[Starter Home] Sell it or Rent it out?

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pepperz
Posts: 236
Joined: Sun Jan 24, 2016 7:13 pm

[Starter Home] Sell it or Rent it out?

Post by pepperz » Sat Oct 20, 2018 9:32 am

I'd like to understand the opportunity of keeping our current home (financials below) as a rental and see if that makes more sense than selling.

Our ‘starter home’ has served us well for the last 9 years and we are planning on upgrading to a larger home in a top school system.

The Financials

- Purchased our "starter home" brand new in 2010 for $166,490
- Zestimate is currently at $283,000
- Mortgage Outstanding Principal balance is $137,331.69
- Monthly Payment (PITI) is $1,159.24
- Rent Zestimate is $1,625 /mo

Our budget for a new home is $550K and we have 25% saved for deposit. If we were to sell our starter home I would put the cash right into the new home as well (resulting in a ~$340K mortgage.)

My Considerations / Thoughts:

- New home location is about 45 mins away from where we now live.

- This would be my first time as landlord. (I’d be looking forward to it assuming keeping it as rental is a better idea.)

- Our Emergency fund would be large enough to comfortably cover any major repairs which might come up should we keep the house as rental (new roof, new AC, etc)

- If we sold the house now we’d get to roll the profits ($100K) into the new house, tax free. (Seems like an amazing opportunity.)

- Considering the principle is relatively low, I can see focusing on paying this home off (by rolling rent profits back into mortgage along with prioritizing our own cash flow into it for a while) and then the entire monthly rent amount would be net income. ($1,600/month in extra income each month seems exciting... could put that all into stock market!)

- If we regret keeping the house as rental and later decide to sell, we will have to pay taxes (22%??) on the gain.
Last edited by pepperz on Sat Oct 20, 2018 10:11 am, edited 1 time in total.

tarmangani
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Re: [Starter Home] Sell it or Rent it out?

Post by tarmangani » Sat Oct 20, 2018 9:48 am

45 minutes away? That's not ideal. Do you live in a cold climate during winter? Will you have to get up at 1 am to go and troubleshoot a home without heat? Shovel the driveway out or contract out? Etc.

I rent out a property and dislike it because I am not handy, don't like the added aggravation after and even during my workday (as an example this Weds. I have to leave work at some point early to meet an electrician in the basement--that sounds a lot worse than it is), and hate dealing with contractors. This is also a good sellers' market, at least in my area. However, if these things don't bother you, you cannot beat the rent with a good tenant. It might also be fun for you to fix washing machines, shovel driveways, or negotiate with contractors.

chevca
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Joined: Wed Jul 26, 2017 11:22 am

Re: [Starter Home] Sell it or Rent it out?

Post by chevca » Sat Oct 20, 2018 9:56 am

I saw a post in a thread like this where someone said/asked the OP, do you have interest in owning 10 rental properties or more... if not, then don't own just one. Even though your EF would cover a roof or HVAC replacement, having to do one or both can knock out a bunch of 'good' years and make the rental not much of a money maker.

I would sell the starter and take advantage of the capital gains exclusion selling your primary home. Unless you are looking to own many rental properties someday. Then it's a good way to get into the business.

Chip
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Joined: Wed Feb 21, 2007 4:57 am

Re: [Starter Home] Sell it or Rent it out?

Post by Chip » Sat Oct 20, 2018 9:56 am

Check out denovo's post on being a landlord. I think it covers a lot of important points.

viewtopic.php?f=2&t=226980

I had single family rentals. They were okay but I'm glad now that I don't have them. In your shoes I would take the tax-free 100k and run.

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Watty
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Re: [Starter Home] Sell it or Rent it out?

