Sell Primary SFH (with a 2.875% rate) or keep as Rental

[joemandadman189]

We are considering a move that would take us about 800 miles from our current place to a new state.

we are about 1.5 years into a 30 year mortgage with a 2.875% interest rate on our current primary residence.

Would you sell the primary to fund the new home purchase or keep as a rental?

Current all in mortgage payment is ~$2700 a month and rents could be $4,000 +/- a month

we could buy the new place (down payment and monthly payment) with out selling the current primary, the new place would have a purchase price of about $470k, ~$90k down, and ~$3,100 a month.

our realtor recommended selling as inventory is so low and prices are holding and rising

Our realtor recommended selling the primary.

What would you do?

We could net about $190k from a sale of the current place

[ChpBstrd]

It's hard to say without more specific numbers. E.g.

1) Current home market value:
2) Current mortgage balance:
3) Rationale for moving (e.g. $X/year higher pay? hate the current location?):

Also would need to know if you've ever had experience with operating a long-distance rental, if you have a property manager in mind, etc.

First things first, I would suggest running the numbers through the spreadsheet mentioned on this thread:
https://forum.mrmoneymustache.com/real-estate-and-landlording/evaluating-a-rental-property/
and telling what you got for your rate of return for the first few years.

[MrGreen]

I have a rental that's 400 miles away and use a management company. I couldn't imagine being 800 miles away and not using a management company. If something happens and you have to go there it's a two day drive.

We've had our rental 5 years now and over time the management company cost is averaging about 13% of gross rent. What would be your reasons for keeping it? Do you think you'd ever move back? Are you just hanging on to it for appreciation? If your net rent after management fees is $3,500 and the mortgage is $2,700, you may not find the cash flow particularly appealing after vacancy, turnover costs, and maintenance. And on a 30 year mortgage you're not moving the needle much on equity each year.

Still netting top dollar because of low inventory might look like a genius move 24 months from now if rates stay up and housing prices drop by healthy amounts. Maybe that drop never materializes though.

[GilesMM]

Setting aside the fact you own it, would you buy it today at those favorable rates and rent it out as described?  There is risk,cost and headaches with rental management. If those don’t appeal, flog it and move on with life.

[Dicey]

Are you considering that $500k in gains (assuming you're married) would be tax free if you just sold it?

[Villanelle]

How much do you owe on the house? Does that mortgage include prop taxes, insurance, HOA, and other expenses?  What do property managers in your area charge?  (Usually % of rents, often with addition feels for turnovers.)  Do you actually want to be a landlord? 

Personally, I'd sell.  Price-wise is is probably a mediocre-ish rental so unless there's an additional reason to keep it, I'd just sell and be done with it. 

[joemandadman189]

I will try to reply to all most questions/comments and check out that spread sheet

Seems like selling is making the most sense

@Villanelle
Zillow Estimated price is ~$725k
We owe ~$450k
Total Mortgage payment is $2740 including PITI & HOA (P&I is about $1930, of which the principal payment is ~$840 and climbing)

I need to investigate what property managers charge in my area

I could see being a landlord where we rent out rooms at a certain price, there are several consulting and engineering office with in a few miles that would make it an interesting rental along with a light rail stop close by.

@Dicey We are considering that any proceeds from a sale would be tax free

@GilesMM I dont think i would buy this specific home to be a rental

@Mr. Green - the home is in a great location - in an area that will be built out with a lot of amenities and services with an even closer light rail stop. Its an earlier 2000's build so has bigger lots, next to a trail and open space. i think it would be a great place to live forever - other than our family isnt close and that is becoming a priority as they age. i could see moving back here some day and or hanging on just for appreciation (south Denver area)

I also like the idea of having a fall back plan if we miscalculated and hate the new place/town/area/state

@ChpBstrd - The big driver for moving is to be closer to our parents and have a better sense of community. we are currently 12 and 14 hours a way from parents, the move would put us 3 and 2 hours away located in the middle/between them. the potential new place is also a city we know from our college days with lots of new amenities and good schools down the block.

We likely can work from home and if not other employers would let us, the new place is less expensive than our current place but with rates the payment would be more.

In a big city its easy to get lost in the shuffle with constant driving and running around. we have many friends in the area now but rarely see them, i bet we would see them more often if we come back to visit.  we have no rental experience (red flag?)

[Paper Chaser]

With the estimated rent of $4k and 2700 PITI, you're left with $1300/mo coming in. Then subtract any expense for management, maintenance, vacancy, etc. So likely a bit under $1k/mo income.

If you sell and add the $190k tax free profit to the 90k downpayment you already have, it looks like your monthly mortgage payment drops by about $1400/mo (assuming the purchase price stays the same).

