Author Topic: So what the hell should I do, sell or collect rent???  (Read 3736 times)

iloathepats

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So what the hell should I do, sell or collect rent???
« on: April 01, 2012, 02:38:56 PM »
Hi all,

I'm looking for some insights into what to do with my house.

I bought a foreclosed 2 unit house when I graduated from grad school a couple years ago so I could stop paying rent.  I  paid $46k for it and I could probably sell it for around $85k-$90k when I get the roof done (in a few years).  Current improvements are about $4k and the roof will be maybe $6k, so let's say I will have put $10k into it.  My girlfriend and I have been living in the lower unit and renting the upper unit.  I will have the private mortgage paid off in less than 3 years.  The upper rents for $650/mo and the lower should rent for about the same, so let's say if I rented both units it would bring in $1300/mo. Total taxes are about $1650/year. Note that I am currently not claiming the rental income on my taxes.

We want to move to another neighborhood in the next couple years (I want another double, but she wants a single hehe) so I'm trying to decide what to do with the current house.  As I see it, there are two options:

1)  Keep the house, collect $1300/month with no mortgage.  I would probably have to claim the rental income if this wasn't my primary residence though. And deal with renters. If I later on decided to sell, I would have to pay capital gains tax on the profit of the sale.

2) Sell the house.  I would get a one time shot of $85k - $46k - $10k = $29k that I could use to buy the new house, and I wouldn't have to pay capital gains tax on it because I would be selling my primary residence and using it to buy another primary residence. 

So what the hell should I do?  Collect a solid $1300/month, or cash in on the lump sum by flipping it?

MEJG

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Re: So what the hell should I do, sell or collect rent???
« Reply #1 on: April 01, 2012, 02:59:05 PM »
I would:
1) pay my taxes (sorry, but that would be top on my list)
2) stay in the duplex until I had 20% down for my next house
3) buy another duplex or buy another very very rentable home
4) rinse and repeat

5) not sell any of my rentals and consider myself able to retire once 10 months rent - contributions into a sinking fund netted me living expenses.

oh, and get yourself some insurance :-) go llc or an umbrella policy

shedinator

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Re: So what the hell should I do, sell or collect rent???
« Reply #2 on: April 01, 2012, 07:56:41 PM »
Well, there are a few ways to look at this, but I'm not sure calculating net profit is the best one for determining the decision. I'd look at it more as a passive income question.
Scenario 1) You save up the money for a down payment, buy another house, and rent the current one at 1300/month combined. Using the 50% rule, this leaves you with about 650/month (or 7800/year) in average returns, presumably into perpetuity.
Scenario 2) You sell the house, using the profit (29k) as your down payment. I don't see anything about a mortgage, so this leaves ~56k that you can invest. Since your rent is paying out "infinitely," you would want an ROI from your investment that was "infinitely" sustainable. 3% is a pretty safe bet there, making your annual takeaway 1680*.84= 1411.20.
Scenario 1 yields 5.5x the annual ROI of scenario 2. I'd say that's worth the headache. Also, If you're willing to put another ~7 years into this plan, you could...
year 1: Save down payment
years 2 &3: Purchase (and improve) a duplex of similar value
year 4: Save another down payment
years 5&6: Duplex #3
year 7: Save final down payment.
years 8ff: purchase SFH, collect 1950/month in rental profit, retire FI with $23400 in annual passive income.
The alternative would be putting that time and $$ into the above investment account, and probably not reaching FI until much later.

I'm by no means an expert in the subject, but if your goal is FI, it looks like renting it out is far and away the best choice.

Secret Stache

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Re: So what the hell should I do, sell or collect rent???
« Reply #3 on: April 02, 2012, 01:18:32 PM »
whoa!  Pay your taxes dude.  That is bad news.

Once you are square with the IRS then I would keep the rental units and move on.  If you end up not liking being a landlord then sell the place.

salmp01

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Re: So what the hell should I do, sell or collect rent???
« Reply #4 on: April 02, 2012, 02:20:01 PM »
Youll have 3 years to sell it once you move out to avoid capital gains so Id consider renting it in the meantime.   Personally, Id take the income stream for now. 

Are there lots of other distressed houses in the area?  If so, it may not be a bad idea to sell this and buy another one to fix up. 

iloathepats

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Re: So what the hell should I do, sell or collect rent???
« Reply #5 on: April 02, 2012, 07:34:14 PM »
Great answers guys and gals, thanks!

On the taxes issue, if and when I move out of the house and rent both units I will definitely be legit with Uncle Sam. I don't really mind paying taxes. But seeing as this is my official residence and the rent is paid in cash, I see very little chance of getting into trouble.  I hope this doesn't become the focus of this thread because it is not the intent...

Anyways on to your points.

MEJG, interesting note on the insurance.  I have homeowner's insurance but it sounds like you're talking about separating the rental business and it's liabilities from my personal affairs.  As MMM has done I suppose I could set up a business such as an LLC and write off a number of business expenses.  I'm also not familiar with an umbrella policy if you'd care to elaborate.

shedinator, I like the cut of your analytic jib.  I know it makes more sense to hold on to the rental income but I have a hard time not leveraging the $29k.  I feel like it's just a bunch of money sitting there earning 0% interest.  The $46k I paid is working hard to get the rent money every month, while the $29k is coasting along.  I do have a private mortgage, but I'm destroying that month by month and it'll be paid off in 34 months.  One thing that is a bit unclear for me is why you're only taking 84% of the annual interest from the potential investment. I also like your 8 year FI plan. I've previously though about that, and although I like my  job and my want to work another 12-15 years (I'm 26 now), it would be nice to have that passive income ready to go if I ever got bored or wanted to try something else.

salmp01, great heads up on the 3 year leeway.  Three years rent post-moveout would be great and the house should predictably increase in value, at least for inflation.  This would allow me to maximize the rental income while minimizing the tax on the sale.  As for the distressed houses, I'm not sure how it compares to other areas, but there seems to be a market.  I'm in Buffalo, NY, and we never had the housing bubble so we never got the bust.  Home values just increase at a steady clip.  I purchased from HUD.  It's a good market for those looking to landlord because rents are relatively high for low cost houses.  Definitely need to know the neighborhoods really well though.  The thing that hurts is taxes which are relatively high (especially with school taxes in the suburbs). For instance, I pay $1700 in taxes on an assessed value of $81k.  In some parts of the country, I imagine this would equate to an assesed value in excess of $200k.  This makes SFH's less of an attractive investment since you only get one unit to rent rather than two (there is a bit of a premium for a SFH rental, but not enough to make up for the loss of a unit). I probably answered more than was asked, but there ya go.

shedinator

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Re: So what the hell should I do, sell or collect rent???
« Reply #6 on: April 02, 2012, 08:53:36 PM »
  One thing that is a bit unclear for me is why you're only taking 84% of the annual interest from the potential investment.

Capital gains tax. The 1680 was the amount you could withdraw annually, and the 84% was what you'd have left after taxes. I believe taxes are figured into the 50% rule on rent, so I wanted to have "pure profit" numbers for both. That said, it would actually take you 2 years to get to a 16% tax rate. Prior to that, the interest would just factor into your income, so it could be higher or lower.