Author Topic: To sell or rent?  (Read 1178 times)

MrsW

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To sell or rent?
« on: April 11, 2016, 09:40:00 AM »
We  currently have a mortgage on our house with a little over $4k left. We are buying a new house (with a mortgage, 80% LTV financed at 2.875%, 15 year fixed). We bought the house for $120k in 2012.

 The old house needs a new furnace, central air conditioner and a basement leak sealed, and would cost around $5-6k to remedy everything. Property taxes once we lose our homestead exemption on this property will be around $4k/year. We've been told we would have no problems renting for $900 / month and we think we could probably get around $1100 / month in our market.

My husband is in favor of renting while I'm leaning against renting purely on the merits of the house sale price vs what we can rent it for, e.g. if rental price / our sale price > 1%, it is a good deal, otherwise it is a bad deal.

Our current house that we could probably sell for $120k, of which we lose $7.2k to a realtor and another $2.3k to the sellers portion of closing costs in our area (transfer taxes and 1 year of owner's title insurance). This would net us $110.5k, assuming it sells at $120k, which neither us or our realtor is confident of.

To keep the house will cost us $5-6k up front for HVAC updates and fixing a minor basement water intrusion. We'll spend $4k/year on property taxes. We may spend 10% on property management but we can probably try to rent it ourselves. Until October we pay $661 / month for the mortgage, a smaller November payment and then the loan is payed off. If we look at May 2016 - May 2017 our costs to own the property are around $14k. Our potential rental income, if continually occupied, ranges from $10,8k to $14.4k (900 to 1200 / month, no property manager). This means, at best, the first year is a wash and realistically it is a loss. In subsequent years our costs go down to $4k / year fixed (taxes) plus a maintenance budget vs 10-14k rent, yielding a decent profit.
I also don't like having the cash locked into this house while paying a mortgage on our new house.

So my question is then, sell or rent? Is there anything in our reasoning that I've overlooked? Is the first year loss "worth it" in the long run? I would still like to get into the rental property game but with homes more in the 70k-80k that you can potentially get the 1% or slightly (and without basements which seem to all have a costly problem at one time or another) . We might not do that for another year or so and this in a way would be a way to learn.

What are your thoughts, anything that we are missing?
 

Spitfire

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Re: To sell or rent?
« Reply #1 on: April 12, 2016, 10:26:15 AM »
I'm not a real estate mathemagician, but if you plan on getting into it anyway you might want to start with this one. You already know the house inside and out since you've been living there, and transaction costs (selling here, buying another) will eat away at your profits. How much does an 80k house rent for in your area?

GrowingTheGreen

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Re: To sell or rent?
« Reply #2 on: April 13, 2016, 07:51:54 AM »
You need to calculate what your house will bring you. Google "cash on cash return rental property" or "ROI rental property". A nice lump of cash can hide terrible return rates. You need to calculate percentages. Why rent for a 3% return (not saying this is your return)?

One big mistake people make: underestimating expenses.

Check our Biggerpockets.com. They have some good resources.

MrsW

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Re: To sell or rent?
« Reply #3 on: April 14, 2016, 11:18:13 AM »
thanks for your responses! I think we will sell. From what I see we could buy a more updated smaller 3 bedroom house for 80-90k and rent it for the same $900-1000 which would make a better rental. I've seen some even for 70k.