So keeping the house makes you a few hundred per month, and selling (and applying the proceeds to your downpayment) saves you $1400 per month.

[Missy B]

Speaking as an absentee landlord whose last inspection revealed a major hoarding situation, disconnected smoke alarms, damaged carpets, baby grow-op and general filth, I would sell.

By the way, I went through 3 property managers, all of whom thought that my request for inspections apart from move-out was invasive and insulting to tenants and that credit checks (and formal ID) were completely unnecessary.

They were the largest two property managers on Vancouver Island, and the third was a highly regarded one on the north island. Their lazy, cavalier management style resulted in dramatically more damage and cost to me than when I managed with the help of my neighbor.

[dandarc]

"I dont think i would buy this specific home to be a rental"

There's your answer right there. Your life will be so much simpler if you just sell.

[MrGreen]

@Mr. Green - the home is in a great location - in an area that will be built out with a lot of amenities and services with an even closer light rail stop. Its an earlier 2000's build so has bigger lots, next to a trail and open space. i think it would be a great place to live forever - other than our family isnt close and that is becoming a priority as they age. i could see moving back here some day and or hanging on just for appreciation (south Denver area)

I also like the idea of having a fall back plan if we miscalculated and hate the new place/town/area/state

If you are unsure whether the new location will stick and you can break even or cash flow the property for a year or two while you're settling in and ensuring it's a place you want to live, there's certainly something to be said for that. The Denver area has way more open space than cities on the East Coast but if you think it would be considerably difficult to buy that same house again in the event you don't want to stay where you're moving there is nothing wrong with holding on to it.

We've been burned once. Sold a piece of land that I'll regret selling til the day I die. I know keep property until I'm damn sure I won't be going back there as long as it's not a financial burden to keep it. For us, being FIREd gives us enormous flexibility which has also made it harder to let go of places because "I'm never coming back here" isn't as concrete as someone who relocates for a job.

Perhaps sitting on it until you know whether the move sticks is worth any risk that the Denver market might see prices come down some.

[Swish]

Realtors always recommend selling... or buying or anything that gets them paid. If you don't have a good option for management I'd sell because of the PIA of 800mi that will take a toll in more ways than just money.

[joemandadman189]

Do rental owners include home price appreciation in NPV calculations?

if i include a 3% home price appreciation the NPV is $40k positive over 5 years, if i exclude appreciation, the 5 year NPV is negative

[MrGreen]

I do not include appreciation. Are you assuming 3% appreciation over inflation, so like 6-7% appreciation per year? In the current environment that may be a tall ask.

[joemandadman189]

I do not include appreciation. Are you assuming 3% appreciation over inflation, so like 6-7% appreciation per year? In the current environment that may be a tall ask.

Good catch, current appreciation would probably be negative if i considered inflation (which i didnt in the appreciation case), i did considered inflation with the discount rate in the NPV calculation

looks like selling is the way to go

Thanks,

[uniwelder]

I do not include appreciation. Are you assuming 3% appreciation over inflation, so like 6-7% appreciation per year? In the current environment that may be a tall ask.

Good catch, current appreciation would probably be negative if i considered inflation (which i didnt in the appreciation case), i did considered inflation with the discount rate in the NPV calculation

looks like selling is the way to go

Thanks,

I include 2% appreciation for rentals.  If you have 25% equity in the property, that's an 8% annual return.  Remember the current high inflation rate is not likely to continue.  It sounds like OP has 38% equity, so that would conservatively be more than 5% return, and with 3% appreciation would be 8% return.  Annual gains of 14.5-22k.

I also include mortgage pay down, which OP stated is $840/month, so with tenants 11.5 months of the year, would be another $9,660 per year.

Certainly those two factors don't put money in your pocket until you sell, but I think its still worth considering, versus just looking at how little rental income the place will bring.  Plus the suggestion of keeping it a couple of years in case you regret moving.

edited to add-- keep in mind you can rent it for 3 years before selling and not pay tax on the gains

[joemandadman189]

if i include a 2% home appreciation along with mortgage paydown the 5 year IRR is 14%, if i only include the mortgage paydown (& rent) the IRR is -17%.

i am assuming:
Rent -                     $4000/month
Principal paydown -   $850/month
Management -          $400/month
Vacancy -                 $310/month
Opex -                     $320/month
Capex -                   $320/month
Yard Management -   $100/month
Mortgage & HOA -    $2750/month
Net -                      ~$660/month

Net with home price appreciation is ~$1450/month

 

I feel like the NPV and IRR model i made is way to sensitive to a future home price, but its good to know that others include it.

Our current home wouldnt be a typical rental, i look at it as more of a don't cost us money every year and we are not looking for it to cash flow. the true value is in several years after some home appreciation and mortgage paydown while that sweet 30 year interest rate of 2.875% does its magic and the surrounding area is developed. 

