Author Topic: Sell rental or hold?  (Read 2731 times)

Villanelle

  • Walrus Stache
  • *******
  • Posts: 6651
Sell rental or hold?
« on: March 29, 2014, 10:13:16 AM »
Because we owned our rental for reasons other than profit, I never really ran the numbers.  I've now done that and am trying to figure out what to do. Because we are well into the loan (mortgage payment is ~50/50 principal/interest) it isn't as simple as dollars in vs. dollars out.  We've now decided that we will never move back to the property, so we are now looking at it as purely an investment.

Rent (after mgt fee)   2255   
Maintenance      75
HOA                      165
Property tax      340
Mortg. interest      896
HELOC interest      100
Insurance              110
      
Income           2255   
Expenses      1686
Net             569

We also pay about $900 per month on principal on the main loan, plus about $1200 on the HELOC (which was taken out as part of a refi which is a complicated story that isn't relevant).  It is an IO payment so if cash ever gets tight, we can keep part or all of that $1200.  HELOC is 2.6% adjustable.  Mortgage is 4.2%, which is the best we could do with it not being owner occupied.  Monthly cash flow is not an issue.  While the house is way down (~$75k) from our purchase price, we are not upside down and could walk away with ~$150k, after all fees and expenses.   Very rough estimates are that the home would sell for $475,000 and we owe about $300,000.

We will likely be moving back to the States in ~ a year and depending on where we land, we might rent or buy.  If we buy, we would not have 20% to put down unless we sold (or sold a ton of stocks).  However, we did not use a VA loan on our last purchase so we have that available to us.  I'm not super familiar with VA loans or the implications, but my understanding is that using one would mean a lower down payment would not be a problem.

We'd buy something probably slightly more expensive than this property because it is an attached townhouse with no yard and we'd like a small yard for a dog.
 
1) Do we sell only if we decide to buy something else?
2) Do we sell regardless of whether we rent or buy at our next location?
3) Do we hold it regardless of renting or buying?

 Thoughts?
« Last Edit: March 29, 2014, 11:06:33 AM by Villanelle »

Thegoblinchief

  • Guest
Re: Sell rental or hold?
« Reply #1 on: April 01, 2014, 04:19:19 PM »
I would hold onto it for now. $500 a month net is nothing to sneeze at.

When you move back, if it works to your favor to need a traditional 20% down payment, then sell the property to recoup the investment.

That said, it's not a very good investment property based on the 1% rule. I wouldn't view it as a long-term holding.

the fixer

  • Handlebar Stache
  • *****
  • Posts: 1029
  • Location: Seattle, WA
Re: Sell rental or hold?
« Reply #2 on: April 01, 2014, 05:01:43 PM »
I noticed you included only mortgage interest as an expense, so you this isn't a cashflow analysis. If your total mortgage payment is roughly twice the interest portion, then the property is cashflow negative by several hundred dollars per month. Projected appreciation is the only possible reason to keep it.

There are much better ways to spend that $150k. Your time horizon, living situation, and other personal factors will constrain your options a bit.

I know very little about doing this, but would your tenant be interested in buying your house on a lease/option? Sell them on it as a way for them to stop throwing their money away on rent. It will also substantially increase your profits from the sale over time.

waltworks

  • Walrus Stache
  • *******
  • Posts: 5653
Re: Sell rental or hold?
« Reply #3 on: April 03, 2014, 08:41:51 AM »
$75/mo in maintenance is totally out of whack for a $475k property. Including big-ticket items that are slowly degrading and will need replacement at some point, figure 1-3% of the total home value per year. So $5k/year minimum.

You're massively cash flow negative here if you include maintenance.

-W

Villanelle

  • Walrus Stache
  • *******
  • Posts: 6651
Re: Sell rental or hold?
« Reply #4 on: April 03, 2014, 02:01:50 PM »
I noticed you included only mortgage interest as an expense, so you this isn't a cashflow analysis. If your total mortgage payment is roughly twice the interest portion, then the property is cashflow negative by several hundred dollars per month. Projected appreciation is the only possible reason to keep it.

There are much better ways to spend that $150k. Your time horizon, living situation, and other personal factors will constrain your options a bit.

I know very little about doing this, but would your tenant be interested in buying your house on a lease/option? Sell them on it as a way for them to stop throwing their money away on rent. It will also substantially increase your profits from the sale over time.

While this is true, it fails to take into account the difference is mortgages that are new (and thus nearly all interest) and old (and thus include a significant amount of principal).  If you look at it this way, then a property with an IO mortgage and a property on which you are paying $1000 in principal and $15 in interest are the same when look at whether they are investments.  Yet anyone with anyone sense knows that the property where you are breaking even cashflow-wise and getting $1000 in equity is a far better investment than a property where you are breaking even and getting $1 in equity.

So because this isn't a new loan or a question about a potential purchase (and a potential new loan), the analysis needs to be different.  The cash flow issues are the same, but the attractiveness of the investment is different.

Our tenant would definitely not buy the house. She's on a public assistance program where they pay 2/3 of her rent, so I'm sure she's in no position to buy. 

Villanelle

  • Walrus Stache
  • *******
  • Posts: 6651
Re: Sell rental or hold?
« Reply #5 on: April 03, 2014, 02:04:12 PM »
$75/mo in maintenance is totally out of whack for a $475k property. Including big-ticket items that are slowly degrading and will need replacement at some point, figure 1-3% of the total home value per year. So $5k/year minimum.

You're massively cash flow negative here if you include maintenance.

-W

That's actually far more than we've ever paid.  Also, it is a townhouse some of the maintenance is covered by the HOA.  Lastly, it is a very real estate market so that throws the numbers out of whack a bit.  This is a 1900 sqft attached townhouse.

waltworks

  • Walrus Stache
  • *******
  • Posts: 5653
Re: Sell rental or hold?
« Reply #6 on: April 03, 2014, 03:27:00 PM »
Ok, even if your exterior is covered:
-Floors have to be redone every 5-10 years.
-HVAC/furnace will die every 15-20 years.
-Water heaters last 10-15 years.
-Electrical and plumbing problems will happen eventually/regularly.
-You gotta repaint the inside every once in a while.
-There are probably exterior features (deck?) that the HOA doesn't cover and unless you've got a good idea that they are budgeting correctly (have they done a reserve study? $165/mo is crazy low for a townhome HOA - I bet they are going to have to assess for painting, new roof, etc when those things come up) you can always get hit with a special assessment for things that they do cover.

Even a place in good shape, with an HOA to deal with the outside features, will require ~1% or more to maintain over the long run. You can leave stuff to decay to some extent but that will hurt the rent you can charge and your resale value (as well as potentially cause a cascade of other problems). 

-W
« Last Edit: April 03, 2014, 03:29:10 PM by waltworks »

 

Wow, a phone plan for fifteen bucks!