Post by Watty » Sat Oct 20, 2018 10:07 am

pepperz wrote:
Sat Oct 20, 2018 9:32 am
- Purchased our "starter home" brand new in 2010 for $166,490
- Zestimate is currently at $283,000
If you sell it now you will have about $100K in capital gains that are free of federal taxes because of the homeowners capital gains exclusion.
pepperz wrote:
Sat Oct 20, 2018 9:32 am
- Mortgage Outstanding Principal balance is $137,331.69
- Monthly Payment (PITI) is $1,159.24
You would want to check on it but without a good rental history the lender for your next house may discount all or part of the rental income in your loan application.

You may not qualify for the new mortage without selling that house.
pepperz wrote:
Sat Oct 20, 2018 9:32 am
Zestimate is currently at $283,000
....
Our budget for a new home is $550K
With both houses you would have over $800K in real estate in the same general area. That may be a high percentage of your net worth, or even over 100% of your net worth. Unless you have a very high net worth then diversification could be a problem.
pepperz wrote:
Sat Oct 20, 2018 9:32 am
New home location is about 45 mins away from where we now live.
"45 mins away" likely means in a good commute in good weather. If this is city driving then it could take a lot longer than that in bad weather or when the traffic is bad. If you are at the house and realize that you need a tool you did not bring then you will likely have to buy another one which not only costs money but takes time.

If you have a burning desire to be a landlord then you should compare that to property to buying one that is closer to where you are at. Many of the things that make a house a good rental property are different than what makes a house good to live in so you might be able to get a better rental property too.

Nate79
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Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: [Starter Home] Sell it or Rent it out?

Post by Nate79 » Sat Oct 20, 2018 10:14 am

It flunks the most basic 1% rule plus you lose the tax benefits of capital gain exclusion. Sounds like a horrible rental to me.

onourway
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Re: [Starter Home] Sell it or Rent it out?

Post by onourway » Sat Oct 20, 2018 10:18 am

Is the $5-6k in yearly cash flow that this rental would bring in after paying the mortgage and taxes really worth your time? For that little bit of income you'll have to find and maintain tenants. You'll have to either drive an hour and a half round trip or pay someone to take care of any issues that arise with the house. You'll have to do normal maintenance that any home requires, and you'll have to subtract out vacancies and unexpected other costs from that slim profit.

Doesn't sound very appealing to me. We live in a neighborhood that would seem to be tailor-made for single family rentals. Small homes, relatively inexpensive to buy, in a college town where rents are high and its conveniently located. The town is filled with rentals. Yet few of these single family homes are rented for more than a year or two before the owners sell. I presume because they run into all the kind of issues I mention above.
Last edited by onourway on Sat Oct 20, 2018 10:18 am, edited 1 time in total.

letsgobobby
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Re: [Starter Home] Sell it or Rent it out?

Post by letsgobobby » Sat Oct 20, 2018 10:18 am

We have a rental with similar numbers to yours and are happy with it. But two factors made it the right decision for us. First, we were never eligible to sell tax free. Second, we hired a good manager for 8% per month. That 8% is a steal, and our house is only ten minutes away. From forty five minutes away, you should definitely consider a manager.

I asked about my rental here and received some great advice. I did keep my rental and am happy with it, partly because prices appreciated further.

viewtopic.php?f=10&t=211558&hilit=Keep+this+rental
Last edited by letsgobobby on Sat Oct 20, 2018 10:22 am, edited 2 times in total.

pepperz
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Joined: Sun Jan 24, 2016 7:13 pm

Re: [Starter Home] Sell it or Rent it out?

Post by pepperz » Sat Oct 20, 2018 10:20 am

What is the one percent rule, Nate?
Nate79 wrote:
Sat Oct 20, 2018 10:14 am
It flunks the most basic 1% rule plus you lose the tax benefits of capital gain exclusion. Sounds like a horrible rental to me.

Flyer24
Posts: 373
Joined: Sun Apr 08, 2018 4:21 pm

Re: [Starter Home] Sell it or Rent it out?

