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Rent or sell house

Posted: Fri Feb 08, 2019 12:27 pm
by J0721
Can some of the real estate experts on here take a look at my numbers and tell me if I am forgetting anything? I am going to sell my house to move into the school district a couple miles away and am considering renting vs selling. I don't mind doing the maintenance or being a landlord so no issue with that piece of it. For me I want to know which one has better numbers. The only expense below that is a little harder for me to estimate is the repair cost. I don't mind doing the repair work myself and the house has a new roof, newer flooring, aluminum/vinyl doors & windows, wraps, etc so pretty low maintenance that way. It will be a while before anything major is needed. From a sell and reinvest in the market option I agree with the general consensus that valuations are probably a little high and future returns may be a little lower but I still think using something like 6% return as a benchmark to compare against is reasonable enough. Appreciate any insight you can offer. If what I have below is reasonably correct it seems the rental will outperform.


Home value $325,000
Amount after sale commissions 5%? $308,750
Tax on sale $-00
Interest rate 2.87%
Mortgage balance approx $86,000


Rental income
$1900/month $22,800


Expenses
Taxes non-homestead approx $4,800
Repairs and maintenance $2,500
insurance $1,700
interest approx 2k/yr $2,000

Depreciation $10,909
milage 1000/yr $1,000
Total expenses $22,909

Total exp w/out depreciation $19,700
Taxes on profit $ none


Real profit:
no deprecation or mileage $11,800


Return on money at 325k 3.63%
Return on money at 308k 3.82%

Property appreciation 1.75%/yr $5,687

Profit plus appreciation $17,487


Investment option
Equity after sales commission $222,750
7% market return $15,592
6% market return $13,365
5% market return $11,137

Re: Rent or sell house

Posted: Mon Feb 11, 2019 1:08 pm
by J0721
Just bumping this up to the top. Appreciate any thought you may have on this scenario.

Re: Rent or sell house

Posted: Mon Feb 11, 2019 2:23 pm
by riverguy
You are calculating depreciation on $300k out of $325k. It is highly unlikely that a house of that value is on a piece of land that is only worth $25k.

4% cap rate. Bad.

Cash on cash based on the equity you have is 5.2% which is pretty bad as well.

I think your repair costs are too high so the above numbers should come up some but still not what I would consider a good rental.

Re: Rent or sell house

Posted: Mon Feb 11, 2019 2:56 pm
by gmaynardkrebs
J0721 wrote:
Fri Feb 08, 2019 12:27 pm
Can some of the real estate experts on here take a look at my numbers and tell me if I am forgetting anything? I am going to sell my house to move into the school district a couple miles away and am considering renting vs selling. I don't mind doing the maintenance or being a landlord so no issue with that piece of it. For me I want to know which one has better numbers. The only expense below that is a little harder for me to estimate is the repair cost. I don't mind doing the repair work myself and the house has a new roof, newer flooring, aluminum/vinyl doors & windows, wraps, etc so pretty low maintenance that way. It will be a while before anything major is needed. From a sell and reinvest in the market option I agree with the general consensus that valuations are probably a little high and future returns may be a little lower but I still think using something like 6% return as a benchmark to compare against is reasonable enough. Appreciate any insight you can offer. If what I have below is reasonably correct it seems the rental will outperform.


Home value $325,000
Amount after sale commissions 5%? $308,750
Tax on sale $-00
Interest rate 2.87%
Mortgage balance approx $86,000


Rental income
$1900/month $22,800


Expenses
Taxes non-homestead approx $4,800
Repairs and maintenance $2,500
insurance $1,700
interest approx 2k/yr $2,000

Depreciation $10,909
milage 1000/yr $1,000
Total expenses $22,909

Total exp w/out depreciation $19,700
Taxes on profit $ none


Real profit:
no deprecation or mileage $11,800


Return on money at 325k 3.63%
Return on money at 308k 3.82%

Property appreciation 1.75%/yr $5,687

Profit plus appreciation $17,487


Investment option
Equity after sales commission $222,750
7% market return $15,592
6% market return $13,365
5% market return $11,137
If houses are only going to appreciate 1.75 % a year, is it realistic to think stocks will appreciate at 6%? They are both long term assets dependent on the overall health of the economy. Now, if your house is in a area that is going downhill, that might be the difference.

