Author Topic: What to do with single family home?  (Read 3197 times)

Stachsquatch

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What to do with single family home?
« on: June 17, 2013, 12:01:36 PM »
Last year I bought a single family home in my area. This was a so reheat premature decision as I hadn't done enough reading about real estate investment or frugality at the time. I am now in a position where moving for work is almost inevitable. The question is: do I rent or sell? Reading here and a bit at biggerpockets has helped give me some idea of what to consider, but I would like to pose the question to the members of this board for additional input. Here are the specs:

3 Bed, 2 Bath, .3 Acres
Initial Loan Amount: $221,500
Remaining mortgage balance: $218,500
Percentage down: 0% (yeah, PMI is a PITA)
Rate: 3.875%
Monthly payment + Escrow: $1350
Current ballpark Value: $223,000
Built in 1996, turnkey condition

As far as what I could rent it for in this area I believe that $1,800 would be my absolute upper limit. More likely to get $1,600 So given all that, here are some of my initial thoughts / options:

1) Rent it for a year so I don't have to pay extra taxes on the sale, plus there is the possibility of appreciation in that time frame.
2) Convert detached garage into ADU to get additional rent and get closer to that desired 1% rule. May not be possible due to zoning and would cost more capital upfront to renovate.
3) Sell it now, take the tax / fees hit and consider it a somewhat costly life lesson.
4) Rent it for the long haul with the understanding that it isn't the most efficient use if capital.
5) Drop some cash into it now to pay down 20% to get rid of the PMI and rent it with a greater degree of cash flow from it.

Those are some of the most prevalent options that come to mind. Regarding #4, I need some help understanding the implications of this. Let's take the lower end of the rent and assume I decided to rent long haul for $1,600 per month, "netting" $250 a month. Assume I am able to do this over an extended period of time. The occupancy rate in this area is one of the highest in the nation, so vacancy is real, but minimal. Since I put 0% down, after 30 years of this wouldn't I theoretically have an asset producing cash flow that someone else (my renters) bought for me? I realize that repair expenses and vacancy issues are going to gobble up most if not all of that $250 per month, but if I could even break even wouldn't it be a net benefit in terms of gained equity? I feel like I am missing something. Plus, once I am 20% in I can get rid of that nasty PMI, gaining me some additional al revenue. What am I not seeing?

arebelspy

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Re: What to do with single family home?
« Reply #1 on: June 17, 2013, 12:45:38 PM »
if I could even break even ... I feel like I am missing something... What am I not seeing?

You are missing the fact that you won't break even.

More detail is needed (future expense projections, PMI info, T&I broken out from PITI would be helpful), but ultimately it'll be an exercise to see if your cash outlay each month (the typical month you'll make 250.. But some months you'll be negative a few thousand, meaning your average mon you'll be negative, even if your median is positive) is worth the benefits (primarily equity gain).
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rollie

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Re: What to do with single family home?
« Reply #2 on: June 17, 2013, 01:25:17 PM »
To me it sounds like a good rental. I have 2 rentals, and both are being paid off by the renters. $250 in your pocket at the start isn't bad, especially if the property is in good condition and you are close enough to fix things if they go wrong. The renters are paying off your interest and principal, and giving you cash flow. Free property! Free income! You could rent a place to live for cheap across town and make money off this until you have enough to buy another property to live in. And yes, once you hit 80% of value, that nasty insurance premium is gone too. In fact, if you put the extra $250 toward principal, you'll hit that 80% even sooner and make even more cash. With real estate, if you aren't losing money, never sell.

Another Reader

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Re: What to do with single family home?
« Reply #3 on: June 17, 2013, 01:29:36 PM »
It looks like you paid $221,500 and could sell for $223,000.  If you sell it now, you will lose the cost of selling it less a few dollars of nominal appreciation.  The loss is not deductible, but there is no "extra" tax hit because there is no capital gain.

If the MI is private, you need to check with the lender for the rules for removing the MI. How much is the MI?

