Author Topic: Should I rent or sell my second house?  (Read 1866 times)

frugalnacho

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Should I rent or sell my second house?
« on: July 19, 2017, 08:34:24 AM »
I purchased a house in 2009 for $67k.  Lived in it for 3 years, then moved into my wife's house.  My family (mother, father, sister, sister+daughter) was getting their home foreclosed on so I let them move into my house.  Rent was far below market value, they just had to reimburse me for the mortgage and take care of their own utilities.

They are moving, so now I need to either sell the house or rent it out.  I owe approximately $35k on the mortgage.  Zillow and Redfin both list the estimated price at $160k+, but that seems a little high to me, but maybe it's accurate as the market is really hot and home prices continue to rise for this area.  If I was moving into it by myself I would move in as is, but if I were to sell it or rent it out it will likely need some updates: new flooring, kitchen updates (hopefully cheap superficial stuff), various small improvements, interior paint

The mortgage/taxes/insurance is approximately $700-750/mo.  The mortgage has about $35k left at 6 or 6.5%.  I paid it down aggressively in the beginning.  If I continue to make the monthly payments with nothing extra the mortgage will expire around 2019 oops 2026.  On going taxes/insurance will be approximately $300/mo.  Monthly rental for comparable houses seems to be around $1100-$1200/mo.

Should I sell it or rent it?  It seems like I should sell it, but I'd like to seek the advice from this sub forum.  I can be persuaded by math if it makes more sense to rent.

EDIT to add:

I just read the top sticky about sell vs rent case study.  I suppose I should have read that before creating a thread.  Doh.  Below are the numbers.

Quote
Make sure you include the following information so we have the correct numbers to help you.

Some of these are estimated values.

Market Value: $150k
Original Purchase price: $67k
Original Mortgage Amount: $67k
Interest Rate: 6.5%
Mortgage Term: 30 years
Term remaining: 21 years (although will be paid off in 9 more years at current payments due to early principal payments)
Amount remaining on mortgage: $35k
Gross Rents: $1100
Principal and Interest (the P&I of your PITI - should match with the above info): $420/mo
Taxes and Insurance (the T&I of your PITI): $300/mo
HOA costs: $0
Deferred maintenance notes: Will need upgrades to make rentable.  New flooring, kitchen upgrades, new paint, new bathroom vanities, minor repairs.  Does not need new roof/hvac/eletrical/plumbing/windows in immediate future.
Anything else special or unique in regards to the numbers of the property (not the property itself; things such as city assessments, back taxes, special costs due to unique features of the property, etc. etc.): Classified as second home, not rental.  No depreciation taken.  I will owe capital gains if I sell, but will likely be minimal tax hit due to my low tax bracket.
« Last Edit: July 19, 2017, 10:30:34 AM by frugalnacho »

Cwadda

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Re: Should I rent or sell my second house?
« Reply #1 on: July 19, 2017, 08:39:19 AM »
There is an option you haven't listed. You can rent it out AND "sell."

How about a cash-out refinance, shift to 20% equity with a low interest rate, and take the rest of the cash out to invest? Then also rent it. If it's worth $150k you'd need $30k in equity, which you already have. That way, if you are in a hot market, you can continue to let it appreciate. Also, you won't be hit with a big capital gains tax bill if you were to sell.

What do you think of this idea?

I've also attached a cash flow calculator for you to figure out your exact numbers a few different ways.




frugalnacho

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Re: Should I rent or sell my second house?
« Reply #2 on: July 19, 2017, 08:47:56 AM »
I've already made a thread in the tax sub forum about capital gains and tax implications.  No responses yet.  If I am understanding how things work though, I should get very little tax hit from selling the property.  Unless I sell it for way more than I am thinking, then I might owe more in taxes than I'm thinking at the moment, but that's a good problem to have.

https://forum.mrmoneymustache.com/taxes/selling-my-second-house-tax-implications-and-questions/

I don't know that I want to deal with a rental. It seems like it will be a big pain my ass.  I can be motivated by $$$, but $$$ being equal I'd much prefer a passive investment.  It fits my personality much better. 

