Poll

Should I sell rental house 2?

Yes
6 (100%)
No
0 (0%)

Total Members Voted: 6

Author Topic: Sell the rental?  (Read 963 times)

Swish

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Sell the rental?
« on: November 13, 2018, 02:05:54 PM »
Recently one of my rental homes has become vacant and I was initially just looking at renting it again it but have had an unexpected offer presented to me.

So quick snapshot of today:

Earnings:

job: $88,000
rental 1: $18,000
rental 2: $15,600
basement rent: $6,000
CCB: $11,289
Total: 138,889

After deductions/Tax inc: $93,055

Savings:

Pension: $15,610
RRSP: $3,131
House 1: $13,780
House 2: $5,209
Home: $15,928
Sub Total: $53,658

Bills:

Interest mort 1: $3,286
Interest mort 2: $5,289
Interest home: $9,433
RRSP loan int: $1,519
utilities: $4,812
housing tax: $9,818
house insurance: $2,270
food: $4,560
phone: $900
internet: $924
Sub Total: $42,811

Total Spending: $96,469

Net Income= -3,414 or -284.50 per month

Total Debt: $631k Net Worth: $350k

So far I have been making up the difference each month by doing side hustles here and there.

The opportunity presented would be to purchase rental house 2 for $200k and I currently owe $163 on it. I had an appraisal this summer from the bank for $225k. The individual broke out their reasons for offering less than appraisal as $9k for realtor fees if I had listed it and $6,750 for lost rent if it sat vacant while showing it as average homes are selling in 5 mo in our area(not sure this one matters as much as I would just rent it again not list it) and then finally if we use my lawyer they would pay the $1200 closing fees/title transfer.

One other option they asked if I would consider carrying the mortgage for up to six months. Title still in my name and they would give me $400 per month in addition to agreed to price while they renovate the property prior to taking possession and transferring title. They are interested either way and this is not a deal breaker one way or another. 

We have been averaging 1-2 months per year vacancy on this home and those months are really tough. If I cannot make enough on side hustles we end up dipping into short term LOC or family loans. Currently we have them all paid up but a year ago we racked up $35k of credit card/LOC debt at our worst point when we ended up with vacancies at both rentals at the same time for several months.

I paid $175k for the home 3 years ago with $5k down so to walk away with $37k after only 3 years seems a respectable return $5k.

This will set me back an additional $400 per month for three years until I am able to refinance my other aggressive loans. If I invest the $37k I should be able to squeak out $150ish/mo or I could look for another rental/s that has $600/mo of free cash flow and hit a neutral point.

Alternatively I could just put the $37k in an emergency fund to draw down $400-700/mo til I can restructure my other debts.

These are the ideas I have explored so far. Any advice or new ideas are most welcome.

Thanks for taking the time to read :)
« Last Edit: November 13, 2018, 04:21:29 PM by Swish »

marty998

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Re: Sell the rental?
« Reply #1 on: November 14, 2018, 01:21:46 AM »
You don't seem to be making enough money to support your current lifestyle?

Are the amounts listed in "savings" mandatory loan principal repayments?

Are your pension savings of $15k counted as part of the deductions from your $139k income? (Asking if it is double counted, otherwise $45k is a lot of tax to be paying for that income, especially if it doesn't take into account expense deductions on the rentals).

Another Reader

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Re: Sell the rental?
« Reply #2 on: November 14, 2018, 05:09:25 AM »
Your "buyer" is an equity thief, likely someone that does this a lot.  This person is trying to take advantage of you as a distressed seller.  Houses usually sell to owner occupants.  They don't discount the value for lost rent.  In the real estate world, that's the "highest and best use" of the property, the use that produces the highest value.  Discounting for vacancy is irrelevant.  It's also very risky to have someone take possession of the property to make improvements with you still holding title.

Appraisals are often inaccurate.  The FIRST thing you should do is call a competent real estate agent that sells a lot of houses in your area.  Tell the agent you are thinking of selling and would like the agent to view the property and give you a market analysis, estimated marketing time, the likely selling price, and what needs to be done to sell the property.  Call a second one and get an estimate from that one to see if the first agent's analysis is accurate. 

In your shoes, I would thank the "buyer" politely and decline the offer.  Just tell them that you are going to put the property on the market and terminate the conversation.

ETA:  Yes, I would sell this property.  It is heavily cash flow negative when all expenses are considered.  It is not a good investment for anyone at 0.58 percent per month in gross rental income, and it is an alligator nipping at your heels with your numbers.  Talk to a knowledgeable agent as discussed above and go from there.