[Paper Chaser]

Keep in mind that part of the cost of keeping the property (for any amount of time) is that you couldn't put that tax free equity gain towards the down payment of the new place. You'd need to finance $190k more of the purchase price of the new place at ~7% in order to keep the 2.875% of the rental. That's turning down guaranteed savings every month of ~1400 on hopes that you'd get the rent you think you could, no major expenses pop up, and it appreciates as much as you anticipate.

[rothwem]

Setting aside the fact you own it, would you buy it today at those favorable rates and rent it out as described?  There is risk, cost and headaches with rental management. If those don’t appeal, flog it and move on with life.

I feel like this question is kinda funny, because when I look at those stats, would I spend $450k to get a house that worth $750k that brings in $4000 of rent per month at a 2.875% interest rate?  FUCK YEAH I WOULD. 

It doesn't mean its actually good rental.  For one thing, I'm surprised that people actually pay $4000 per month for a rental property.  Is that really a thing?  I thought you could rent a Manhattan apartment with a view for that price.  (ITT, rothwem discovers rich people exist outside of NYC and California)

Assuming it is though, if I were in the shoes of the OP, I'd rent it out for a couple years.  See if its a pain in the dick and if you hate it, then sell it.  I don't think the housing market is going anywhere in Denver, there's so much business investment there. Something to consider is that at 2.875%, your principle paydown is going to be significant.  And also, the tax benefits of owning a rental property are also significant.  If you like to visit Denver, you'll also be able to write off most of your trip expenses there as long as you do *something* related to your rental while you're there, maybe meet with your property manager or something. 

So anyways, I'd hedge.  Kick the selling decision down the line a few years.  And never trust to a Realtor. 

[uniwelder]

if i include a 2% home appreciation along with mortgage paydown the 5 year IRR is 14%, if i only include the mortgage paydown (& rent) the IRR is -17%.

i am assuming:
Rent -                     $4000/month
Principal paydown -   $850/month
Management -          $400/month
Vacancy -                 $310/month
Opex -                     $320/month
Capex -                   $320/month
Yard Management -   $100/month
Mortgage & HOA -    $2750/month
Net -                      ~$660/month

Net with home price appreciation is ~$1450/month

 

I feel like the NPV and IRR model i made is way to sensitive to a future home price, but its good to know that others include it.

Our current home wouldnt be a typical rental, i look at it as more of a don't cost us money every year and we are not looking for it to cash flow. the true value is in several years after some home appreciation and mortgage paydown while that sweet 30 year interest rate of 2.875% does its magic and the surrounding area is developed.

This is nitpicking a little, but for the appreciation, you said you're using 2%, but $790/month for a 725k home is actually a 1.3% annual increase in home value.  At 2% appreciation, your monthly gain comes to $1,870.

[joemandadman189]

if i include a 2% home appreciation along with mortgage paydown the 5 year IRR is 14%, if i only include the mortgage paydown (& rent) the IRR is -17%.

i am assuming:
Rent -                     $4000/month
Principal paydown -   $850/month
Management -          $400/month
Vacancy -                 $310/month
Opex -                     $320/month
Capex -                   $320/month
Yard Management -   $100/month
Mortgage & HOA -    $2750/month
Net -                      ~$660/month

Net with home price appreciation is ~$1450/month

 

I feel like the NPV and IRR model i made is way to sensitive to a future home price, but its good to know that others include it.

Our current home wouldnt be a typical rental, i look at it as more of a don't cost us money every year and we are not looking for it to cash flow. the true value is in several years after some home appreciation and mortgage paydown while that sweet 30 year interest rate of 2.875% does its magic and the surrounding area is developed.

This is nitpicking a little, but for the appreciation, you said you're using 2%, but $790/month for a 725k home is actually a 1.3% annual increase in home value.  At 2% appreciation, your monthly gain comes to $1,870.

i made it more complicated and probably wrong but, i used a 2% a home price appreciation starting at $700k value, looked at annual mortgage paydown, subtracted out selling fees and figured out a net proceeds from a home sale and used the annual difference between years 0 and 1 (divided by 12) as the monthly net appreciation, then did that for several years to see the impact on NPV, IRR

[joemandadman189]

Setting aside the fact you own it, would you buy it today at those favorable rates and rent it out as described?  There is risk, cost and headaches with rental management. If those don’t appeal, flog it and move on with life.

I feel like this question is kinda funny, because when I look at those stats, would I spend $450k to get a house that worth $750k that brings in $4000 of rent per month at a 2.875% interest rate?  FUCK YEAH I WOULD. 

