Another "To Rent or Sell" Question

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pdanet
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Another "To Rent or Sell" Question

Post by pdanet » Mon Nov 20, 2017 2:00 pm

We are likely to move into our newly constructed home(we have set-aside 20% for downpayment) sometime in January 2018 and we are in a dilemma regarding our existing(paid-off) home.

220k: Home purchased 10+ years ago
260K - 265K: Current price as per Zillow/Redfin
0K: Capital gains tax
2.5K: Current annual property tax
0.8K: Current annual home insurance
0.6K: Current annual HOA fees
0K: Realtor fees(neighbour is interested in buying so there is no need for a realtor but there maybe closing fees(unsure of it now))
10K: Need to invest this amount towards painting, new carpet, landscaping and miscellaneous items

If we sell:
Net = 260 -10 = ~ 250K

If we do rent:
1.8k - 2k: Expected Monthly rent range
3.5K: Annual Property tax will be higher as it's not a primary home(ballpark)
0.8K: Annual Home Insurance(ballpark)
0.6K: Annual HOA fees
1K: Allocated for annual maintenance(ballpark)

Net = 1.8k*12 = 21.6K - (3.5 +0.8 +0.6 +1) = 16.6K

Question: Can we invest 250K (in stocks/bonds/CDs) to generate 16.6K in annual return ?

Math tells me, I need returns of 6.6% (16,600/250,000). Your thoughts?

ThriftyPhD
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Re: Another "To Rent or Sell" Question

Post by ThriftyPhD » Mon Nov 20, 2017 2:30 pm

$1k for maintenance might be low. Usual suggestion is to budget 1% of home value. These things tend to be 'bursty'. Nothing for a couple years, and then *bam* new roof, or a couple broken windows. You also need to budget for months of no occupants during tenant turnover. Depends on how aggressively to price the rent.

chevca
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Re: Another "To Rent or Sell" Question

Post by chevca » Mon Nov 20, 2017 2:48 pm

Well, this one is much different than the more recent rent or sell threads.

With the house being paid off and you don't need any equity to put toward the new house, this one would be plenty good to keep as a rental. It's an obvious income producing rental right from the start. I'd say it simply comes down to, do you want to be a landlord?

It would be difficult to match the return numbers from a typically set up portfolio. But, your portfolio doesn't call at 2 am telling you there's a plumbing leak either. :happy

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Meg77
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Re: Another "To Rent or Sell" Question

Post by Meg77 » Mon Nov 20, 2017 2:50 pm

Hi there, landlord here. A couple of clarifications:
--You want to assume that you'll have 1 month of vacancy per year in case tenants move every year (it'll take a month on average to clean up the place and get it re-leased). So if you can charge $1900 a month your annual income will be more like $20,900.
--$1000 a year is not possible over any length of time. That's roughly how much it will take to touch up paint and clean carpets between tenants in an average sized house. Not to mention the random toilet clogs, HVAC repairs (basic checks not including replacement every 10-15 years), roof repairs, exterior paint refreshers, etc. If you're spending $1000 a year now it's because you are DIYing a bunch of stuff yourself, which you may or may not continue to do when you move. I'd budget $3000 a year.
--You'll have other costs like commissions if you have a realtor lease the place for you (they will do the background check and give the tours and draw up the lease etc.), legal fees if you have to evict or draw up an LLC, a PO box so you don't let tenants know where you live, etc. Budget $1000 a year, plus 10% of the gross rents if you hire a property manager.
--your home insurance will go down because you won't have to cover contents any more. And PS I wouldn't bother drawing up an LLC if you do keep it - just make the liability coverage on the home insurance $1000000.

So you're really looking at $12,200 a year in net income before depreciation (for tax purposes you'll have less income since you can deduct non-cash costs like depreciation and possibly also run things like your cell phone and some mileage through as a rental deduction). That's a hair under 5% return plus appreciation which probably will average around 2% a year. Not bad, and if you don't own any RE currently it's also not bad to have some diversification outside the stock market.

But dealing with tenants is annoying at times. A year will go by with no problems, then you need a new HVAC or have to evict. You might get lucky with a low maintenance tenant, or you might get a problem one who calls you every month - always during a holiday party or at night or when you're out of town of course - with some silly problem or another. I lived in my old condo for 9 years with zero problems, but as soon as it became a rental the faucet leaked, the shower clogged, the HVAC needed Freon, etc etc.
"An investment in knowledge pays the best interest." - Benjamin Franklin

Liberty1100
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Re: Another "To Rent or Sell" Question

Post by Liberty1100 » Mon Nov 20, 2017 3:04 pm

Do you have any ambition to be a landlord? On top of the great down to earth analysis Meg77 mentioned, I would also possibly add in a property management company if you are moving far away. Do you have enough cash for your emergency fund?

pdanet
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Re: Another "To Rent or Sell" Question

Post by pdanet » Mon Nov 20, 2017 3:26 pm

ThriftyPhD wrote:
Mon Nov 20, 2017 2:30 pm
$1k for maintenance might be low. Usual suggestion is to budget 1% of home value.
Thanks.
chevca wrote:
Mon Nov 20, 2017 2:48 pm
With the house being paid off and you don't need any equity to put toward the new house, this one would be plenty good to keep as a rental. It's an obvious income producing rental right from the start. I'd say it simply comes down to, do you want to be a landlord?

