Hilarity. I can always count on you folks to explain to me why the apparent fantasy real estate deal is really a money pit.
Are you going to be managing it yourself?
That's the plan, yes. We already manage one rental property, with minimal hassle. We had three or four calls in the first six months, then nothing for the next three years. Same tenant, pays on time, no vacancies.
Maintenance (say, 3k/yr - it'll probably be more long term - the actual repair costs will only be a few hundred, but many multiples of that if and when tenants move and you have to pay for paint, carpet, etc. - turnover costs suck -- and when you count long term capital repairs like a roof, water heater, HVAC, etc.. it very well could average quite a bit more).
You always tell me that these maintenance costs are sky high but I'm just not seeing it. This has been my personal family residence for the past five years and we haven't spent anywhere near that much money on it averaged over that time, even accounting for a bunch of ridiculous upgrades. It will need a new roof eventually, for a few thousand dollars. I can put in a delux new water heater for $500.
Having lived here I feel like I have a pretty good feel for the condition of the place and its expected maintenance costs over the coming years. I think $2k/year is more than enough. You really think a well kept SFR will cost $10k for upkeep every five years? Roofs and water heaters and furnaces should all last at least 15, and I think I could replace all three of those for $10k.
A gain of 3192 on 44k equity is a 7% return.
If that's the worst case scenario using your doomy assumptions, I'll gladly take it. My worst case scenario on my stock portfolio is minus 50%.
Here's an alternative scenario using my rose colored glasses:
The couple that just signed a 12 month least is active duty military and they want to stay for the next three years, the duration of their assignment here. So best case scenario is that for the next three years I collect (12*(1900-1712)) 2256/year in up front positive cashflow and spend maybe 1k in maintenance while they contribute 4800/year in to my equity and I take tax deductions on the depreciation. At the end of my three year least, I've collected 3768 in positive cashflow minus repairs, they've paid 14k into my equity, I've temporarily banked a few grand in tax deductions on the depreciation, and the market price of the house has appreciated 30k. I then sell and realize approximately 100% return over 3 years on the 44k in equity I could get out today.
Hooray! The unicorns won!
Reality is probably somewhere in between the two. I'm fine with that too.
Oh, and the renters I just signed? They want me to put in new carpet, at their expense. I didn't argue.
If I were in your shoes, I would definitely sell. The only reason to keep the house would be to speculate on capital appreciation.
44k is not exactly an enormous chunk of our stash to be speculating with, and I think the value of this home in three years will be notably higher than it is today.
Tell you what, if I'm still here in three years I'll report back to this thread to let you know how it played out.
One thing that hasn't been mentioned is that there are phase-outs for the deductibility of passive real estate losses for owners
Are those phase outs based on gross income including rents? On MAGI? We press our taxable income down pretty low by taking advantage of every form of tax deferral we can find.
Even if we have to carry the losses forward, that woudn't be the end of the world. We're not hurting for cashflow so we can opt for the mathematically optimal long term play. If it means losing money every month to make more money in the future, I'm down with that.
Love the wishful thinking ... "well it doesn't cash flow now, so let me look into the future via my crystal ball
Except it does cashflow now, technically. Every property is cashflow negative if you assume 50% vacancy and crazy maintenance costs. This is not one of those properties.
I imagine - you're renting because it can't be sold today).
I think every property can be sold today, for the right price. This one could comfortably be sold for 300k today, but I paid more than that for it five years ago and I expect it to be worth more than that next year.
Tax breaks like depreciation are returned to the government upon sale ... silly to count those chickens.
Can someone explain to me how that works? Are the taxes you pay upon sale independent of your other income? How are RE capital gains taxed? Is there an advantage to selling after we retire and have zero earned income? Can I get me some of that juicy 0% LTCG rate action?
This one is a major repair (roof, heating system .... ) or BAD tenant (3+ months no rent) away from being a real stinker.
A fair point from another pessimist. But I do live here, and I'm pretty confident in the roof and heating system and such.
Either seem like a better option than what you have now, especially since you can cash it out tax free.
My understanding of the 2 in 5 rule is that I can still sell the place without being taxed on the gains as long as I've lived in it 24 months in the past five years. So I could sell it 2 years and 11 months from now and still qualify?
One last thing: If you are planning to buy your next house instead of rent, just keep in the back of your mind that lenders will include your rental home mortgage in your total debts
We were worried about that too, since we technically have mortgages on two homes already and are getting a third to buy the new place. As it turns out, we managed a 15 year fixed term and still didn't have to include our rental income to meet the debt ratio requirements. Score one for buying in moderation.
Thanks for the feedback, everyone. We're renting it out for at least a year, then we'll see what's what at that point. Even if we end up deeply in the red, it won't significantly affect our plans for early retirement.