07, 2019, 05:13:56 PM »
Your primary residence does not need to meet the 1 % rule to be a good long term investment. Have all of your plans changed for the future? Not gonna have a bunch of kids? Not interested in the suburban life? The mortgage doesn't sound too high, what is the upkeep? Does it need a lot of work before you can put it on the market?

Atlanta is a pretty hot market all the way around. I think you should come out clean fairly quickly. I think you need to get very specific about what your goals are before you sell and buy something else closer to work.

Do you want rental property? This is not a good candidate based on the ratio even if you pay down the mortgage. The point of 1% is that it is the best return on the investment for the money.
Do you still want to fill your house with kids?
How long will you guys be working in town?
Are you committed to this church and no other closer to home?

Work it out on paper and with various budgets before you give up. Moving alone is expensive.


waltworks

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #6 on: November 07, 2019, 07:28:48 PM »
You're spending something like 20 hours each driving each month (I'm assuming you drive separately). No idea how you value your time, but let's say minimum wage-ish. $200 each per month for that.

Assuming you're on a freeway for at least some of that time, you've gotta be doing close to 1000 miles each per month. I forget what the IRS lets you deduct for gas/maintenance/depreciation on a car but it's in the ballpark of 50 cents. If you're driving an old beater, it's quite a bit less, so let's say 25 cents. $250 each, every month.

So living where you do is, at a minimum, costing you $900 per month. It's probably more, though, if you're also driving to church and to see friends, not just to work.

This is leaving aside entirely how unhealthy it is for you to spend all that time sitting in cars breathing exhaust from other cars and being stressed out about traffic. If you care about the environment at all, obviously all that driving is not good either. So there are non-financial costs here too.

Your house is, thus, costing you somewhere between $10,000 and $15,000 a year, while fattening you up and trashing the planet and local air quality.

Sell it (it's a crappy rental) and move to where you actually spend your time.

-W

dandarc

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #7 on: November 08, 2019, 10:15:51 AM »
Interesting. Thank you for the advice.
Re: renting, I dont know if I quite understood the cash cushion point you madeyoure just saying that wed need to meet the 1% rule plus have more money in the bank to make renting out a stable investment?
I'm just saying houses come with expected and unexpected drains on cash flow. Forget the 1% rule - you said you've got $1600 in rent and a $1200 payment. Looks like it should work OK if nothing ever goes wrong, but what do you do if the house is vacant and you need to replace the roof at the same time?

You need money or at least available credit on short notice when you own real estate. That's true whether you live in the place or rent it out.

lv2glrfy

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #8 on: November 08, 2019, 01:17:42 PM »
First off: thanks to all for the advice!! It's truly helpful and inspiring, even when I get difficult answers.

Have all of your plans changed for the future? Not gonna have a bunch of kids? Not interested in the suburban life? The mortgage doesn't sound too high, what is the upkeep? Does it need a lot of work before you can put it on the market?

No, that's the thing--we definitely still plan on having that bunch of kids in suburbia. It's just that it might happen in 5-7 years instead of the expected 1-2. That's exactly why I originally thought that "saving it for later" via renting it out would be smart, but based on y'all's opinions, it seems rather not.

Upkeep has been low thus far. We've DIYd everything we could. The only thing that would probably need to happen before listing it is replacing the roof...although my father-in-law just hopped up on the roof yesterday and told us it looks remarkably solid for its age. But we've been preparing for that large purchase and are ready to spring into action if something major happens.

Our lives have the potential to become a more even mix between in-town and suburbs soonish. DH's career will pretty much always be in-town, because he's in film/media, but the future is much more unclear for me.

So living where you do is, at a minimum, costing you $900 per month. It's probably more, though, if you're also driving to church and to see friends, not just to work.

Split that in half, because we work at the same company & ride together to literally everything (we're newly married and in love blahblahblah). But we care about the environment and I totally see your point. I want to reiterate that originally, we thought we were buying our house-for-the-next-decade and knew we'd want more freedom than the 600 sqft, $1900-per-month in-town rentals could offer.

waltworks

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #9 on: November 08, 2019, 01:31:46 PM »
Yes, cut that in half - but remember I was assuming you're driving a gas-sipping beater and your time is only worth minimum wage...

I think you should move, the real question is whether you keep the house and rent it (financially bad move, probably) or sell it (financially better most likely).

