Sell our condo or rent it out?

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MoneyMike82
Posts: 9
Joined: Mon May 18, 2015 8:11 pm

Sell our condo or rent it out?

Post by MoneyMike82 » Sat Mar 23, 2019 7:55 pm

Hey everyone,

My wife and I just paid off our first home (a small condo) and we want to buy a bigger house. So I don't know if we should...

a) sell the house and use the money as a down payment on the next house
b) sell the house and invest the money in index funds
c) rent it out and see if we can make some passive income

Just to give you an idea of where we are at financially...

We are both 35 and have a combined income of $175,000.00.
We have no debt
$80k saved for the down payment on the new home (Purchase price around $400k)
$50,000.00 in emergency funds
Around $50,000.00 in taxable funds (mostly total stock market index)
Around $325k in retirement savings between Roth and 401ks

I know rental income isn't always easy money, but if we can get good tenants, it seems like the way to go...
The condo is worth about $155k
Property taxes are currently $450 a month (NJ) and our HOA is $250.00
Similar properties around me are renting for $1,600.00 a month so after expenses, the monthly cash flow would be around $900 a month or $10,800.00 a year. That would be the equivalent of a 7% dividend.

What am I missing? What should I know? What do you guys think?

Gill
Posts: 5852
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: Sell our condo or rent it out?

Post by Gill » Sat Mar 23, 2019 8:16 pm

Seems to me you are missing a lot of expenses that could erode that return. How about vacancies, repairs and replacement of major equipment, carpeting, cleaning between tenants, utilities, insurance. I’d sell.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

Trader Joe
Posts: 1427
Joined: Fri Apr 25, 2014 6:38 pm

Re: Sell our condo or rent it out?

Post by Trader Joe » Sat Mar 23, 2019 8:48 pm

MoneyMike82 wrote:
Sat Mar 23, 2019 7:55 pm
Hey everyone,

My wife and I just paid off our first home (a small condo) and we want to buy a bigger house. So I don't know if we should...

a) sell the house and use the money as a down payment on the next house
b) sell the house and invest the money in index funds
c) rent it out and see if we can make some passive income

Just to give you an idea of where we are at financially...

We are both 35 and have a combined income of $175,000.00.
We have no debt
$80k saved for the down payment on the new home (Purchase price around $400k)
$50,000.00 in emergency funds
Around $50,000.00 in taxable funds (mostly total stock market index)
Around $325k in retirement savings between Roth and 401ks

I know rental income isn't always easy money, but if we can get good tenants, it seems like the way to go...
The condo is worth about $155k
Property taxes are currently $450 a month (NJ) and our HOA is $250.00
Similar properties around me are renting for $1,600.00 a month so after expenses, the monthly cash flow would be around $900 a month or $10,800.00 a year. That would be the equivalent of a 7% dividend.

What am I missing? What should I know? What do you guys think?
I would rent it out. See if you like it. This could become a great new and profitable investment/life adventure.

HomeStretch
Posts: 3431
Joined: Thu Dec 27, 2018 3:06 pm

Re: Sell our condo or rent it out?

Post by HomeStretch » Sat Mar 23, 2019 9:12 pm

While deciding whether to sell or rent, take into consideration that you can generally exclude the gain (up to $500k on a joint return) on the sale of your main home if you have lived in it for at least 2 years out of the 5 years prior to sale.

rarehman
Posts: 1
Joined: Sat Dec 16, 2017 11:09 pm

Re: Sell our condo or rent it out?

Post by rarehman » Sat Mar 23, 2019 9:41 pm

Unexpected costs eat away majority of the profits. Sell.

chevca
Posts: 2958
Joined: Wed Jul 26, 2017 11:22 am

Re: Sell our condo or rent it out?

Post by chevca » Sat Mar 23, 2019 10:39 pm

I'd sell it and put it towards the new house. You would be going from no debt and a paid off condo to a $300k plus mortgage. Not that you couldn't afford that, you can easily with your income. But, it seems paying off the old mortgage was a priority to you guys? Why go backwards and take on a bigger mortgage than you have ever had.

I can understand wanting to upsize/upgrade from the condo to a house, and that will tend to cost more. If getting rid of debt was a priority though, stick with that priority and don't take on more debt than you need to. Just my take on it.

JGoneRiding
Posts: 1836
Joined: Tue Jul 15, 2014 3:26 pm

Re: Sell our condo or rent it out?

Post by JGoneRiding » Sun Mar 24, 2019 12:34 am

Generally speaking if you can get 1% of value as monthly return that us considered a decent to great rental. So I would certainly consider it.

novemberrain
Posts: 216
Joined: Wed May 09, 2018 12:26 pm

Re: Sell our condo or rent it out?

Post by novemberrain » Sun Mar 24, 2019 1:01 am

MoneyMike82 wrote:
Sat Mar 23, 2019 7:55 pm
Hey everyone,

My wife and I just paid off our first home (a small condo) and we want to buy a bigger house. So I don't know if we should...

a) sell the house and use the money as a down payment on the next house
b) sell the house and invest the money in index funds
c) rent it out and see if we can make some passive income

Just to give you an idea of where we are at financially...

We are both 35 and have a combined income of $175,000.00.
We have no debt
$80k saved for the down payment on the new home (Purchase price around $400k)
$50,000.00 in emergency funds
Around $50,000.00 in taxable funds (mostly total stock market index)
Around $325k in retirement savings between Roth and 401ks

I know rental income isn't always easy money, but if we can get good tenants, it seems like the way to go...
The condo is worth about $155k
Property taxes are currently $450 a month (NJ) and our HOA is $250.00
Similar properties around me are renting for $1,600.00 a month so after expenses, the monthly cash flow would be around $900 a month or $10,800.00 a year. That would be the equivalent of a 7% dividend.