Post by Flyer24 » Sat Oct 20, 2018 10:26 am

pepperz wrote:
Sat Oct 20, 2018 10:20 am
What is the one percent rule, Nate?
Nate79 wrote:
Sat Oct 20, 2018 10:14 am
It flunks the most basic 1% rule plus you lose the tax benefits of capital gain exclusion. Sounds like a horrible rental to me.

The rent should be equal to at least 1% of the selling price of the home.

Clemblack
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Re: [Starter Home] Sell it or Rent it out?

Post by Clemblack » Sat Oct 20, 2018 10:29 am

Sell it. You wouldn't make enough on your money to justify renting it. Your money will perform better elsewhere.

Momus
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Re: [Starter Home] Sell it or Rent it out?

Post by Momus » Sat Oct 20, 2018 10:29 am

Flyer24 wrote:
Sat Oct 20, 2018 10:26 am
pepperz wrote:
Sat Oct 20, 2018 10:20 am
What is the one percent rule, Nate?
Nate79 wrote:
Sat Oct 20, 2018 10:14 am
It flunks the most basic 1% rule plus you lose the tax benefits of capital gain exclusion. Sounds like a horrible rental to me.
The rent should be equal to at least 1% of the selling price of the home.
That's not gonna work in hcol, you probably get half that. I'd say 4-10% cap rate. You are lucky to get 4% in hcol.

pepperz
Posts: 236
Joined: Sun Jan 24, 2016 7:13 pm

Re: [Starter Home] Sell it or Rent it out?

Post by pepperz » Sat Oct 20, 2018 10:32 am

If we purchased the house for $164K and rent it out for $16500/month, wouldn’t that be a 10% “cap rate”?

Hypothetically if we paid off the mortgage it would be a 10% ROI each year (of course there will be expenses not being factored here).

Do I have that right?
Momus wrote:
Sat Oct 20, 2018 10:29 am
Flyer24 wrote:
Sat Oct 20, 2018 10:26 am
pepperz wrote:
Sat Oct 20, 2018 10:20 am
What is the one percent rule, Nate?
Nate79 wrote:
Sat Oct 20, 2018 10:14 am
It flunks the most basic 1% rule plus you lose the tax benefits of capital gain exclusion. Sounds like a horrible rental to me.
The rent should be equal to at least 1% of the selling price of the home.
That's not gonna work in hcol, you probably get half that. I'd say 4-10% cap rate. You are lucky to get 4% in hcol.

Flyer24
Posts: 373
Joined: Sun Apr 08, 2018 4:21 pm

Re: [Starter Home] Sell it or Rent it out?

Post by Flyer24 » Sat Oct 20, 2018 10:38 am

pepperz wrote:
Sat Oct 20, 2018 10:32 am
If we purchased the house for $164K and rent it out for $16500/month, wouldn’t that be a 10% “cap rate”?

Hypothetically if we paid off the mortgage it would be a 10% ROI each year (of course there will be expenses not being factored here).

Do I have that right?
Momus wrote:
Sat Oct 20, 2018 10:29 am
Flyer24 wrote:
Sat Oct 20, 2018 10:26 am
pepperz wrote:
Sat Oct 20, 2018 10:20 am
What is the one percent rule, Nate?
Nate79 wrote:
Sat Oct 20, 2018 10:14 am
It flunks the most basic 1% rule plus you lose the tax benefits of capital gain exclusion. Sounds like a horrible rental to me.
The rent should be equal to at least 1% of the selling price of the home.
That's not gonna work in hcol, you probably get half that. I'd say 4-10% cap rate. You are lucky to get 4% in hcol.

If the house could be sold for $250K then your rent should be at least $2500 to make it valuable to rent. In this case, it is more advantageous to sell due to increased home value. If the home value had remained at $160K then it would be a good rental. I would sell while you have a good home value and no taxes on the sell.

chevca
Posts: 1918
Joined: Wed Jul 26, 2017 11:22 am

Re: [Starter Home] Sell it or Rent it out?