It doesn't mean its actually good rental.  For one thing, I'm surprised that people actually pay $4000 per month for a rental property.  Is that really a thing?  I thought you could rent a Manhattan apartment with a view for that price.  (ITT, rothwem discovers rich people exist outside of NYC and California)

Assuming it is though, if I were in the shoes of the OP, I'd rent it out for a couple years.  See if its a pain in the dick and if you hate it, then sell it.  I don't think the housing market is going anywhere in Denver, there's so much business investment there. Something to consider is that at 2.875%, your principle paydown is going to be significant.  And also, the tax benefits of owning a rental property are also significant.  If you like to visit Denver, you'll also be able to write off most of your trip expenses there as long as you do *something* related to your rental while you're there, maybe meet with your property manager or something. 

So anyways, I'd hedge.  Kick the selling decision down the line a few years.  And never trust to a Realtor.

i feel like its funny/silly too, the rate alone feels like a reason to keep it

Rental prices are bonkers and i am not sure i believe it, but a young coworker is renting a 2b/2ba for ~$2700
here is a town house renting for $4.5k on zillow, 4b/3.5ba 2200sf
https://www.zillow.com/homedetails/10068-Town-Ridge-Ln-Lone-Tree-CO-80124/157719818_zpid/
we have a SFH, 5b/3.5ba with 3500sf, 3 car garage

i hadn't considered the travel back a business expense, we would have to travel back every ~2-3 months anyway for work

[clarkfan1979]

Setting aside the fact you own it, would you buy it today at those favorable rates and rent it out as described?  There is risk, cost and headaches with rental management. If those don’t appeal, flog it and move on with life.

I feel like this question is kinda funny, because when I look at those stats, would I spend $450k to get a house that worth $750k that brings in $4000 of rent per month at a 2.875% interest rate?  FUCK YEAH I WOULD. 

It doesn't mean its actually good rental.  For one thing, I'm surprised that people actually pay $4000 per month for a rental property.  Is that really a thing?  I thought you could rent a Manhattan apartment with a view for that price.  (ITT, rothwem discovers rich people exist outside of NYC and California)

Assuming it is though, if I were in the shoes of the OP, I'd rent it out for a couple years.  See if its a pain in the dick and if you hate it, then sell it.  I don't think the housing market is going anywhere in Denver, there's so much business investment there. Something to consider is that at 2.875%, your principle paydown is going to be significant.  And also, the tax benefits of owning a rental property are also significant.  If you like to visit Denver, you'll also be able to write off most of your trip expenses there as long as you do *something* related to your rental while you're there, maybe meet with your property manager or something. 

So anyways, I'd hedge.  Kick the selling decision down the line a few years.  And never trust to a Realtor.

I'm going to echo 100% of the comments by @rothwem

Because of the location, you will make more money on this by keeping it than investing in the stock market. However, it will involve a little bit of work, so it becomes a personal decision. Is the juice worth the squeeze? Only you can decide that for yourself.

Rent it out for 1-3 years and test it out. If it's worth it, keep it. If it's not, sell it before 3 years to get the capital gains exclusion.

I have done this same very thing 3 times. All 3 of my rentals (4 doors) were a former primary residence. One property is a 3-hour drive, one is a 4-hour plane ride and the last is a 7 hour plane ride.

Be disciplined and put the cash flow into a separate account. Only spend from this account for repairs on the rental house. If you unconsciously spend all the cash flow and an expensive repair is needed (and you don't have the cash), it could blow up in your face.

[SeattleCPA]

Rent it out for 1-3 years and test it out. If it's worth it, keep it. If it's not, sell it before 3 years to get the capital gains exclusion.

As a tax accountant, I get nervous about the losing the Section 121 exclusion due to the timing. Especially if the gain is big.

I feel like people plan to rent for a couple of years... then something happens so it's more than a couple of years... but there's still time to meet the 2 out of 5 years requirement so no worries... and right at the time they do go to sell the market softens or mortgage rate rise and boom they lose ability to exclude $250K or $500K of gain from taxes.

[joemandadman189]

Rent it out for 1-3 years and test it out. If it's worth it, keep it. If it's not, sell it before 3 years to get the capital gains exclusion.

As a tax accountant, I get nervous about the losing the Section 121 exclusion due to the timing. Especially if the gain is big.

I feel like people plan to rent for a couple of years... then something happens so it's more than a couple of years... but there's still time to meet the 2 out of 5 years requirement so no worries... and right at the time they do go to sell the market softens or mortgage rate rise and boom they lose ability to exclude $250K or $500K of gain from taxes.

i re-ran the NPV using a 20% capital gains tax on a home sale proceeds after 3 years, it turns all 5-8 year NPV's negative @ 6%