Sell or Keep House?

[Ty Webb]

I live in Canada and I recently purchased a great house for around $600k and have put my current house up for sale for $500k. If my current house languishes on the market for a long time, I was thinking of just keeping and and renting it out for $1700/month rather than sacrifice it to a lowball offer. I still have around $220k on the current house's mortgage. I have already been approved to carry mortgages on both houses, would be very comfortable to sell it in order to have a cash cushion. Keeping both would only leave about $100k in savings. Real estate in this area appreciates at around 6% a year. Being aware of some of the pitfalls of being a landlord, which choice would be the most beneficial to my long term net worth?

[Another Reader]

Past performance is no indication of future performance.  Property values could go up, stagnate, or go down.  Over time, if you are in a highly desirable area where the economy is not dependent on a single commodity (e.g. the oil patch), the rate of growth in property value may exceed inflation.  New York City, San Francisco, and similar locations have a history of above inflation returns over time.  Other, more mundane locations do not.

A $500k house that rents for $1,700 a month is not going to produce a decent cash on cash yield. What are your mortgage terms?  Payment?  How much do you pay out in taxes and insurance?  I can't see much cash flow if any at typical terms for $220k in mortgage balance.  You may well be cash flow negative.  Interest here on investment properties is deductible as an expense - is that the case up there?

In your shoes, I would look at my other investments as well.  How much equity do you have in the new house?  How much in retirement accounts?  What about investments other than the $100k you would have left in savings?

If you sell the $500k house, is there a taxable capital gain?  How much tax would you have to pay?  That could be a consideration as well.

Without more information, I can't say what I would do in your shoes.  However, I would never buy a $500k property that rents for $1,700 a month and bank on 6 percent appreciation for my profit.  Too risky for me.

[Ty Webb]

Thanks, the mortgage on the current house is 2.6%, payment is $950/month, taxes and insurance are another $450. I wouldn't buy a house for $500k to rent for $1700 month either but I only paid $300k for this one and all of the transaction costs were paid long ago, as well as saving $20k real estate sales commission by keeping it. No capital gains tax to pay if it sells now. Interest on your principal residence is not tax deductible here but it is on investment properties. As far as other investments just another $80k in retirement accounts. If I were to carry both houses I would have $120k in equity on the new house and $270k in equity on the old house.

[waltworks]

Keeping it is an appreciation gamble, nothing more. So decide if that's what you want to do, and act accordingly. In your shoes I would sell it yesterday - and then rent it back from the new owner if I could!

I'm kidding (a little) - if rents are that cheap, IMO you should be selling both houses and renting until the market crashes, which if price/rent is that out of whack, it will.

-W

[escolegrove]

Everyone has their own "view" and belief. We are buy and hold investors so take my thoughts with a grain of "salt". We buy houses and than put as little into the as possible downpayment wise. We don't refinance the money out with the goal that the tenant pays of the mortgage and earns the appreciation. For us our goal is for the house to grow as much as possible. The downside would be if your investment loss if you have a different investment mode to invest the money that would be earning a better return.

[Poorman]

IMO you should be selling both houses and renting until the market crashes, which if price/rent is that out of whack, it will.

I second this if rents are pretty stagnant, but if rents are rising by double digits it might be a good appreciation play.