Post by chevca » Sat Oct 20, 2018 10:52 am

pepperz wrote:
Sat Oct 20, 2018 10:32 am
If we purchased the house for $164K and rent it out for $16500/month, wouldn’t that be a 10% “cap rate”?
If you can rent it out for $16,500/month, I think most of us would say go for it. :happy

Your purchase price is only good for the capital gains part of things now. Other things should go off the current value, so if the house is now worth $280k or so that's what you need to get the numbers from.

runner540
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Joined: Sun Feb 26, 2017 5:43 pm

Re: [Starter Home] Sell it or Rent it out?

Post by runner540 » Sat Oct 20, 2018 11:34 am

I would look at the equity in your starter home as a huge windfall - you bought low in 2010, interest rates were kept low and the housing market rocketed up. Most of it did not come from your principal payments. Don't assume that will happen again...either with the new bigger house or this one. If you got $100k, would you use it to buy this house and rent out?

I wouldn't: $1600 rent, less PITI and maintenance, doesn't seem like it would leave much cash flow to invest as you suggested.

CedarWaxWing
Posts: 625
Joined: Sun Nov 02, 2014 12:24 pm

Re: [Starter Home] Sell it or Rent it out?

Post by CedarWaxWing » Sat Oct 20, 2018 12:30 pm

I did exactly what you are discussing doing. Bought my first home in 1981 and lived in until 1990. Then had a major job change for a big income increase about 45 minutes away.

The old house was worth not much more than what I paid due to market forces, but the market forces also were pretty similar in the new area.

I managed the house (R1) for about 4 years, then bought 3 more rentals where I lived since I did not know enough about investing to do something better.

My R1 house had great renters when I managed it myself... but after 3 rentals I got prof management so I could have a real life.

Property management over all where I live (and I suspect almost anyway) is in fact a field that has very low entry qualifications, and the ave ethics and skill set of property managers imho are not better than the so call financial planners that you find discussed on this list (Edward Jones, Ameriprise, etc)
They usually do not get the best renters, and do not properly monitor how the house is being cared for, nor to they usually go proper maintenance at turnover times. Their priority is to maximize their income and minimize their workload. They do not do that for you, only for them. There are exceptions to this pattern, according to some folks responding in this thread, but the exceptions may well be not as good as the commenters think... and until 30 years (selling time) arrives the owner likely does not fully understand the wear and tear that has occurred. (Since they do not manage it themselves, they don't see it as often as they should usually.)

Capitalization rate: I am in the PNW part of the country and we are currently undergoing a lot of price increased in real estate. I retired recently and therefore fixed the house up and sold it. I did that because the rental capitalization rate has never been better than 3.5% of current value and I have on ave done better than that by quite a bit with mutual funds. This number is after having no loans, and paying income taxes on the rental income after all other expenses. After selling such a rental... the cap gains rates on the part that was depreciated will be recaptured at 25% (not 15) and then the rest will be taxed at 15% federal if you don't make enough to cause that to be 20%. Both the city and state however took a tax out of the sale, and the real estate company took 5%. The costs of putting the house into tip top shape was about 110 K, and the house sold for 371k. (Purchase price was about 62 K in 1981.)

After taxes, remodeling, and sales/marketing costs, and taxes on the sales I came out at about 3% annualized over the years that I had this house.

The rental income was modest, and of course 8-10% of that annually was lost to property management.

Over all those years looking back and looking at how my mutual funds did the mutual fund portfolio was in fact a better investment with far less risk, and the gains are all not taxed as regular income but at a 15% rate when harvested.

IF you want to be a landlord it is almost a sure thing that you would still be better off by selling your old residence (not taxed) and using those funds for your new house rather than being an absentee landlord.

