Rent / sell case study

[almost]

Hi,
I’m considering selling my rental unit and could really use a second set of eyes.  I feel I could sell this place and invest the cash in vanguard indexes and do just as well, with less emotional toll. 

Short story:
We’ve rented our first house out for the last two years.  We’ve had a great tenant, but it’s emotional, getting costly and maybe time to sell.  After all expenses are paid, we make $100-200 per year so far.

The house is on the fringe of a ghetto (why we moved) in a rust-belt city.  The neighborhood could go up or down.
I feel I could sell this place and invest the cash in vanguard indexes and do just as good, with less emotional toll.

Facts:
Market Value: $69,000
Original Purchase price:  $64,500
Original Mortgage Amount: $51,200
Refinanced amount:  $47,325
Interest Rate: 2.99%
Mortgage Term: 15
Term remaining: 13 years
Amount remaining on mortgage: $42,113
Gross Rents: $725 / month; 8,700 / year
Principal and Interest : $326.60 / month
Taxes and Insurance: $1912 for taxes + $579 for insurance = $2,491 annually
HOA costs:  $0
Deferred maintenance notes: I’ll need a furnace and carpet in the next couple years - $5,000
Management fee – 10%.  We live about 100 miles away and this city requires we have a manager.
This was our first home and we refinanced two years ago.  The refi costs were about $1,000. 

Long story:
Over the last year we’ve had a lot of service calls for little things like leaky faucets and running toilets.  Each of these is about $100.  We had to buy a new water heater too which cost $1,200.  This is very frustrating for me because it’s stuff I would have fixed myself for much less cost.  We’ve eaten up about 18 months of what I had budgeted for maintenance.  The furnace and carpets will need to be replaced in a couple years.  This was my first house and it’s precious to me.
The house is on the fringe of a ghetto (why we moved) in a rust-belt town.  The neighborhood could go up or down.
I feel I could sell this place and invest the cash in vanguard indexes and do better, with less emotional toll.

Thanks for your help.

[johnhenry]

This is a tough one, could go either way.  It meets the 1% rule, but barely. I'd be inclined to sell mainly because of the neighborhood and your distance from it.  Sounds like you know the ropes as a landlord and could make something work better if it was closer to home and a slightly better deal.

Tell me more about the $100-200 per year.  Is that positive cash flow?  Or is it slightly cash flow negative and you are factoring in the principal paid?  And is that before or after depreciation expense?

18 months of estimated maint isn't *horrible* for a year in which you replace a big ticket item like water heater.  Unless your cost for the water heater is above and beyond the maintenance expenses! 

On one hand you've got a great rate because you got financing as an owner occupant (I'm guessing).  The 15 year term is aggressive, and the cash flow could be higher if you had longer terms.  I'm not advising that....especially because you'd likely pay a higher rate now, plus more closing costs.  Just making the point that your financing isn't geared for maximum cash flow.  That's not necessarily a bad thing, depending on your perspective.

Your investment is kind of geared to put most of your returns into the house instead of into cash flow.  Which is why I'd lean towards selling if I wasn't sure about the neighborhood.

[waltworks]

It's meh at best and it's making your life suck. Sell it.

-W

[arebelspy]

I'd slightly lean towards "keep" but not if it's causing issues, which it seems like it is, only if it was basically hassle-free.

It seems like you know what you want:

I feel I could sell this place and invest the cash in vanguard indexes and do better, with less emotional toll.

[almost]

Thanks everybody for your advice.  I've been a reader for about 9 months and this was my first post.  I don't have any Mustachian friends or relatives so I am very grateful to get your opinions.

Johnhenry - I included the principal payments in the expenses, so the $100-200/year is positive cash flow after paying down principal, but before depreciation.

I forgot to mention the house is about 90-100 years old.   It's been well cared for, but I'll probably end this experiment and stick the money in vanguard.  I'd like to try another rental someday that's close to home - no management fees and self-maintained.

Thanks,

[johnhenry]

Johnhenry - I included the principal payments in the expenses, so the $100-200/year is positive cash flow after paying down principal, but before depreciation.

Ya, $200 in cash flow stinks.  But, hey, that's better than $200 "net" after factoring in your principal payments :)  So you didn't cash flow well this year, but you "made" $200 plus what you paid into the house in principal..... right??  May not matter in your buy/sell decision, but I'm curious what that number is...

And just to be clear.... you didn't actually count the principal payments as an expense on your Schedule E, right?  Only the the interest portion of your payments should be listed there.  (If you actually listed your total mortgage payment as an expense, then you probably did much better than you calculated!!). 

For clarification, you counted the principal (and interest) payments as outflows in your cash flow statement which resulted in +$200 cash flow....but the principal portion was not listed a an expense??  Not trying to split hairs... just trying to make sure the analysis wasn't bungled by an accounting terminology mixup.