If you think you'll actually raise your kids in this particular house and want to try being landlords, hold onto it. You'll slowly lose money on repairs and BS, but you'll be ready to go when you have the kids.

I'll warn you, though - you have no idea what you'll actually want when you have kids. We bought what we thought was the perfect house for our family - and then realized that once the kids hit 5 years old or so and wanted to explore the neighborhood/world on their own that our chunk of suburbia was super car-centric and kid unfriendly (sounds like your place). Your priorities will change dramatically and honestly, you won't know what you really want until you actually have kids running around, no matter how well you think you're planning it now.

So I vote sell.

-W

lv2glrfy

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #10 on: November 08, 2019, 01:51:21 PM »
You need money or at least available credit on short notice when you own real estate. That's true whether you live in the place or rent it out.

I hear you. We're at about 40k of accessible cushion, currently. My naive plan was for us to be the fixer-upper guinea pigs, so that once we got tenants in, there would be virtually nothing to improve and it would be relatively smooth sailing.

I'll warn you, though - you have no idea what you'll actually want when you have kids.

There's the rub. It's only now I've realized how long it might be until we get to that stage. My mind is always 10 years ahead, I think...anyway, selling soon is looking more and more reasonable the more you guys talk about it. I think we should at least wait until this June when we can avoid capital gains taxes, though....

waltworks

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #11 on: November 08, 2019, 02:46:49 PM »
Barring the house selling for a LOT more than you project, you will not owe any capital gains regardless of when you sell, since you'll be deducting all the overhead costs at both ends of the transaction (from back when you bought, and from when you sell).

I'd be pretty shocked if you don't actually show a small loss for tax purposes. You'd need the place to sell for $215k+ to even come close to a profit in most normal circumstances.

-W

lv2glrfy

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #12 on: November 08, 2019, 02:49:49 PM »
Good point...

lv2glrfy

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #13 on: January 03, 2020, 12:31:24 PM »
Hello again all! Just checking back in to see if anyone's willing to answer an additional question for me.

I believe we're pretty sold on renting the house out with the help of a property manager at this point, for better or for worse. If crap hits the fan during the first lease we sign, we could reconsider selling based on how we felt (18 or so months in the future, assuming we get a tenant relatively quickly).

My question now is another age-old one: rent or buy once we go in-town? This would hopefully be in the next 6 months or so. Everything above remains mostly the same. We'd be looking at condos in the 150k-170k range in town and would definitely rent it out when we eventually moved back to the 'burbs (and it would definitely meet the 1% rule right off the bat, so cash flowable in the future). However, we can get a comparable place for about 1200-1400 monthly rent including utilities and such. If we're willing to live in a slightly more sketchy complex, amend that to 1100-1200. The michaelbluejay calculator tells me that buying becomes profitable in year 3 (https://michaelbluejay.com/house/rentvsbuy.html)...but my question is, what if you might move out and replace yourself with a tenant during that same year 3? Is it still smart if what you're relying on is the ability to rent it out in the future? Thanks in advance!!

waltworks

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #14 on: January 03, 2020, 09:35:28 PM »
We'd be looking at condos in the 150k-170k range in town and would definitely rent it out when we eventually moved back to the 'burbs (and it would definitely meet the 1% rule right off the bat, so cash flowable in the future). However, we can get a comparable place for about 1200-1400 monthly rent including utilities and such. If we're willing to live in a slightly more sketchy complex, amend that to 1100-1200.

So, if the condo you're going to buy would meet the 1% rule, how come you can rent a comparable one for less than that? Something doesn't make sense there.

-W

Dicey

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #15 on: January 03, 2020, 10:32:01 PM »
I call bullshit on using a property manager. Nobody cares more about your house than you do. You're not that far away and you have DIY skills.

lv2glrfy

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #16 on: January 04, 2020, 07:44:03 AM »

So, if the condo you're going to buy would meet the 1% rule, how come you can rent a comparable one for less than that? Something doesn't make sense there.

-W

Perhaps Im being naive about the possible rent income. But the area weve been looking to buy in is closer to our work and in a more bougie area of town...it might be harder to snap something up there, but Im seeing places for rent around 1500/mo or more. If we rented, wed of course be willing to go a little further from work (still less than 5 mi away) in the slightly more grungy neighborhoods to snag that 1200-1400 rent.

lv2glrfy

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #17 on: January 04, 2020, 07:47:21 AM »
I call bullshit on using a property manager. Nobody cares more about your house than you do. You're not that far away and you have DIY skills.