If you want to be a landlord in an area close to your new house, I would suggest you take a year to educate yourself about the amount of time and risk that is required by doing a LOT of reading. I would NOT recommend talking to people you meet who are doing it unless they have been doing it for at least 20 years and also also have a more diversified portfolio of mutual funds and who have obviously crunched the numbers to properly compare the two end results.

My part of the country may be different than yours, but imho the risk, time, difficulty in finding a good property manager who will look out for your welfare more than his/hers, and the lack of diversification makes being a landlord not as good as low cost investing in mutual funds with a good company.

BTW... I have a friend who did rentals in San Diego... and he is happy with it. BUT ... he also has absolutely what his capitalization rates are, nor does he understand how to invest any other way...other then the 500 K he handed over to Fisher Investments. I gave him 3 good books from the Bogleheads.org book list and he did not read one. I am almost sure that I have also done better than he has...and he has had some foreclosures on his rentals... he lost all but on in the 2008 recession... and has one apartment building at this time in his retirement years. He also has a VERY nice house in SD that is paid off, but he went through some VERY bad times to end up where he is at this time.

CedarWaxWing
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Re: [Starter Home] Sell it or Rent it out?

Post by CedarWaxWing » Sat Oct 20, 2018 12:31 pm

runner540 wrote:
Sat Oct 20, 2018 11:34 am
I would look at the equity in your starter home as a huge windfall - you bought low in 2010, interest rates were kept low and the housing market rocketed up. Most of it did not come from your principal payments. Don't assume that will happen again...either with the new bigger house or this one. If you got $100k, would you use it to buy this house and rent out?

I wouldn't: $1600 rent, less PITI and maintenance, doesn't seem like it would leave much cash flow to invest as you suggested.
1+

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Watty
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Re: [Starter Home] Sell it or Rent it out?

Post by Watty » Sat Oct 20, 2018 12:51 pm

I am not really up to speed on the accounting but don't forget;
pepperz wrote:
Sat Oct 20, 2018 9:32 am
If we sold the house now we’d get to roll the profits ($100K) into the new house, tax free. (Seems like an amazing opportunity.)
Which would increase your monthly payment on the new house by about $500
pepperz wrote:
Sat Oct 20, 2018 9:32 am
- Monthly Payment (PITI) is $1,159.24
- Rent Zestimate is $1,625 /mo
If you add that $500 to your PITI you get $1,659.24 which is more than the rent.

That is before you adjust it for taxes and all the other expenses like property management fees, maintenance and vacancies.

There are lots and lots of details that you could crunch but when you include that you are well into negative cash flow.

Some areas also have property tax breaks for owner occupied homes so your property taxes might go up too.

pepperz
Posts: 236
Joined: Sun Jan 24, 2016 7:13 pm

Re: [Starter Home] Sell it or Rent it out?

Post by pepperz » Sat Oct 20, 2018 1:19 pm

Thank you for sharing your experience. Really appreciate all the details.
CedarWaxWing wrote:
Sat Oct 20, 2018 12:30 pm
I did exactly what you are discussing doing. Bought my first home in 1981 and lived in until 1990. Then had a major job change for a big income increase about 45 minutes away.

The old house was worth not much more than what I paid due to market forces, but the market forces also were pretty similar in the new area.

I managed the house (R1) for about 4 years, then bought 3 more rentals where I lived since I did not know enough about investing to do something better.

My R1 house had great renters when I managed it myself... but after 3 rentals I got prof management so I could have a real life.

Property management over all where I live (and I suspect almost anyway) is in fact a field that has very low entry qualifications, and the ave ethics and skill set of property managers imho are not better than the so call financial planners that you find discussed on this list (Edward Jones, Ameriprise, etc)
They usually do not get the best renters, and do not properly monitor how the house is being cared for, nor to they usually go proper maintenance at turnover times. Their priority is to maximize their income and minimize their workload. They do not do that for you, only for them. There are exceptions to this pattern, according to some folks responding in this thread, but the exceptions may well be not as good as the commenters think... and until 30 years (selling time) arrives the owner likely does not fully understand the wear and tear that has occurred. (Since they do not manage it themselves, they don't see it as often as they should usually.)