« Last Edit: November 14, 2018, 08:18:35 AM by Another Reader »

ShoulderThingThatGoesUp

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Re: Sell the rental?
« Reply #3 on: November 14, 2018, 07:47:14 AM »
Not to this guy, but it seems like you need to fundamentally reevaluate your cash flow.

Swish

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Re: Sell the rental?
« Reply #4 on: November 14, 2018, 09:22:26 AM »
You don't seem to be making enough money to support your current lifestyle? Correct. I had a much higher paying job about a year and a half ago(approx +$25-40k per year depending on bonuses) that all this debt was structured on. I quit the job to take my current role as it had a lot of better benefits. Even with the perks the change has been a tough lesson on overextending our debt.

Are the amounts listed in "savings" mandatory loan principal repayments? Yes, I counted the principal portion of the payments as savings and unfortunately I cannot negotiate them for another 3 years without hefty penalties.

Are your pension savings of $15k counted as part of the deductions from your $139k income? (Asking if it is double counted, otherwise $45k is a lot of tax to be paying for that income, especially if it doesn't take into account expense deductions on the rentals). I split out the pension contributions as to not double count. We have higher tax in Canada and my mandatory employer benefits plan is not cheap either.

@Another Reader These are good thoughts. They want to move to our area as several of our friends have all moved to within 2-3 blocks of each other. I agree, discounting for lost rent is stupid as I can just rent the home out again as I was not planning to sell it. I think they would have been better to just make an offer no excuses and see if I accepted it. I told them I needed some time to digest it all and am still showing the home for possible tenants in the meantime. I could always counter their offer with a higher price.

Floating the mortgage has a lot of risks. If they gut the place and the deal falls through I could be on the hook for thousands in restoration costs. A way to mitigate that would be for them to place a larger deposit on the contract that they would lose if it falls through. Still it is much cleaner if they just buy and take possession.

I actually had already inquired about a second assessment earlier and voila it came in this morning. They state $219,000 assuming I trim up the hedges/trees, paint the interior, finish some missing trim/vent, and replace the flooring and tub+surround in the bathroom. So the bank one little bit high compared to this one. Realtors here charge 6% on first 100k and 3% on remaining balance. I'd be looking at $9,570 in fees plus Lawyer and title transfer fees of approximately $1,200. Assuming these amounts would you still decline and list with agent? My thought is counter in the $205-210k range. If they don't go for it just rent it again.

Another Reader

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Re: Sell the rental?
« Reply #5 on: November 14, 2018, 09:39:21 AM »
By a second assessment, do you mean a competent, knowledgeable agent looked at the place, analyzed comparable sales, and provided an estimate?  If so, that's a good data point. 

I'm confused about the potential buyer.  Are they planning to lease it, occupy it, or flip it?  If this is not a flipper, taking $220k and discounting by the realtor's commission and the approximate costs of repairs is not unreasonable.  However, the buyer needs to provide their own financing and prove themselves capable of closing before I would sign a contract.

You cannot afford to lease this house out, based on your current numbers.  You have to borrow to get by.  It's an alligator, waiting to pounce.  Sell this house and be done with it.  In your shoes, I would sell the other house as well and stay away from real estate until the market fundamentals improve and you are in better shape financially.

Swish

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Re: Sell the rental?
« Reply #6 on: November 14, 2018, 11:08:05 AM »
I believe the assessor is competent and yes they came and looked at the place. The comparables are pretty similar and used the average sales of the last several months. The buyer is planning to move into the home as they want to be closer to our group of friends that live over here.

I had not thought about selling the other house seriously. On that note I paid $235k and owe $127k. There are 8.2 years left on it. The plan is to refinance the primary home in 2021. Redirect funds to the rental and pay it off outright by 2026. Then refinance that rental to pay down my primary residence when its term is up again (mortgages on primary homes are not tax deductible here so it makes sense to shift the debt to the rental and use the additional refund to pay of my house first). By 2021 all my fixed loans are covered by rent if I keep all three properties. If I sell house 2 and keep the other one my fixed bills will be just short of the rents I receive assuming I don't invest the $37-40k from the sale of house 1. Upon refinancing the combined payments decrease to $24k per year vs $42k now. It is three years out but would be $18k/yr I could use to invest or pay off debt. Do you think I should stick to this plan or just dump it and look to reinvest?

The problem with each of these houses is that they were purchased as our homes then we moved and rented them instead of selling them. I love having the rental income and equity being built by someone else but we definitely didn't look at them as income investments when we first purchased them which makes them subpar rentals now.
« Last Edit: November 14, 2018, 11:10:45 AM by Swish »

Swish

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Re: Sell the rental?
« Reply #7 on: April 03, 2019, 04:55:37 PM »
Sold the house for $200,000 and closed January 1st. Since then market in our area is down another 18% :) Thanks for all the advice!