If I sell I will get enough cash that I can pay off my current mortgage on my primary home ($46k) and have enough left over to have a years+ worth of money in taxable investments.  No rental, no mortgages of any kind, and a pile of cash in taxable investments sounds a lot less stressful than 2 mortgages and dealing with a rental property.

Cwadda

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Re: Should I rent or sell my second house?
« Reply #3 on: July 19, 2017, 09:35:11 AM »
I've already made a thread in the tax sub forum about capital gains and tax implications.  No responses yet.  If I am understanding how things work though, I should get very little tax hit from selling the property.  Unless I sell it for way more than I am thinking, then I might owe more in taxes than I'm thinking at the moment, but that's a good problem to have.

https://forum.mrmoneymustache.com/taxes/selling-my-second-house-tax-implications-and-questions/

I don't know that I want to deal with a rental. It seems like it will be a big pain my ass.  I can be motivated by $$$, but $$$ being equal I'd much prefer a passive investment.  It fits my personality much better. 

If I sell I will get enough cash that I can pay off my current mortgage on my primary home ($46k) and have enough left over to have a years+ worth of money in taxable investments.  No rental, no mortgages of any kind, and a pile of cash in taxable investments sounds a lot less stressful than 2 mortgages and dealing with a rental property.

Totally fair. Did you try factoring in 10% of rent for property management?

frugalnacho

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Re: Should I rent or sell my second house?
« Reply #4 on: July 19, 2017, 10:01:04 AM »
I've already made a thread in the tax sub forum about capital gains and tax implications.  No responses yet.  If I am understanding how things work though, I should get very little tax hit from selling the property.  Unless I sell it for way more than I am thinking, then I might owe more in taxes than I'm thinking at the moment, but that's a good problem to have.

https://forum.mrmoneymustache.com/taxes/selling-my-second-house-tax-implications-and-questions/

I don't know that I want to deal with a rental. It seems like it will be a big pain my ass.  I can be motivated by $$$, but $$$ being equal I'd much prefer a passive investment.  It fits my personality much better. 

If I sell I will get enough cash that I can pay off my current mortgage on my primary home ($46k) and have enough left over to have a years+ worth of money in taxable investments.  No rental, no mortgages of any kind, and a pile of cash in taxable investments sounds a lot less stressful than 2 mortgages and dealing with a rental property.

Totally fair. Did you try factoring in 10% of rent for property management?

No, haven't crunched any numbers.  I could read up on all the rental resources online and on this site, but figured I'd ask here first to hopefully save me some time and effort with the advice of some experienced mustachians.  If I didn't own it already, and approached this deal I would think it's a terrible deal without running numbers.  Buy a $150k house and rent it out for like $1100/mo? I would think I'd need much higher rent, or a much lower purchase price for that to make sense.  If I wouldn't buy it as a rental, shouldn't I be selling it?  Is this correct, or am I going to be making a financial mistake by selling instead of renting? 

Cwadda

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Re: Should I rent or sell my second house?
« Reply #5 on: July 19, 2017, 10:03:08 AM »
I'd just crunch the numbers. It won't take more than 10 minutes. I attached a nifty spreadsheet for you a little further up.

If you're not getting a good cash on cash return, sell it. Also, consider doing FSBO and saving $ there.

frugalnacho

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Re: Should I rent or sell my second house?
« Reply #6 on: July 19, 2017, 10:12:36 AM »
I'd just crunch the numbers. It won't take more than 10 minutes. I attached a nifty spreadsheet for you a little further up.

If you're not getting a good cash on cash return, sell it. Also, consider doing FSBO and saving $ there.

I checked out the spread sheet.  I guess what I'm asking is for others to help me crunch the numbers.  I'm a real estate noob, so I'm not sure which numbers I should be focusing on, and how to compare that with the option of selling it.  Or if any of my assumptions with the numbers are realistic. 