Capitalization rate: I am in the PNW part of the country and we are currently undergoing a lot of price increased in real estate. I retired recently and therefore fixed the house up and sold it. I did that because the rental capitalization rate has never been better than 3.5% of current value and I have on ave done better than that by quite a bit with mutual funds. This number is after having no loans, and paying income taxes on the rental income after all other expenses. After selling such a rental... the cap gains rates on the part that was depreciated will be recaptured at 25% (not 15) and then the rest will be taxed at 15% federal if you don't make enough to cause that to be 20%. Both the city and state however took a tax out of the sale, and the real estate company took 5%. The costs of putting the house into tip top shape was about 110 K, and the house sold for 371k. (Purchase price was about 62 K in 1981.)

After taxes, remodeling, and sales/marketing costs, and taxes on the sales I came out at about 3% annualized over the years that I had this house.

The rental income was modest, and of course 8-10% of that annually was lost to property management.

Over all those years looking back and looking at how my mutual funds did the mutual fund portfolio was in fact a better investment with far less risk, and the gains are all not taxed as regular income but at a 15% rate when harvested.

IF you want to be a landlord it is almost a sure thing that you would still be better off by selling your old residence (not taxed) and using those funds for your new house rather than being an absentee landlord.

If you want to be a landlord in an area close to your new house, I would suggest you take a year to educate yourself about the amount of time and risk that is required by doing a LOT of reading. I would NOT recommend talking to people you meet who are doing it unless they have been doing it for at least 20 years and also also have a more diversified portfolio of mutual funds and who have obviously crunched the numbers to properly compare the two end results.

My part of the country may be different than yours, but imho the risk, time, difficulty in finding a good property manager who will look out for your welfare more than his/hers, and the lack of diversification makes being a landlord not as good as low cost investing in mutual funds with a good company.

BTW... I have a friend who did rentals in San Diego... and he is happy with it. BUT ... he also has absolutely what his capitalization rates are, nor does he understand how to invest any other way...other then the 500 K he handed over to Fisher Investments. I gave him 3 good books from the Bogleheads.org book list and he did not read one. I am almost sure that I have also done better than he has...and he has had some foreclosures on his rentals... he lost all but on in the 2008 recession... and has one apartment building at this time in his retirement years. He also has a VERY nice house in SD that is paid off, but he went through some VERY bad times to end up where he is at this time.

pepperz
Posts: 236
Joined: Sun Jan 24, 2016 7:13 pm

Re: [Starter Home] Sell it or Rent it out?

Post by pepperz » Sat Oct 20, 2018 1:20 pm

Great point! If I wanted to proactively get into real estate investing I surely would not choose this house.
runner540 wrote:
Sat Oct 20, 2018 11:34 am
I would look at the equity in your starter home as a huge windfall - you bought low in 2010, interest rates were kept low and the housing market rocketed up. Most of it did not come from your principal payments. Don't assume that will happen again...either with the new bigger house or this one. If you got $100k, would you use it to buy this house and rent out?

I wouldn't: $1600 rent, less PITI and maintenance, doesn't seem like it would leave much cash flow to invest as you suggested.

CedarWaxWing
Posts: 625
Joined: Sun Nov 02, 2014 12:24 pm

Re: [Starter Home] Sell it or Rent it out?

Post by CedarWaxWing » Sun Oct 21, 2018 3:09 pm

pepperz wrote:
Sat Oct 20, 2018 1:19 pm
Thank you for sharing your experience. Really appreciate all the details.
CedarWaxWing wrote:
Sat Oct 20, 2018 12:30 pm
I did exactly what you are discussing doing. Bought my first home in 1981 and lived in until 1990. Then had a major job change for a big income increase about 45 minutes away.