It would be difficult to match the return numbers from a typically set up portfolio. But, your portfolio doesn't call at 2 am telling you there's a plumbing leak either. :happy
You are correct. this would generate income from day 1. Regarding landlord? we aren't sure but we aren't against it as there are only certain things that can go wrong with a home(we had this home constructed so we know the history)
Meg77 wrote:
Mon Nov 20, 2017 2:50 pm

So you're really looking at $12,200 a year in net income That's a hair under 5% return plus appreciation which probably will average around 2%
if you don't own any RE currently it's also not bad to have some diversification outside the stock market.

But dealing with tenants is annoying at times.
This is a biggie - you are right that holding RE would provide us with diversification however, trying to minimize the hassle of being landlord if we can generate similar or close to 7% (5+2)as you indicated.
Liberty1100 wrote:
Mon Nov 20, 2017 3:04 pm
I would also possibly add in a property management company if you are moving far away. Do you have enough cash for your emergency fund?
Yes, we do and we are moving away like 20 miles so don't think there would be an issue visiting the rental(if needed)

Jack FFR1846
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Re: Another "To Rent or Sell" Question

Post by Jack FFR1846 » Mon Nov 20, 2017 3:42 pm

Some telling questions for you:

Do you want to be a landlord. If no, sell. If yes:

Why haven't you already bought rental property to rent?

(if you don't have a solid reason, sell)
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denovo
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Re: Another "To Rent or Sell" Question

Post by denovo » Mon Nov 20, 2017 4:04 pm

Meg77 wrote:
Mon Nov 20, 2017 2:50 pm

--$1000 a year is not possible over any length of time. That's roughly how much it will take to touch up paint and clean carpets between tenants in an average sized house. Not to mention the random toilet clogs, HVAC repairs (basic checks not including replacement every 10-15 years), roof repairs, exterior paint refreshers, etc. If you're spending $1000 a year now it's because you are DIYing a bunch of stuff yourself, which you may or may not continue to do when you move. I'd budget $3000 a year.
--
+1. I wrote a long post on the topic OP should check out.

viewtopic.php?t=226980
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soccerrules
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Re: Another "To Rent or Sell" Question

Post by soccerrules » Mon Nov 20, 2017 4:05 pm

I don't know anything else about you - but a few that make a difference in my answer - Age, Profession, Kids,Other assets. I think these are important in what type of advice you might get.
I don't own RE other than my current home I live in, so take my input for what it is worth and what you are paying for it.

I did consider keeping our 1st home (19 years ago) as a rental when we moved across town. It probably would have been doable financially but these were the reasons I did NOT.
2 mortgages (you will have 1) Not sure I would have slept well with 2 mortgages in my early 30's
young kids at home, SAHW, single income
I was young
Didn't want upkeep of 2 houses

the biggest reason was I didn't want to devote time to being a landlord or paying someone else to manage it. The extra time I had I wanted to spend it with my family.
Don't let your outflow exceed your income or your upkeep will be your downfall.

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Meg77
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Re: Another "To Rent or Sell" Question

Post by Meg77 » Mon Nov 20, 2017 4:48 pm

I'll add that I managed my rentals myself for a few years, but I hired a property manager a few years ago and it has definitely been worth the money. Actually they've helped me get such cost savings on repairs and maintenance that it has more than made up for their fee. My cash flow on average increased after I hired them. I had four duplexes though so it was quite a bit of work - there's always something going wrong when you have 8 tenants.

That said, I still manage one property that is around the corner from where I live now; it's a condo/townhome so the HOA takes care of a lot and it's higher end so the tenants are usually low maintenance. I do pay a realtor to re-lease it every time a tenant leaves. That might be worth a try at least for the first year.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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boomer
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Re: Another "To Rent or Sell" Question

Post by boomer » Mon Nov 20, 2017 8:59 pm

If you sell, you will not pay capital gains tax, as it is your primary home. If you rent it for a couple of years and then want to sell, you will have capital gains tax in addition to 25% recapture tax on the depreciation.

I would not do it, and I am a landlord. I would sell. Then figure out if you want to be a landlord, and if you do, buy an investment property.

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