The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: BJacks on October 10, 2018, 10:19:40 AM
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We have a former rental that were trying to figure out if we should sell or re-rent out. We just sunk 30k into this place because the previous tenants wrecked it down to the studs in some places. we updated it a lot and it's basically a brand new house.
numbers
we owe 142k on the house. it's about two years into a 15 year mortgage. The house is worth about 299k and we should now be able to rent it out for about 1800 minus fees for a property manager which bring it down to a take home of $1650 (my husband is no longer willing to do this himself as of now due to last awful tenant). we would have to pay capital gains on probably 100k. What makes the most sense?
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I'd do a Return on Equity comparison against other investments. As you found out, owning a rental isn't risk free -- you need to be compensated for the risk relative to what you could be earning in other investments.
Oh, and that $30k? That's a sunk cost now, should not affect what you do going forward.
I'm going to make a bunch of assumptions, change as needed. Equity: $150k. Property Taxes: $3k/year. Cash flow after taxes, mortgage, fees, insurance, etc: $350/month, $4500/year.
If you sell and owe 20% cap gains on $100k of equity then I assume this means you walk away with $80k + $50k (the equity you don't owe cap gains on) = $130k. [Edit: Probably a little less after transaction costs.]
You should be able to easily make, conservatively, 3.5% annually by investing this lump sum in something comparable such as a REIT fund or intermediate-term investment-grade bond fund. This would yield $4550/year. With these specific numbers it's basically a wash, though since you don't *really* want to be landlords I would sell and invest elsewhere. A fund never needs new paint or carpet or repairs :)
If there are other reasons you want to be in RE (e.g. for diversification) then this can factor into the decision, doesn't need to be a decision made strictly on the numbers. But ROE is a good starting point.
Again, this is all fictional and based on my many assumptions. Run your own numbers for this specific case. YMMV.
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If you like having your investments destroyed by tenants, sinking 30k into repairs, arguing over what to do now, spending time taking care of your property and otherwise giving your life over to this "investment", then by all means rent it out again.
If you want your money, time and sanity back; SELL IT!