Author Topic: Sell or rent my current home  (Read 1035 times)

jeffryanrodgers

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Sell or rent my current home
« on: October 13, 2021, 09:37:43 PM »
Hey folks,

Looking for a little help here. My family and I are moving to Oregon but we have a home and rental across the street in Denver that we currently own. I'm questioning whether we should sell our home and do a 1031 exchange with the rental or keep them both. Here's the situation:

Our home has a (Zillow) Market Value: $865,100. We purchased it for $315k. There is $241k remaining on the mortgage with an interest rate of 3.25% with a 16 yr term remaining. I believe I could get about $5k per month with rent. Principal and interest is about $1700 per month and about $475 on taxes & insurance.

It is a 2 bedroom 2 bath home. There is a three stall garage in the back with an 1 bed / 1 bath airbnb apartment above the garage that cash flows about $36-$40k annually. My current neighbor is interested in renting the property and would host the airbnb to offset the rent. My neighbor is the exact kind of tenant you would hope for from a maintenance perspective as well as how good of care he would take care of the property. The property sits within a historic district in Denver near the broncos stadium.

Additionally, we have a duplex across the street. It has a (Zillow) market value of $654k. We purchased it for $476k. It has a mortgage rate of 5% and we have approximately $92k remaining in debt w/ 25 years remaining on the loan. Principle and interest is around $400 and taxes and insurance is around $500. It is an upper / lower duplex. The upper unit is currently occupied by my mother-in-law and is about 750 sq ft with about 600 sq ft of unfinished attic space. The lower unit is currently rented for $1450/month and is about 800 sq ft. Both units are nearly identical as 1 bed / 1 bath units with no parking. My current neighbor would also help oversee the maintenance/management of the apartments across the street if we chose not to sell.

I'm looking for some advice on evaluating whether these properties should be kept and rented or sold. I've done some analysis of selling vs renting and it seems as though unless the market is providing strong returns, hanging on to the properties would be smarter. However, I don't quite understand the tax implications so it's unclear to me whether my analysis is accurate or not. Hoping some folks smarter than me can help.

Thanks

uniwelder

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Re: Sell or rent my current home
« Reply #1 on: October 14, 2021, 03:56:41 AM »
What happens to your mother-in-law if you sell her apartment?  Does she want to stay in Denver or is she coming to Oregon too?

I'd personally hold onto the properties for a year or so, rent them out, then make a decision about selling.  Its possible Oregon isn't the place for you and you want to come back to Denver.

former player

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Re: Sell or rent my current home
« Reply #2 on: October 14, 2021, 06:53:55 AM »
Personally my view is that I don't allow the taxman to determine my life decisions.  He doesn't get to decide where I life, what I do or what I own.  I make those decisions based on what's best for me and then pay the tax I owe in order to do those things in a safe, secure and economically sound environment.

Applying that to your case, I would say that the big question is: why are you (and presumably your MIL as well?) moving and is there any chance at all of you wanting to come back to Denver and to those houses?

I had a remote rental for a while and was pleased when I sold it, I probably should have sold it straight off.  Even with good people on hand to take care of things it was a tie to a place I had moved on from, and I generally prefer to be hands-on rather than rely on others.  In your case you are putting a lot onto your neighbour, and however good they are things can still go wrong and your neighbour can decide at any time to move on.

If you are done with Denver for good I think you are better off selling immediately.

Dee18

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Re: Sell or rent my current home
« Reply #3 on: October 14, 2021, 07:25:18 AM »
Others have made this suggestion and I think it is a good one:  If you did not own those properties now would you buy them for an investment?  If the answer is no, then the only reasons to keep them are, as suggested above, if your MIL needs one and/or if you think you might move back within a couple years.

PMJL34

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Re: Sell or rent my current home
« Reply #4 on: October 14, 2021, 09:23:37 AM »
OP,

1. Why are you moving?
2. I doubt you will get 5k for. 2/2 when a 1/1 across the street is $1450. I know one is a sfh and one is a duplex, but still.
3. How do you only owe 92k on the duplex? Did you put down 80%?
4. Where is your mother in law going to go if you sell?
5. Is it possible to rent the 2/2 AND hand the Airbnb to a management company?
6. Do you have more homes and how much of your net worth is in these homes?

If you can really get 5k rent + 36-40k (3k/month) Airbnb for the primary, then keep it unless you really want to sell.

Duplex is a lot more complicated because it's virtually paid off and have family there. I could go either way.

You are in a great position and will be good either way. Best of luck!

beekayworld

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Re: Sell or rent my current home
« Reply #5 on: October 14, 2021, 01:11:50 PM »
Market Value: $865,100. We purchased it for $315k.

With $550k in LTCG (less transaction costs), I would sell right away.
A married couple can keep $500k gains tax free on a home they lived in 3 of the last 5 years.  If you wait and it goes up in value, you will owe taxes on the amount over 500k.

Whereas if you take the 500k right now and invest in stocks, you can decide which portion of future gains you take out and when, allowing you to decide if you are going to pay LTGC or not.  If you keep your income low enough you may not have to pay any LTCG on your stock increases.

