Sell or Rent? Our long-term plan.

[rentalnewbie]

My husband an I currently live in a 2/2.5 townhouse. We bought it 3.5 years ago with the idea in mind that in a few years we would buy a SFH home for ourselves and rent our townhouse. Earlier this year we bought a SFH as rental in a nearby city but they are pricey-pants in the city where we live, so here we bought a less expensive townhouse with idea for it to become rental #2 when we were ready.

Now the problem is, when we bought the townhouse we were just starting to look at REI more seriously and did not really know what made a good rental so we did not make a great choice. Now I am wondering if we should bother renting it or sell it? We are 18-24 months from making this decision, so hopefully either the housing or rental markets will move in our favor in the meantime.

Some napkin math for each option below.

Rental Option:
PITI: 780/mo (we owe 115k on the house at 4.125%)
Rent: 1100/mo (this is realistic for the current market but on the high side. There are some smaller floor plan 2/2s in the community that are currently listed for 900-1100, this is the slow season and ours is larger but still 2 bed)
Vacancy: 65/mo (5%)
Maint: 65/mo (5%)
HOA: 209/mo

cash flow: $1/mo

The maintenance figure is a little low but that is because we have an HOA that does all of the exterior maintenance, roof, siding, lawn care etc. Since I've owned the house, we've definitely spent less than this. The vacancy is also a little low but the area is highly desirable by grad students (dental, medical and law) because it's very convenient to the university. In talking to some landlords who have properties in the area, they have all said their rentals are snapped up immediately and people usually stay at least 3 years until they graduate.

I should have also included some money for my time to manage but I'm already losing money. Possibly, in the peak rent season in 18 months, I could rent it for 1150 or 1200. I have seen units like mine listed as high as 1275 peak season (who knows if that rented, I was skeptical).

Sales option:
Original purchase: 147K (149k - 2k concessions)
Current market: ~150k (Similar properties listed for this now, so it two years I could probably list higher and actually sell for this)
6% commission on sale: -9k
Current loan: 115k

Net: 26,000

This figure is around what my down payment was, so I basically paid the bank rent for 3 years which doesn't make me happy.

Looking at the math, what would you do? I am leaning toward keeping the house as a break-even, slightly negative rental because the rental market here is reliable and I believe the appreciation will come, eventually. If I could go back in time, I'd buy one of the smaller 2 bedroom units because they seem to sell for much less and rent for the same amount. Hindsight is 20/20 though.

I would love to hear your thoughts!

[waltworks]

I'd sell it. Downsides are major (especially if the HOA decides to assess - your dues seem really low for all exterior maintenance - how closely have you inspected the HOA reserve study?) and the upsides are meh. Get your money back out and consider it a lesson learned.

-W

[Bobberth]

My default answer to questions like this is: "If you didn't specifically buy it for a rental, sell it."

I just did a projection for a client and here is a quick & dirty one for you:
3% Mortgage pay down each year-just a guess
1% Property value increase each year-similar to your projections
6% RE commission
2% Selling costs & make ready-closing costs, inspections, make ready expenses/repairs (this is conservative for a rental property as you probably won't be receiving rent while property is on the market & in escrow. Those out of pocket payments will add up fast)

In 2 years, at your sell/rent decision point, I come up with about $28k in net equity. Very similar to your numbers.

After 5 years, I come up with about $46k. That's awesome! $18k profit "breaking even" on a rental for 3 years!

But don't forget what happened during those 3 years: You made 36 payments of $780/month to the bank (total of $28,080)
You made 36 payments of $209 to the HOA (total of $7,524)
You had to find tenants for your property. You had to manage those tenants. You had tenants living in your property and hopefully taking care of it. You had to repair things. You had to replace things. You may have had to float the mortgage payment because the tenant was a slow pay one month. You had to make the place ready and find new tenants when one moved out. There are many bad things that could happen that you are hoping don't. You didn't mention a property manager so you will be doing these things on your own.

Hopefully a tenant makes those payments for you but you are ultimately responsible for $35,604 in payments in order to make that $18k. Plus work along the way. Maybe if you are lucky and have the perfect tenant that stays the entire time until the day you sell, you make an additional $2,340 from zero vacancy. It doesn't take too many turnovers to eat that up though. If absolutely nothing breaks, you make an additional $2,340 as well. There are a long list of items that can eat up $2,300 over 3 years.

It seems to me you are taking on a huge amount of risk for little return. Real estate investing either needs to be for cash flow or appreciation. In this situation it appears there is neither and you should sell instead of rent.

[adamcollin]

Renting would be a good option for you.

[rentalnewbie]

Thanks for your viewpoints. If we pulled our money out we could more easily buy the next place/a rental that was more profitable, so that's another plus.

Walt, yeah the hoa has very strong reserves actually. I go to the meetings, we actually haven't had a rate increase in 3 years.

So unless the rental prices increase, i should plan to sell. Or love in the house longer myself, that's another option.