What am I missing? What should I know? What do you guys think?
You are missing a lot of variable in your cashflow calculation. (Vacancies, routine repairs, major repairs etc). See this video on how to better calculate cash flow
https://www.youtube.com/watch?v=T_7vhsSBi7c

Momus
Posts: 796
Joined: Tue Feb 21, 2012 9:23 pm

Re: Sell our condo or rent it out?

Post by Momus » Sun Mar 24, 2019 1:50 am

There is no more leverage return since you have a fully paid off rental. The <7% cash return is the top estimate + whatever appreciation % you can get every year on the property.

Investing in stocks will likely net you more or less the same amount with no headache. If you don't mind extra work, I'd rent it out... Be prepared to get calls once every 3-4 months to fix something.

Nissanzx1
Posts: 605
Joined: Wed Jul 18, 2018 11:13 pm

Re: Sell our condo or rent it out?

Post by Nissanzx1 » Sun Mar 24, 2019 2:18 am

Rental income needs to make 10% on equity at minimum.

In your example I’d be selling. Play around with rentals after your home is paid off.

Skiandswim
Posts: 119
Joined: Tue Dec 21, 2010 3:24 pm

Re: Sell our condo or rent it out?

Post by Skiandswim » Sun Mar 24, 2019 9:48 am

We consider converting a Condo rental (and understood may of the headaches). However, after running even simple cash flow models we sold the condo and reinvested the funds in our portfolio. There are MANY real estate property cash flow model. The fun part is you can run sensitivity analysis to judge your risk tolerance.

I used a simple model based on your comments: rent $1600, vacancy loss 5%, monthly operating expenses $780 (added $40 repairs, $20 insurance, $20 legal, accounting), gives you net operating income of $8,880 or Capitalization Rate of 5.73% on $155,000 property value. This quick look assumes things go right. What happens when they don't? The capitalization rate seems to be low in my opinion. What rental return rate do you need to handle the risks versus your next best alternative (e.g. your portfolio) ?

obgraham
Posts: 1233
Joined: Mon Jan 28, 2013 7:30 pm

Re: Sell our condo or rent it out?

Post by obgraham » Sun Mar 24, 2019 9:52 am

Sell it. Being a landlord is a thankless task, unless you make a career of it.

A tenant wants everything fixed NOW, whereas when you live in it you put up with some stuff that doesn't quite work right "till you get around to fixing it". Just not worth the hassle for a few dollars of possible profit.

rgs92
Posts: 2440
Joined: Mon Mar 02, 2009 8:00 pm

Re: Sell our condo or rent it out?

Post by rgs92 » Sun Mar 24, 2019 10:01 am

The problem is the condo may lose a lot of value or stay flat for the next 10-20 years in that area. So you are losing opportunity cost (and possibly large costs of maintenance/renovation) over time. (And the rent might not keep up with the taxes and other costs over the long term.)

If it is very close to New York, you could be more confident, but otherwise, it's more of a risk.

gsmith
Posts: 212
Joined: Sun Mar 21, 2010 1:02 am

Re: Sell our condo or rent it out?

Post by gsmith » Sun Mar 24, 2019 10:07 am

Just wanted to mention you may need to ask for permission to rent from your condo assn.
Many bylaws say a majority of condos must be owner-occupied, otherwise the condos aren't eligible for mortgages
Also, insurance for condos is very expensive and doesn't pay out for vacancy.

Grt2bOutdoors
Posts: 21725
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Sell our condo or rent it out?

Post by Grt2bOutdoors » Sun Mar 24, 2019 11:29 am

JGoneRiding wrote:
Sun Mar 24, 2019 12:34 am
Generally speaking if you can get 1% of value as monthly return that us considered a decent to great rental. So I would certainly consider it.
Gross or net? He still has to pay HOA and property taxes from rental? Likely will make 7% if fully rented. As I type this, I’m at my rental replacing the faucet. If the OP is not handy, sell it. If you want to own real estate buy a REIT. Try AVB or Equity Residential, if you wouldn’t sink $155k into something that is professionally managed, why would you do it with a single unit?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Grt2bOutdoors
Posts: 21725
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Sell our condo or rent it out?

Post by Grt2bOutdoors » Sun Mar 24, 2019 11:31 am

gsmith wrote:
Sun Mar 24, 2019 10:07 am
Just wanted to mention you may need to ask for permission to rent from your condo assn.
Many bylaws say a majority of condos must be owner-occupied, otherwise the condos aren't eligible for mortgages
Also, insurance for condos is very expensive and doesn't pay out for vacancy.
You must mean co-op’s, not condos. I own a condo rental, insurance for condo is NOT expensive.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

rallycobra
Posts: 188
Joined: Sat Aug 23, 2008 9:40 pm

Re: Sell our condo or rent it out?

Post by rallycobra » Sun Mar 24, 2019 8:31 pm

Did you budget in a new HVAC system, roof, carpet, cabinets, paint, etc? What happens when the HOA runs out of money due to mismanagement or a big expense and all of the condo owners are hit with a special assessment?

Sell it while you can. I wouldn't want to rent something with a HOA, and generally the taxes are too high in NJ to make rentals economically feasible.
26% Total Stock Market/20% Total International/13% Small Cap Value/6% Reit/35% Intermediate Bond Fund | 65/35 Stock Bond 2:1 Domestic/International + Reit

J295
Posts: 2232
Joined: Sun Jan 01, 2012 11:40 pm

Re: Sell our condo or rent it out?

Post by J295 » Sun Mar 24, 2019 8:37 pm

Remember to factor in depreciation, a valuable tax benefit should you decide to rent

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