Author Topic: Sell or Rent in Mustache Utopia  (Read 1127 times)

chads

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Sell or Rent in Mustache Utopia
« on: November 18, 2019, 12:58:42 PM »
Hi,
I am considering whether to sell or continue renting the house I bought in 2014.
It is in the same FI utopia that Mr. Money Mustache lives in.
Housing values have greatly outpaced rents in the last 5 years.




Market Value:   315-330,000 appraised   Zillow Zestimate:338,000
Original Purchase price:   206,000   
Original Mortgage Amount:   164,000   
Interest Rate:   4.375%   
Mortgage Term:   360   
   

Re-financed Mortgage Amount   161000   
Re-financed Interest Rate   3.625   
Re-financed Mortgage Term:   360   
Re-financed Time Remaining   9/1/2046 (321.5 months)   
      
Amount remaining on (re-finance) mortgage:   151000   
Gross Rents:   1525   
Principal and Interest (the P&I of your PITI - should match with the above info):   734.25   
Taxes and Insurance (the T&I of your PITI):   171.54
Property Management @ 9 % =    $137.25
HOA costs:   0   
Deferred maintenance notes:   0   
Anything else special or unique in regards to the numbers of the property:   
  • I lived in the house from 08/01/2014 until 12/31/2017 so I should have enough time to sell without incurring capital gains tax.
       
  • Current tenant lease is through 03/01/2020



waltworks

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Re: Sell or Rent in Mustache Utopia
« Reply #1 on: November 18, 2019, 01:21:29 PM »
Sell. Longmont has done great, but that won't last forever IMO.

Then again, I sold our place in Boulder in 2014. Shoulda kept it another 5 years, obviously. So my "appreciation is over!" track record sucks.

-W

chads

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Re: Sell or Rent in Mustache Utopia
« Reply #2 on: November 18, 2019, 01:56:25 PM »
Sell. Longmont has done great, but that won't last forever IMO.

Then again, I sold our place in Boulder in 2014. Shoulda kept it another 5 years, obviously. So my "appreciation is over!" track record sucks.

-W
Hi, do you have any objective advice based on the numbers?
What if you did not know where the house was located?

waltworks

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Re: Sell or Rent in Mustache Utopia
« Reply #3 on: November 18, 2019, 02:15:18 PM »
Sure - even not considering vacancy, maintenance, etc, you're making in the low single digits for a return on your $150k of equity.

Thats objectively pretty bad, and you'd need a LOT more appreciation to pay those capital gains if you wait to sell in a few more years.

-W

Jon Bon

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Re: Sell or Rent in Mustache Utopia
« Reply #4 on: November 18, 2019, 02:23:46 PM »
Your return is pretty bad.

Your appreciation is pretty good.

The tax(free) consequences of selling now make it a fantastic gain.

Put it this way, if you were buying this house for 330k would you be renting it out for $1500 a month? Hell no you would not.

Sell the house, get a bunch of money, be happy.




MoneyMatrix

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Re: Sell or Rent in Mustache Utopia
« Reply #5 on: November 18, 2019, 07:30:32 PM »
I think a lot of it depends on more than just the numbers.

What is the rentals job? Is it to provide cashflow? Increase in value?  What is your goal with the rental?

Are you local, planning to stay there long term? Where do you think Longmont will be in 20 years+.
I held stuff that went way down during the great recession because I had a long term goal and believed the area would grow. But you have to be optomistic about the long term to get through the down times.

Back to the numbers, it might be helpful to figure out exactly what you would net after all sales costs and taxes. Then figure out what you would do with that money and selling makes sense based on the return of whatever you would put it into.


chads

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Re: Sell or Rent in Mustache Utopia
« Reply #6 on: November 18, 2019, 08:02:39 PM »
I figure about 320k sell price
Guesstimate 6% commissions
After 151k mortgage, that's net about 150k.
As for taxes, almost none. Figure recapture of ~[edit:]$12,000 depreciation... maybe deduct $3k taxes so net ~$145-147k .


After principal, interest, taxes, maintenance, etc. about $322 x 12 = $3864 per year.
After depreciation it's roughly tax free.