Re: Rent or sell house

Posted: Mon Feb 11, 2019 6:05 pm
by boomer
Another thing to consider is that you are losing your tax-free capital gain if you don't sell it as your primary home. Will there be a sizable capital gain? I am guessing that you have enough down payment to purchase another home without the funds from this home?

If it is sold later as a rental, there will be tax to pay on the capital gain, as well as 25% recapture tax on the depreciation.

Alternatively, you could sell it later and trade it into another rental using a 1031 tax-free exchange. This postpones the tax due until a later date.

Re: Rent or sell house

Posted: Tue Feb 12, 2019 12:41 am
by Caduceus
No need to make it so complicated. You have a situation where you have two options. Either you can take $308,000 from the sale that you can then re-allocate into investments, paying off debt, etc. Or you keep the house and earn what seems like an approximately 3% rental yield. Depreciation for tax purposes is not the same thing as economic depreciation, which is the true devaluation in the value of the property. But your real cash expenses already takes up 50% of your rental income.

My guess based on the numbers is that selling probably makes more sense.

Re: Rent or sell house

Posted: Fri Feb 15, 2019 12:21 pm
by J0721
Thank you for the responses I think we will just sell and invest the proceeds. I am not even 100% sure I can get the $1900/month rent so if it was $1600/month instead the numbers would get pretty ugly compared to other options.

Re: Rent or sell house

Posted: Fri Feb 15, 2019 12:41 pm
by cherijoh
boomer wrote:
Mon Feb 11, 2019 6:05 pm
Another thing to consider is that you are losing your tax-free capital gain if you don't sell it as your primary home. Will there be a sizable capital gain? I am guessing that you have enough down payment to purchase another home without the funds from this home?

If it is sold later as a rental, there will be tax to pay on the capital gain, as well as 25% recapture tax on the depreciation.

Alternatively, you could sell it later and trade it into another rental using a 1031 tax-free exchange. This postpones the tax due until a later date.
Good points. The other thing to consider is that your lender will not count any prospective rental income on your former primary residence as income - you have to have established a stream of rental income for some specified period of time for them to count any of it. (I think the time period and what percentage of the income they count may vary by lender, but if it isn't rented at the time of taking a new mortgage then it definitely won't count at all).

But I guarantee that they will be counting the remaining mortgage as part of your debt load! This could impact the interest rate you are offered or whether they will lend you the money at all.

EDITED To add: If you don't have the house sold by the time you move, your best option may be to take a mortgage that can be recast when you sell the first house. Then you can use some of the home equity from the first house to make a large extra principal payment on the mortgage for the next house. You keep the same term and interest rate, but the lender with reamortize and give you a lower payment for principal and interest. Then you can use the cash flow to keep up with your investing.

Re: Rent or sell house

Posted: Fri Feb 15, 2019 6:14 pm
by megabad
Personally I would look for maybe double that rent before I considered it a viable rental investment. Big sell for me.

If you assume residential real estate appreciation is the same as historical average ~2% (close to your 1.75), this would imply historical real stock market growth as well of maybe 8%. Basically it seems to me like you are increasing your risk exponentially with lower expected return which doesn’t suit me. Additional, you may incur a bigger tax bill in the future. I would want to see multiples higher return than the broad stock market for any single rental property, I want compensation for my risk.

Re: Rent or sell house

Posted: Fri Feb 15, 2019 7:54 pm
by Wiggums
Another vote for selling for all the reasons stated. The biggest one to me is not a great rerturn.