Advice on renting versus selling, in light of student loans

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BobLaw
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Joined: Mon May 04, 2015 3:25 pm

Advice on renting versus selling, in light of student loans

Post by BobLaw » Sun Mar 19, 2017 10:20 pm

My spouse and I are at a juncture in our lives where we will be moving from Minnesota to New York City for two years. Seeking your opinion on whether we should sell or rent out our current condo for the next two years - what makes the most financial sense. Here are some details regarding our current cash/debts, not including retirement:

Cash: $85,000

Debts:
Mortgage:
$115,000 @ 4.375% fixed
Student Loan: $158,000 @4.04% variable (Started out at 3.4% and has been climbing up in the last year) Making $2600/mo in payments with $2100 going to principal.

Annual gross income currently is approximately $250,000. In New York, we are not sure if it will stay the same or change bc my spouse does not yet have a job there. For our monthly living expenses with housing in NY (and including other things such as loan payments, utilities, gas etc) we are budgeting approximately $15,000/month.

We anticipate that we will be able to rent out our condo for about $1800/mo which will allow us to break even with our mortgage + association fees and make an extra $150/mo or so. The benefit of this is that it allows us to build equity for a couple years which will help us with our eventual down payment when we are looking to buy. Not sure how significant the tax implications of renting for a couple years are , however.

On the other hand, our realtor tells us that the sellers market is great at this time and that we can likely sell our place for about $230,000 (purchase price was $182,000). In two years, I don't know that the market will be quite so favorable.

Our plan is to rent a place in New York, and soon thereafter buy a place once we are finally settled.

Your advice is much appreciated. Thanks in advance.

shanghaista
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Re: Advice on renting versus selling, in light of student loans

Post by shanghaista » Sun Mar 19, 2017 10:41 pm

Few notes I takeaway:
1) You may have income that'd be more $250k (if spouse finds a job)
2) Your cushion for renting out your condo is only $150/month. Very slim. Means you have to find a renter ASAP and hope there's no turnover.
3) Your student loans concern me
- Unlike mortgage interest, they're not deductible because you make too much
- Variable APR is crippling in a rising-rate environment like we're currently in (not sure what's available in a fixed rate version?)

Only you know the full picture, but judging from the facts you presented, the $150 profit from renting it out is not worth it. The headaches and potential troubles you'd have as a landlord is far greater than $150/month IMO. I'd think paying down your student loans is a better resource allocation.
That and the proceeds you'd get is not subject to capital gains tax (assuming you lived there for the past 2 years) whereas you WOULD be subject to it later when you sell after 3 years.

You're doing great with leaving a decent amount in cash (Liquid savings/Emergency Fund). After prioritizing student loan reduction, perhaps when you get a general idea of what you want in NY, you can start paring that back to minimums and building up your expected down payment range. But judging from your $250k income and $180k expenses, even after taxes, you should be able to save decently.

*It's always a great market for your realtor as a seller. Don't listen to someone that has a financial incentive. What makes you think the market may not fare so well in 2 years? Is it legitimate concerns? If so, perhaps you should sell. But don't rely on the real estate broker's opinion solely.

Rmats
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Joined: Tue Mar 14, 2017 5:55 pm
Location: CA Bay Area

Re: Advice on renting versus selling, in light of student loans

Post by Rmats » Sun Mar 19, 2017 11:13 pm

shanghaista wrote:Few notes I takeaway:
1) You may have income that'd be more $250k (if spouse finds a job)
2) Your cushion for renting out your condo is only $150/month. Very slim. Means you have to find a renter ASAP and hope there's no turnover.
3) Your student loans concern me
- Unlike mortgage interest, they're not deductible because you make too much
- Variable APR is crippling in a rising-rate environment like we're currently in (not sure what's available in a fixed rate version?)

Only you know the full picture, but judging from the facts you presented, the $150 profit from renting it out is not worth it. The headaches and potential troubles you'd have as a landlord is far greater than $150/month IMO. I'd think paying down your student loans is a better resource allocation.
That and the proceeds you'd get is not subject to capital gains tax (assuming you lived there for the past 2 years) whereas you WOULD be subject to it later when you sell after 3 years.

You're doing great with leaving a decent amount in cash (Liquid savings/Emergency Fund). After prioritizing student loan reduction, perhaps when you get a general idea of what you want in NY, you can start paring that back to minimums and building up your expected down payment range. But judging from your $250k income and $180k expenses, even after taxes, you should be able to save decently.

*It's always a great market for your realtor as a seller. Don't listen to someone that has a financial incentive. What makes you think the market may not fare so well in 2 years? Is it legitimate concerns? If so, perhaps you should sell. But don't rely on the real estate broker's opinion solely.


This is spot on. I'd only add to factor in the cost of a property manager as you'll likely need one being out of state. Also consider if you have vacancy periods how this affects your numbers. It's usually pretty difficult to transition tenants out without any lapse in occupancy. Should you list remember that commission rates are negotiable.

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Watty
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Re: Advice on renting versus selling, in light of student loans

Post by Watty » Sun Mar 19, 2017 11:14 pm

It is likely that you have capital gains in the condo and will qualify for the homeowners capital gains exclusion if you don't rent it out for more than a few years. That would allow you to sell it when you move and not pay any capital gains taxes.

That alone could make selling it an easy choice.

BobLaw wrote:We anticipate that we will be able to rent out our condo for about $1800/mo which will allow us to break even with our mortgage + association fees and make an extra $150/mo or so.


Having a remote rental property without paying for a property manager is likely not realistic

I would guess that you might clear $30,000 after the selling costs if you sell the condo. If you used that to pay down your 4% student loan that would save you $1,200 a year so you are really only clearing about $50 a month with you consider that lost investment income.

Either way I doubt that is enough to build up reserves for vacancies, the occasional bad tennant, and maintenance like replacing carpeting and painting the condo. You will eventually have large expenses like remodeling the bathrooms and kitchen etc they are already at least a few years old.

One other problem to consider is that if you buy a place in NY then the lender will want to see several years tax returns showing a good rental history in order to count any of the rental income as income in your loan application. That could make it difficult to qualify for a mortgage in NY for the next few years if the rental income is not counted.

Your student loan rate is not very good and it is variable. I would just sell the condo when you move, pay down the student loan, and get on with your life.

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Clever_Username
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Re: Advice on renting versus selling, in light of student loans

Post by Clever_Username » Sun Mar 19, 2017 11:20 pm

Do you plan to move back to Minnesota after these two years are up, and if so, do you want to move back into your existing condo? That may figure into this -- if you can find a renter for some or all of those two years, the bigger issue is that at what might be low cost to you (property manager, vacancy period, etc), you still have your condo to move back to when you're home again.

I did something similar, when I left Los Angeles with the vague idea that I might return (spoiler alert: I did), instead of selling my condo I rented it out for a year and, when I moved back, moved right back in and lived there for another four years after the return. So that was nice.

(Also, semi-related but not to your question: at least the Vikings are going to NYC for a game in 2018...)
"What was true then is true now. Have a plan. Stick to it." -- XXXX, [i]Layer Cake[/i]

shanghaista
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Joined: Sun Mar 19, 2017 8:50 am

Re: Advice on renting versus selling, in light of student loans

Post by shanghaista » Mon Mar 20, 2017 7:12 pm

One more thing regarding your property, think of it in current terms and not your sunk costs (similar to stocks).

Would you actively look to buy a house, take on the mortgage you have now and "earn" $150/month? Remember, this is Minnesota vs NY so like others have stated, you'd likely need to get a property manager (who usually average around 10% of rent).

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