Well put. I think with us both working full time, and theoretically having just escaped the drive out to the burbs, we were worried that having to spend time going back and forth addressing petty things would waste our newly-gained time. I always hear landlords complain about the extreme time commitment, even for one property.

waltworks

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #18 on: January 04, 2020, 08:39:49 AM »
Perhaps Im being naive about the possible rent income. But the area weve been looking to buy in is closer to our work and in a more bougie area of town...it might be harder to snap something up there, but Im seeing places for rent around 1500/mo or more. If we rented, wed of course be willing to go a little further from work (still less than 5 mi away) in the slightly more grungy neighborhoods to snag that 1200-1400 rent.

Maybe you are misunderstanding me. The amount you can rent for IS your potential rental income, if you're renting something comparable to what you would buy. You're literally paying the market rent. So if rent is cheaper significantly less than 1% of the price of the property per month, these are not 1% rule properties. Right?

-W

Dicey

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #19 on: January 04, 2020, 08:46:43 AM »
I call bullshit on using a property manager. Nobody cares more about your house than you do. You're not that far away and you have DIY skills.

Well put. I think with us both working full time, and theoretically having just escaped the drive out to the burbs, we were worried that having to spend time going back and forth addressing petty things would waste our newly-gained time. I always hear landlords complain about the extreme time commitment, even for one property.
They clearly are not mustachians. You need to reframe this thinking. Calculate what you will be paying a PM. That's a LOT of money you will be paying yourself for the few tasks that come up. I have zero fucks for landlords who complain about costs/repairs that arise due to lack of maintenance and/or the inability to plan and budget for the future. You say your house is in good shape. Staying on that will yield big rewards. For you, not for a property manager.

Jon Bon

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #20 on: January 04, 2020, 01:57:40 PM »
Well we have mostly established that hanging onto the house is a bad investment. You might break even at best. Most likely you would be losing money.

Now keeping it can make sense if it has some sentimental or other value to you. But that does not seam to be the case. Also I could see keeping it if it was somewhat of a rare property.

Why are you holding onto some plane Jane suburban house for 5-7 years?

That is like having a 2018 Toyota Camry parked in your driveway for 5 years because you might use it "some day"

You won't make money
You don't want to landlord
You don't love the house.

Give me a good reason to hold it for I see none.

« Last Edit: January 07, 2020, 10:48:20 AM by Jon Bon »

lv2glrfy

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #21 on: January 06, 2020, 09:53:59 AM »
You won't make money
You don't want to landlord
You don't love the house.

Give me a good reason to hold it for I see none.

-I have a major desire to be a landlord. DH is neutral, which is why he's in favor of getting a PM company. It's his idea, not mine.
-I think I've understated the attachment. We both adore the house. It's pretty dang unique for the time it was built and the area. It's the first house we ever got together, it's the first place we moved into together, and it's the first place we've lived in as a married couple. It's the place we fully planned to raise a family in. We are super attached to it.
-I did a cursory search for comparable places in the entire Atlanta metro area in the 210k range, and for the price, you really cannot get anything that big and updated and unique in that good of an area. Yeah, it's actually pretty rare, and I think buying something like it again in 3 years would be an incredibly expensive struggle.

I appreciate the advice, but at this point, we're not looking to be convinced out of keeping it--the question was whether we should rent or buy in the city.

Thanks for the PM advice, @Dicey. I'll try and convince DH to move away from that, but I don't think he's mentally or emotionally prepared for us handling everything ourselves. Real estate majorly excites me and majorly stresses him. Can you guess whose idea it was to buy our current home in the first place? *wry smile*

Maybe you are misunderstanding me. The amount you can rent for IS your potential rental income, if you're renting something comparable to what you would buy. You're literally paying the market rent. So if rent is cheaper significantly less than 1% of the price of the property per month, these are not 1% rule properties. Right?

Right, if rent were significantly cheaper, which I don't think it is. Let me explain my logic: there are 2 main areas we're looking at.

Option 1 is bougie, close to everything we love (park, no-money-spending fun), and walkable/bikeable to work. Purchase prices from 160-180k for a little condo. I see virtually nothing for under 1300/mo rent in that area, and the 2 units I see look sketchy. When I look in the 1550-1800/mo rent range, I see lots of places that seem comparable to the places we'd be looking to buy.