The old house was worth not much more than what I paid due to market forces, but the market forces also were pretty similar in the new area.

I managed the house (R1) for about 4 years, then bought 3 more rentals where I lived since I did not know enough about investing to do something better.

My R1 house had great renters when I managed it myself... but after 3 rentals I got prof management so I could have a real life.

Property management over all where I live (and I suspect almost anyway) is in fact a field that has very low entry qualifications, and the ave ethics and skill set of property managers imho are not better than the so call financial planners that you find discussed on this list (Edward Jones, Ameriprise, etc)
They usually do not get the best renters, and do not properly monitor how the house is being cared for, nor to they usually go proper maintenance at turnover times. Their priority is to maximize their income and minimize their workload. They do not do that for you, only for them. There are exceptions to this pattern, according to some folks responding in this thread, but the exceptions may well be not as good as the commenters think... and until 30 years (selling time) arrives the owner likely does not fully understand the wear and tear that has occurred. (Since they do not manage it themselves, they don't see it as often as they should usually.)

Capitalization rate: I am in the PNW part of the country and we are currently undergoing a lot of price increased in real estate. I retired recently and therefore fixed the house up and sold it. I did that because the rental capitalization rate has never been better than 3.5% of current value and I have on ave done better than that by quite a bit with mutual funds. This number is after having no loans, and paying income taxes on the rental income after all other expenses. After selling such a rental... the cap gains rates on the part that was depreciated will be recaptured at 25% (not 15) and then the rest will be taxed at 15% federal if you don't make enough to cause that to be 20%. Both the city and state however took a tax out of the sale, and the real estate company took 5%. The costs of putting the house into tip top shape was about 110 K, and the house sold for 371k. (Purchase price was about 62 K in 1981.)

After taxes, remodeling, and sales/marketing costs, and taxes on the sales I came out at about 3% annualized over the years that I had this house.

The rental income was modest, and of course 8-10% of that annually was lost to property management.

Over all those years looking back and looking at how my mutual funds did the mutual fund portfolio was in fact a better investment with far less risk, and the gains are all not taxed as regular income but at a 15% rate when harvested.

IF you want to be a landlord it is almost a sure thing that you would still be better off by selling your old residence (not taxed) and using those funds for your new house rather than being an absentee landlord.

If you want to be a landlord in an area close to your new house, I would suggest you take a year to educate yourself about the amount of time and risk that is required by doing a LOT of reading. I would NOT recommend talking to people you meet who are doing it unless they have been doing it for at least 20 years and also also have a more diversified portfolio of mutual funds and who have obviously crunched the numbers to properly compare the two end results.

My part of the country may be different than yours, but imho the risk, time, difficulty in finding a good property manager who will look out for your welfare more than his/hers, and the lack of diversification makes being a landlord not as good as low cost investing in mutual funds with a good company.

BTW... I have a friend who did rentals in San Diego... and he is happy with it. BUT ... he also has absolutely what his capitalization rates are, nor does he understand how to invest any other way...other then the 500 K he handed over to Fisher Investments. I gave him 3 good books from the Bogleheads.org book list and he did not read one. I am almost sure that I have also done better than he has...and he has had some foreclosures on his rentals... he lost all but on in the 2008 recession... and has one apartment building at this time in his retirement years. He also has a VERY nice house in SD that is paid off, but he went through some VERY bad times to end up where he is at this time.
I need to correct one (typo) thing: My friend in SD has no idea what his cap rate on his rentals is..... nor does he know how he is doing with Fisher compared to a 3 fund portfolio. Few of the people I know who are landlords have any idea what their real cap rate is, and have no real concept of what their risks are. Most of them also do not know how to properly invest any other way, so they think they are doing well. I also know several who lost everything in 2008 ... after bragging for a few years about what great real estate geniuses they were... but leveraging to the hilt.

Best wishes.

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