The rental used to be my primary residence then we moved for a job. Accidental landlord. The real estate market was going up like crazy so I didn't want to sell. The real estate market is pretty level at the moment. I want to enable FI in approximately 10 years, that's the only goal.


$140k in VTI yielding 2.18% per year is $3052 (minus applicable taxes).
On top of that are any market returns.
I also thought about splitting it up into VTI/VNQ (say around 100k/40k that's 100 @ 0.0218 + 40k@0.0379 = $3696)
or if you go 50/50 on VTI/VNQ ( that's an average dividend yield of 2.985%  = $4,172).
Again, not account for any historical returns.

$140k @ 5% return after 10 years ~$228k + ~$37,000 in dividends.

As for the house, if I estimate as increasing in value from here at inflation+1% (say 3% / year) that's ~430,000 (320,000 * 1.03^10). There's about 1000 units for rent becoming available in the next 18 months, most apartments.

If I were to sell I would have to pay full taxes, plus ( I believe) re-capture all the depreciation I claimed for 10 years. Ouch. Otherwise do an exchange or just keep the rental forever. I have no interest in landlording for myself. I'm way more interested in fix (and/or flip).

I'm a little biased against keeping the rental so I am having a hard time being objective with the numbers.
I am optimistic about Longmont in the long term. However, currently, I do not feel the return is good.

If I had not been an accidental landlord I would not have bought the property back in 2014 for rent (~$1400 on 206,000 << 1% rule). So, I think the only reason I have the rental is because I didn't want to sell it after becoming an accidental landlord.

« Last Edit: November 18, 2019, 09:35:41 PM by chads »

waltworks

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Re: Sell or Rent in Mustache Utopia
« Reply #7 on: November 18, 2019, 09:06:15 PM »
You have $10k worth of depreciation that will be recaptured? Remember that the total depreciation number is just subject to taxes (so if you've depreciated it for one year for $10k, you'll only pay $1500 in taxes).

-W

chads

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Re: Sell or Rent in Mustache Utopia
« Reply #8 on: November 18, 2019, 09:34:32 PM »
You have $10k worth of depreciation that will be recaptured? Remember that the total depreciation number is just subject to taxes (so if you've depreciated it for one year for $10k, you'll only pay $1500 in taxes).

-W

The depreciation should be two years worth(2018, 2019).
I had the number wrong. If I recall depreciation is around $160,000 for structure over /27 years = ~$6k per year x 2 = $12,000 recaptured.
Less than I wrote before.

waltworks

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Re: Sell or Rent in Mustache Utopia
« Reply #9 on: November 18, 2019, 09:56:15 PM »
You have $10k worth of depreciation that will be recaptured? Remember that the total depreciation number is just subject to taxes (so if you've depreciated it for one year for $10k, you'll only pay $1500 in taxes).

-W

The depreciation should be two years worth(2018, 2019).
I had the number wrong. If I recall depreciation is around $160,000 for structure over /27 years = ~$6k per year x 2 = $12,000 recaptured.
Less than I wrote before.

Yes, but that wasn't a tax *credit*, it was counted against the rental income. So you'll have to pay taxes on it, not pay back the entire $12k. That was my point. The depreciation recapture won't be very much money, you'll probably net in the ballpark of $150k.

-W

chads

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Re: Sell or Rent in Mustache Utopia
« Reply #10 on: November 18, 2019, 10:00:19 PM »
You have $10k worth of depreciation that will be recaptured? Remember that the total depreciation number is just subject to taxes (so if you've depreciated it for one year for $10k, you'll only pay $1500 in taxes).

-W

The depreciation should be two years worth(2018, 2019).
I had the number wrong. If I recall depreciation is around $160,000 for structure over /27 years = ~$6k per year x 2 = $12,000 recaptured.
Less than I wrote before.

Yes, but that wasn't a tax *credit*, it was counted against the rental income. So you'll have to pay taxes on it, not pay back the entire $12k. That was my point. The depreciation recapture won't be very much money, you'll probably net in the ballpark of $150k.

-W
Yup, I totally am agreeing with you and already updated the post above
"After 151k mortgage, that's net about 150k.
As for taxes, almost none. Figure recapture of ~[edit:]$12,000 depreciation... maybe deduct $3k taxes so net ~$145-147k ."