Option 2 is in a rougher area. Still close to some nice things, though they're almost all money-spending things. Bikeable (maybe) to work, but no way is it walkable to work. Purchase prices 130k-170k. Reasonable rent options for 1100-1400/mo.

Don't ask me why the stark change in rent prices...these areas are not insanely far from each other. But then again, we'd prefer Option 1, so who are we to talk? You can check my work if you want...this is in Midtown Atlanta.

If we bought, Option 1 w/ price negotiating would probably be smartest. If we rented, Option 2 would probably be smartest to get the cheaper rent prices and sacrifice location. Right? Am I missing something?
« Last Edit: January 06, 2020, 10:28:50 AM by lv2glrfy »

waltworks

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #22 on: January 06, 2020, 11:16:08 AM »
Ok, so you were just off on your numbers when you wrote:
"We'd be looking at condos in the 150k-170k range in town and would definitely rent it out when we eventually moved back to the 'burbs (and it would definitely meet the 1% rule right off the bat, so cash flowable in the future). However, we can get a comparable place for about 1200-1400 monthly rent including utilities and such. If we're willing to live in a slightly more sketchy complex, amend that to 1100-1200."?

I mean, do what you want. If you can buy a place that meets the 1% rule (run the actual numbers, of course) then buying is certainly a good move. But don't manipulate the numbers to make it work, just because you want to buy a place.

-W

lv2glrfy

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #23 on: January 06, 2020, 12:17:52 PM »
@waltworks Yeah, sentence #1 was basically talking about the preferable Option 1 neighborhood, and in sentence #2, I was referring to the cheaper Option 2 neighborhood. Sorry for the confusion.

Agreed about not manipulating numbers...for example, the unrealistic dream property right now is an impeccably renovated, 400-square-foot studio in the most perfect location for 175k. But the only stuff around there that's that small and renting for 1700+/mo has tons of amenities that the dream property building doesn't have. I'm thinking that would pull only 1550/mo rent max, unless things drastically change in the next 2 years.

waltworks

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #24 on: January 06, 2020, 12:27:56 PM »
Remember that condos are investor kryptonite, many times. HOAs can and will decide to build or fix things in ways you don't like, for WAY more money than you want to spend. Be super, super careful about buying a condo with the goal of eventually renting it.

-W

lv2glrfy

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #25 on: January 06, 2020, 03:22:57 PM »
Agreed. The realtor we think we'd go with seems super knowledgeable about that particular area--she's been able to tell us which buildings/HOAs are due for an assessment and which seem to manage their money badly. She also knows which buildings are built poorly and may come due for a surprise assessment. Hopefully she's as great as she seems!

waltworks

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #26 on: January 06, 2020, 04:16:05 PM »
Make sure you can legally rent the place, too, of course. Though HOAs have been known to change their minds...

-W

lv2glrfy

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #27 on: January 07, 2020, 07:16:21 AM »
Yeah, that's the downside to some of the places in the Option 1 bougie area--they have a 20% rental cap. You have to go on a wait list to rent out. We assumed that we'd know when we wanted to move out ahead of time and be able to time when to enter said wait list...have to do some research on that.

Jon Bon

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Re: Rent Out, Sell, or Do Something Crazy?
« Reply #28 on: January 07, 2020, 10:58:29 AM »
My advice would be very careful about making an emotional decision here. As everyone knows making emotional financial decisions is a great way to lose a lot of money. Your post about adoring the home made me think of this. You can keep the home due to emotional attachment, it is just most likely going to be very expensive. If you are in a place where you can make that decision and not worry about the money then more power too you!

Also the future: I have no earthly idea what I think I will want in 5 years. I generally have some foggy notion of what I might need, but knowing what house I will live in beyond my predictions. Families have a tendency to rapidly change your priorities. The person I thought I would be is not really who I turned out to be at all. I too thought I would want the spacious suburban house. Turns out relationships, neighbors, my environment is MUCH more important than I ever imagined.

I guess my suggestion think about a few scenarios about what ht best case is, and what a few 'likely' cases would be.

Best case
Job change (Location/+- pay ect)
Family health emergency
Something crazy at church
More kids than you expected (this is more common than you think!)
ect ect

Good luck to you!