EDIT: I've edited my original post to include a sell/rent case study from ARS's sticky.
« Last Edit: July 19, 2017, 10:31:19 AM by frugalnacho »

Cwadda

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Re: Should I rent or sell my second house?
« Reply #7 on: July 19, 2017, 11:59:11 AM »
I'd just crunch the numbers. It won't take more than 10 minutes. I attached a nifty spreadsheet for you a little further up.

If you're not getting a good cash on cash return, sell it. Also, consider doing FSBO and saving $ there.

I checked out the spread sheet.  I guess what I'm asking is for others to help me crunch the numbers.  I'm a real estate noob, so I'm not sure which numbers I should be focusing on, and how to compare that with the option of selling it.  Or if any of my assumptions with the numbers are realistic. 

EDIT: I've edited my original post to include a sell/rent case study from ARS's sticky.

The best way to do it quickly is to fill out all the items on the spreadsheet, then take a look at the cash-on-cash return. The market is currently giving us around an 8% return. Anything lower than that, and it'd probably be worth selling. Especially if you don't want to do property management.

Cwadda

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Re: Should I rent or sell my second house?
« Reply #8 on: July 19, 2017, 12:06:22 PM »
I ran some numbers. This is if you were to buy (or refinance) the place for $150k and turn it into a rental property, plus use property management. It'd give you a break even/slight loss. So selling would be the superior option.

Hope this helps!


Cwadda

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Re: Should I rent or sell my second house?
« Reply #9 on: July 19, 2017, 12:10:04 PM »
An alternate calculation I ran for when you originally bought it for 0% down.

Assuming you put $5000 into it for repairs, you'd be getting around a 32% annual return on that $5000. (~$133 bucks a month in cashflow).

I estimated some fields for both scenarios, btw.

frugalnacho

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Re: Should I rent or sell my second house?
« Reply #10 on: July 19, 2017, 12:15:03 PM »
I'd just crunch the numbers. It won't take more than 10 minutes. I attached a nifty spreadsheet for you a little further up.

If you're not getting a good cash on cash return, sell it. Also, consider doing FSBO and saving $ there.

I checked out the spread sheet.  I guess what I'm asking is for others to help me crunch the numbers.  I'm a real estate noob, so I'm not sure which numbers I should be focusing on, and how to compare that with the option of selling it.  Or if any of my assumptions with the numbers are realistic. 

EDIT: I've edited my original post to include a sell/rent case study from ARS's sticky.

The best way to do it quickly is to fill out all the items on the spreadsheet, then take a look at the cash-on-cash return. The market is currently giving us around an 8% return. Anything lower than that, and it'd probably be worth selling. Especially if you don't want to do property management.

I filled it out and it seems negative.

Here is what I put in:

Purchase Price    $150,000.00
Down Payment %   56%
Down Payment Amount    $84,000.00
Interest Rate   6.000%
Loan amount    $66,000.00
Life Loan (years)   30
Payments Per Year   12
Total # of Payments   360

Full Rent Amount    $1,100.00
Yearly Property Taxes    $3,000.00
Expected Vacancy %   8.3%
Management Fees (% of Rent)   10%


This assumed I refi right now, and take $30k cash to fix the place up.  That should give me a mortgage of approximately $66k for 30 years.  I don't think I can get much more than $1,100 or $1,200 for rent.  Some places in the area are renting up to $1,500, but I don't know if I can pull those rents with this place, or if anyone could get those rates.  I suspect those listings renting for $1,500+ are not comparable to this place.  It looks like a moot point as the rent needs to creep up to $1,900/mo to make the cash on cash return equal 8%, which should be about the break even point for making renting a financially viable option? I don't want to just match the market returns though if I have to deal with the headache of a rental, so ideally I'd need even higher rent than that to make it worth my while.

This sounds like a real stinker of a rental property, but a fantastic deal for me to sell it and be done with it.  That was my initial gut reaction, and after looking at the numbers I'm leaning even more towards selling instead of renting.  Is there anything I am missing or not considering?