If you rent it, you will likely have to hire a management company, as you are moving out of the area.  Have you factored in that cost?  As the house ages, the maintenance and repair budget will have to increase.  Have you accounted for this?

In general, I would consider doing this only if rents and values were rising steadily.  You will likely lose money on the cash flow, but hope to make it up on appreciation.  If rents and/or values stagnate or go down, you will lose more than you would by selling today.

rollie

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Re: What to do with single family home?
« Reply #4 on: June 17, 2013, 01:39:02 PM »
If the house is 1996, in turnkey condition, you shouldn't have any big repairs in the near horizon. Your water heater and AC should be in fine condition, and the roof should have many years to go. Even the appliances should all still work. If your place were older (1970s or 1980s) I would assume a lot more for repairs, but you appear to be in a good spot.

arebelspy

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Re: What to do with single family home?
« Reply #5 on: June 17, 2013, 01:46:24 PM »
If the house is 1996, in turnkey condition, you shouldn't have any big repairs in the near horizon. Your water heater and AC should be in fine condition, and the roof should have many years to go. Even the appliances should all still work. If your place were older (1970s or 1980s) I would assume a lot more for repairs, but you appear to be in a good spot.

Oh, you're ready to proclaim a 17 year old HVAC and Water Heater perfectly okay over the internet?

Can I hire you to divine which repairs my properties will need?  ;)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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Another Reader

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Re: What to do with single family home?
« Reply #6 on: June 17, 2013, 01:56:19 PM »
Turnkey means different things to different people.  At 17 years, the furnace and roof would be nearing the end of their useful lives unless they have already been replaced.  In coastal Washington, exterior paint and siding can take a beating from the elements.  Maintenance helps, but replacement is inevitable.  Paint and carpet last 5 to 7 years with typical tenants.  Water heaters are good for around 10 years, meaning the OP may have to replace his in the next 5 years.  Ranges are usually good for 15 years or more, unless you get a tenant that is really hard on one.  Dishwashers seem to last 8 to 10 years.

The OP should be prepared to have a negative cash flow at $1,600 rent and a payment of $1,350 PITI including MI.  Management will take a bite of 8 to 10 percent of the rent, and that still does not account for vacancy and collection loss plus repairs and maintenance.

Stachsquatch

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Re: What to do with single family home?
« Reply #7 on: June 17, 2013, 02:01:26 PM »
I'm on break at work at the moment, but can provide more information later when I am off. Arebelspy, Another Reader, what would you do in this situation? Much more importantly; why would you take a certain course of action and based on what factors?

Also- no AC unit, doesn't get hot enough often enough here and that is commonplace in my side of the state.
Further, for commonplace repairs (i.e., non-roof replacement type of things) can be done on a very  cheap basis due to handy family members who will remain in the area.
The roof and siding are both is in good condition still and should not need replacement or repair for many years.

arebelspy

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Re: What to do with single family home?
« Reply #8 on: June 17, 2013, 02:07:15 PM »
Also- no AC unit, doesn't get hot enough often enough here and that is commonplace in my side of the state.

To clarify: I typically say AC when I really mean HVAC (bad habit due to that being the more important factor here in Vegas).  I assume it has heat, so it amounts to the same thing when I talk about AC repair/replacement.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Another Reader

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Re: What to do with single family home?
« Reply #9 on: June 17, 2013, 02:27:26 PM »
Why don't you collect and assemble all the numbers and then post them?  Make estimates for annual repairs and maintenance, management fees, etc.  Call your lender to see what you would have to do to remove MI.  Also ask what terms would you get for a refi as an owner occupant (i.e. before you move) if you could pay the house down to 80 percent of the appraised value, which is probably what you would have to do to remove the MI anyway.  This would further reduce your payment.

Are you planning on occupying the house again?  Moving back into a house you rented out has some serious tax consequences in certain sale scenarios.  Keep that in mind if you are taking a temporary transfer.