It's also less stressful.
Generally a home purchased as a primary home doesn't make a good rental. The criteria is different.

jeffryanrodgers

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Re: Sell or rent my current home
« Reply #6 on: October 14, 2021, 09:00:59 PM »
Thanks for all the feedback.

My mother-in-law will be moving to Oregon with us. Probably should have said that up front. The choice of moving to Oregon was to be in a smaller town, closer to nature and give our girls (ages 1 & 4) more freedom to explore their world while not requiring us to monitor them so much as I feel we need to in Denver. Besides, its where my wife grew up.

The 5k in rental agreement for the 2/2 bath is including the airbnb rental. It currently does better than 3k a month and our neighbor would be responsible for the remaining 2k. The rental only has 92k left on the principal because my mother-in-law used her proceeds to pay down the principal on the loan in order to live their for free. When we sell she will get her money back.

When looking at our overall net worth. About 2/3 of our wealth is in real estate and another 1/3 is in invested in the market (most of which is in retirement accounts).

The biggest concern on keeping the house is really around the maintenance and upkeep. One thing my Dad always told me was the things you own end up owning you and I am concerned that owning these properties while being far away is likely to result in unnecessary stress. But, if it was financially much smarter to keep the properties, I'd likely deal with the stress for a better long-term outcome.

Thanks again for the questions and helping me thing about this.

PMJL34

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Re: Sell or rent my current home
« Reply #7 on: October 15, 2021, 09:17:03 AM »
Your replies certain help.

It sounds like you have to sell the duplex no matter what because your MIL has tons of money tied in it already.

As for the primary, the neighbor thing ain't gonna work long term. You have no strong desire to be long distance rental owner. Unless you fear you will return one day, sell it and enjoy the tax free gains.

Personally, I would keep both though because you bought at low prices and I doubt you could cashflow better anywhere else at this moment (including stocks). I am also pro real estate, especially in a city like Denver.

I would rent the 2/2 as is. Rent the Airbnb to long term tenants. Rent both duplex units and enjoy the hefty cashflow. Def refi the duplex or pay it off in full. Maybe refi the primary as well.

Edit this assumes about 5k rents for primary and 4k for duplex.
« Last Edit: October 15, 2021, 09:26:10 AM by PMJL34 »

magus

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Re: Sell or rent my current home
« Reply #8 on: October 15, 2021, 01:10:19 PM »
Let's analyze the SFH based on your numbers-

$600k in tax free equity (net of transaction  $500k gain + $100k principal paydown) tied up
$60k/yr in rent (some people include a vacancy % - I usually do not where I am as I have people pay a month+ rent to vacate their lease a bit early more often than I have 2-3 weeks+ of vacancy but YMMV)
-$6k/yr in Taxes/insurance
-$3k/yr in maintenance (adjust based on age of home, major appliances/roof, etc)
-$7.5k/yr in interest
=$43.5k in cash and principal paydown over 12 months
+26k/yr equity gain @ 3% appreciation
$69.5k / yr / $600k in equity = 11.6% expected yield

1) what do your other investment opportunities look like?
2) might be worth locking in $500k tax free if you think you'll rent for 4-5 years and then sell and losing the tax free portion
3) Will you possibly want to move back?
4) How sure are you with the monthly rental amount? Do you expect the rent to continue to grow well there?

regenaeb

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Re: Sell or rent my current home
« Reply #9 on: October 22, 2021, 08:15:39 AM »
Wanted to throw another perspective at you since I am currently a home owner that is renting out our single family home. Our forever home (the home I lived in for 6 years prior to renting) has to be rented because we are active duty military and are stationed in a different state then our home. I refuse to sell our home because it is our perfect forever home for when my husband finally turns in his retirement paperwork. I pray he does this every day (he is currently 33 years active duty). We have been extremely lucky in our tenants. Our home has been rented for the past 5 years and we have had two sets of great tenants. We are very blessed in that because I have heard nightmare stories from other people. With that being said, homes always cost money. We cover all our costs of the home in the monthly rent that are standard home expenses. It is the unexpected costs that are always difficult and have to come out of separate savings. Most years it has not been that bad. This year has been a bad year. Since the beginning of July through just this week, I have spent a total of $18,600 on repairs/maintenance on that house. We keep our house in very good shape and always service it as needed. It has just been a bad 6 months with things breaking that could not be repaired and needed to be replaced instead. Don't even get me started on my HOA blasting us with notices about dead spots in our lawn that must be replaced or they will fine us $100 a day starting December 1st. It is always something.

My point being it may look very good on paper to keep these properties, but you also need to consider your time/stress in dealing with these properties from a distance. I hate that my house is a rental, but I am also planning on returning to that home in  the next 20 months, it is my forever home. If you do not plan on coming back to that area, then consider how long you want to deal with these properties. I think the advice about keeping them for a year or two is solid to see how you feel about being a long distance land lord. You may even find yourself wanting to move back after a year or two and then will have to rebuy in a higher market. But also it might be a good idea to keep the property you would consider moving back into and let the other one go.

Again just my perspective. I know not everyone has to deal with the maintenance issues that I have to or the crazy HOA people that have nothing better to do with their time then to drive by my house once a day looking for any violation they can find because they hate that any house in our neighborhood is a rental. Houses cost money plain and simple.