Cwadda

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Re: Should I rent or sell my second house?
« Reply #11 on: July 20, 2017, 07:19:47 AM »
Quote
This assumed I refi right now, and take $30k cash to fix the place up.

Oh man, it needs $30k in renovations? And it's still worth $150k as is? You could estimate an ARV after putting money into it and sell for higher? Or you could just sell now.

Seems like selling is the best idea.

frugalnacho

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Re: Should I rent or sell my second house?
« Reply #12 on: July 20, 2017, 08:30:01 AM »
Quote
This assumed I refi right now, and take $30k cash to fix the place up.

Oh man, it needs $30k in renovations? And it's still worth $150k as is? You could estimate an ARV after putting money into it and sell for higher? Or you could just sell now.

Seems like selling is the best idea.

The kitchen was dated in 2009 when I bought it.  It's wood paneling, and wood ceiling, wood colored cupboards, and thin dirty carpet.  I didn't have the money to do a kitchen reno at the time, and frankly I didn't place that high of a value in the aesthetics of the kitchen.  It was still functional, and I liked the rustic cabin feel.  And so instead I got some roommates, partied, put in a second bathroom, and aggressively paid the mortgage down.

I think the $150k price tag is for a move in ready house, which is why I am planning for $20-30k potentially.  I don't know what it's going to cost to reno the kitchen on the cheap, or where my best value is going to be, so I am just throwing my best guesses out.  I thought $30k was a conservative estimate of completely redoing the kitchen (with resale value being top priority), new carpet through out, new paint, and a few other minor repairs. 

I could reduce the price and sell as is, but I am hoping I can get better than 1:1 return for money spent prettying the place up, and I think it's going to sell much quicker if it's fixed up and move in ready too.

This is all preliminary though.  I'm not a real estate agent, or an appraiser, or a construction contractor.  I have a real estate agent coming to look at the house next week and give me his opinion. 

Cwadda

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Re: Should I rent or sell my second house?
« Reply #13 on: July 20, 2017, 09:15:31 AM »
Quote
This assumed I refi right now, and take $30k cash to fix the place up.

Oh man, it needs $30k in renovations? And it's still worth $150k as is? You could estimate an ARV after putting money into it and sell for higher? Or you could just sell now.

Seems like selling is the best idea.

The kitchen was dated in 2009 when I bought it.  It's wood paneling, and wood ceiling, wood colored cupboards, and thin dirty carpet.  I didn't have the money to do a kitchen reno at the time, and frankly I didn't place that high of a value in the aesthetics of the kitchen.  It was still functional, and I liked the rustic cabin feel.  And so instead I got some roommates, partied, put in a second bathroom, and aggressively paid the mortgage down.

I think the $150k price tag is for a move in ready house, which is why I am planning for $20-30k potentially.  I don't know what it's going to cost to reno the kitchen on the cheap, or where my best value is going to be, so I am just throwing my best guesses out.  I thought $30k was a conservative estimate of completely redoing the kitchen (with resale value being top priority), new carpet through out, new paint, and a few other minor repairs. 

I could reduce the price and sell as is, but I am hoping I can get better than 1:1 return for money spent prettying the place up, and I think it's going to sell much quicker if it's fixed up and move in ready too.

This is all preliminary though.  I'm not a real estate agent, or an appraiser, or a construction contractor.  I have a real estate agent coming to look at the house next week and give me his opinion.

Gotcha. If you're handy (or wish to learn), you could consider doing the renovations yourself. I just did one of my rental apartment kitchens for about $2k. New countertops, painted cabinets, painted the walls, bought a new fridge, and added storage. Paint goes a LONG way and is high value for what you actually pay.

AccidentalMiser

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Re: Should I rent or sell my second house?
« Reply #14 on: July 20, 2017, 03:35:05 PM »
I don't know that I want to deal with a rental. It seems like it will be a big pain my ass.

This sentence right here says all you need to know.  I'd sell.  I have 4 rental houses and hate being a landlord.