Author Topic: Sell or continue to Rent ?  (Read 1415 times)

newbieMMM

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Sell or continue to Rent ?
« on: October 03, 2016, 01:21:37 PM »
Hi there, I bought this property in 2004, moved out of it in 2012, but rented out. I need help in deciding what is the best way forward. Here are my details:

Market Value: $620,000
Original Purchase price: $470,000
Original Mortgage Amount: $376,000
Interest Rate: 3.125%
Mortgage Term: 7/1 ARM - 30 years (it got reset and currently on the yearly reset)
Term remaining: 17 years
Amount remaining on mortgage: $335,000 (includes a $70,000 HELCO)
Gross Rents: $2600/month
Principal and Interest (the P&I of your PITI - should match with the above info): (principal : $1320, Interest: $840) Total: $2160/month (including the HELCO payments for both Principal and Interest)
Taxes and Insurance (the T&I of your PITI): $713/month
HOA costs:None
Deferred maintenance notes: None
Property located in SF bay area

As you can see, I have a negative cash flow per se, $2600-$2160-$713 = -$273, but this rent does pay the principal of $1320, so if I include then I do get $1320-$273 = $1,047 ( am I doing it correctly?) Basically, it is worth making $1047 for the $245,000 equity ($620,000 - $335,000 mortgage - $40,000 selling cost) or sell it or hold out for more appreciation ?

Thanks in advance

Cwadda

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Re: Sell or continue to Rent ?
« Reply #1 on: October 03, 2016, 03:32:48 PM »
Hi there newbieMMM,

I'd sell it, it doesn't follow the 1% rule, not even close. You'd need to be taking in $6200/month in rent or even $4700/month for the original purchase price.

I've done out some cashflow calculations (attached) and they're probably not entirely accurate because I made some assumptions (play with the numbers yourself) but you're getting very little cashflow for the amount of cash you've invested into it. That money would be better off in an index fund.

Also, $40,000 in selling costs? I don't know the market over there but to me that's absurd. Have you considered FSBO?
« Last Edit: October 03, 2016, 03:35:52 PM by Cwadda »

newbieMMM

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Re: Sell or continue to Rent ?
« Reply #2 on: October 05, 2016, 02:02:13 PM »
thank you, Cwadda. appreciate the detailed analysis on the excelsheet.

re: 1% rule, I am not sure if it possible to achieve that in the SF Bay area where the median house price is $720K.

re: selling cost, I thought it is usually 6% ? I haven't looked into FSBO, good point.

Thanks again for your time.

marty998

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Re: Sell or continue to Rent ?
« Reply #3 on: October 05, 2016, 02:25:03 PM »
1% rule doesn't work in every property market.

You're getting about $12-$13k capital appreciation per year, which doesn't automatically indicate you should sell. It would be different if the value had stagnated for 12 years.

If you are still in accumulation mode, it's better to have most of your gains coming from capital instead of income because it will (generally) be taxed less.

Once you decide to FI, then it would be good to look at other asset classes that provide better cash flow.

waltworks

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Re: Sell or continue to Rent ?
« Reply #4 on: October 05, 2016, 02:57:25 PM »
Would you buy the house for market value right now to use as a rental?

If not, why aren't you selling it? You could win on appreciation here but it's a terrible rental by any normal metric.

-W

Cwadda

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Re: Sell or continue to Rent ?
« Reply #5 on: October 06, 2016, 11:02:49 AM »
thank you, Cwadda. appreciate the detailed analysis on the excelsheet.

re: 1% rule, I am not sure if it possible to achieve that in the SF Bay area where the median house price is $720K.

re: selling cost, I thought it is usually 6% ? I haven't looked into FSBO, good point.

Thanks again for your time.

Yes, 1% rule doesn't really exist in California. But if you could make $500 in cashflow in another area for a $100,000 property, it's no different than making $500 cashflow on a $720,000 property. It's never good to bank on appreciation no matter what area you are. Cashflow is key, and appreciation is a bonus.

My advice is this:
Really, REALLY look into FSBO. It's doable if you stick with it. You will make $40,000 which is better than the cashflow and appreciation for probably the next 2 years.

Go on Bigger Pockets, it's a real estate blog similar to MMM. They have podcasts that talk about FSBO and will really educate you.

newbieMMM

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Re: Sell or continue to Rent ?
« Reply #6 on: October 13, 2016, 03:11:52 PM »

If you are still in accumulation mode, it's better to have most of your gains coming from capital instead of income because it will (generally) be taxed less.


Hello Marty998, Thanks for your input, can you please elaborate on this statement, I didn't get it.

newbieMMM

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Re: Sell or continue to Rent ?
« Reply #7 on: October 13, 2016, 03:19:15 PM »
thank you, Cwadda. appreciate the detailed analysis on the excelsheet.

re: 1% rule, I am not sure if it possible to achieve that in the SF Bay area where the median house price is $720K.

re: selling cost, I thought it is usually 6% ? I haven't looked into FSBO, good point.

Thanks again for your time.

Yes, 1% rule doesn't really exist in California. But if you could make $500 in cashflow in another area for a $100,000 property, it's no different than making $500 cashflow on a $720,000 property. It's never good to bank on appreciation no matter what area you are. Cashflow is key, and appreciation is a bonus.

My advice is this:
Really, REALLY look into FSBO. It's doable if you stick with it. You will make $40,000 which is better than the cashflow and appreciation for probably the next 2 years.

Go on Bigger Pockets, it's a real estate blog similar to MMM. They have podcasts that talk about FSBO and will really educate you.

Thanks Cwadda... I have a follow up question, if I were to sell this property and use this ~$250K equity to invest with a commercial investment properties, I was told I can get almost 6~7% tax free (owner's draw), so I am looking at $15,000~$17,500 annually / $1250~$1450 monthly, but not sure of the capital appreciation. Any comments ?

Cwadda

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Re: Sell or continue to Rent ?
« Reply #8 on: October 14, 2016, 10:00:23 AM »
thank you, Cwadda. appreciate the detailed analysis on the excelsheet.

re: 1% rule, I am not sure if it possible to achieve that in the SF Bay area where the median house price is $720K.

re: selling cost, I thought it is usually 6% ? I haven't looked into FSBO, good point.

Thanks again for your time.

Yes, 1% rule doesn't really exist in California. But if you could make $500 in cashflow in another area for a $100,000 property, it's no different than making $500 cashflow on a $720,000 property. It's never good to bank on appreciation no matter what area you are. Cashflow is key, and appreciation is a bonus.

My advice is this:
Really, REALLY look into FSBO. It's doable if you stick with it. You will make $40,000 which is better than the cashflow and appreciation for probably the next 2 years.

Go on Bigger Pockets, it's a real estate blog similar to MMM. They have podcasts that talk about FSBO and will really educate you.

Thanks Cwadda... I have a follow up question, if I were to sell this property and use this ~$250K equity to invest with a commercial investment properties, I was told I can get almost 6~7% tax free (owner's draw), so I am looking at $15,000~$17,500 annually / $1250~$1450 monthly, but not sure of the capital appreciation. Any comments ?

I don't think I can fully answer your question because I'm from Connecticut so things might vary considerably from state to state. I do think you have the right idea in exploring options to shelter the tax hit if you sell the property. Yes, you may be able to leverage the $250k towards commercial properties, but I'd talk to a commercial mortgage broker (local ones are best) and also consult an accountant.