Sell home or keep as rental?

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Topic Author
TSR
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Sell home or keep as rental?

Post by TSR »

As I've posted elsewhere, I'm moving to another state soon. This fact alone would tend to make me want to sell my home rather than keep it as a rental, but the details make it a closer call. I'm in an extremely HOT sales/rental market right now, and I made the genius decision ( :wink: ) to buy my home about eight years ago when things were tepid. I do not assume that these good times will last, but my home is close to downtown in a very desirable neighborhood and unlikely to be hurt too badly even in a very bad downturn. Here are the numbers as I see them, having spoken to a friend who is very knowledgeable in real estate in my specific area of town:

Value to me:
Purchase price: $258,000
Interest rate: 3.875%
Current amt left on loan: ~$180,000
Monthly payment: ~$1,550
Home: 2BA/2BA, 0.27 acre lot (slightly larger than usual) in hot neighborhood close to downtown but not too close. Built circa 1920.

Value of sale:
Easy sale without even using an agent: $475,000
Outside chance when properly marketed using agent: $550,000 or more
Current guess is that either sale could be accomplished in 30 days or less in current conditions

Value of rental:
Monthly lease: $2400-$2600 easy
Property manager: 4-6%/yr (note that this city has lots of Air BnB rentals, so there are a TON of property management companies who find it relatively easy to cover the long-term-rental market)
Supposedly conservative estimate of appreciation per year: 5% (yes, I know you can't predict the future, but all other estimates for this city are much higher)
Presumed average maintenance costs per year: $10,000

So those are the numbers. Here is what I'm thinking:

Advantages of sale:
-This is the best time in the history of this city to be selling a home; although the future looks bright, my crystal ball is cloudy.
-Get the property off my back, including the whole "old home" thing that could have some expensive repairs one day.
-I'd get lots of cash that could be invested elsewhere. For example, I am moving to presumably get married, maybe have kids. It'd be nice to have an immediate college fund, or an immediate down payment for a new home (partner does not own a home currently). She has plenty of income and I have decent cash reserves, but not $300,000.
-Moving from a mid-to-high-COL city to LCOL-town, so it would be nice to leverage the difference.
-Unclear what I will be doing for work once I accomplish the move, so it would be nice to have a lot of cash, or even just to invest in taxable and make some passive income off that.
-Avoid one-foot-in-one-foot-out mentality of my move, which is to go be with a partner for presumably the rest of my life.
-Mortgage rates are low now but could rise and make sales harder one day.
-Not needing to pay a property manager or prevail upon family to do things for me from a distance.
-Money now

Advantages of rental:
-All signs point to continued growth of city, continued increase in home value.
-Even if home value doesn't grow, the long-term rental market is very tight due to ridiculous use of Air BnB properties, limited real estate, etc.
-Assuming I could make a little money every year renting this thing out, I could reinvest in the home and maybe knock out the mortgage in 10 years.
-Assuming I don't make as much money in my future work, it would be nice to have the "annuity" of rental income some day when the mortgage is paid off.
-Allows me to prolong this decision -- if I decide I really need to sell the thing, I can do it at any point in the future.
-This is my home town where my family is and it would be nice to continue having a footprint there; it is also possible that the relationship could not work out or something could happen to her job (which is the reason for moving) to where a quick retreat back home was necessary.
-Seems like an awfully valuable piece of property to have at such a low interest rate/monthly payment.
-Money later?

Anyway, eager to hear everyone's thoughts. It feels like a pretty close call to me.
Jack FFR1846
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Re: Sell home or keep as rental?

Post by Jack FFR1846 »

If you think about it as a "sell now" or "sell later" decision, maybe it'll be more clear. If you sell now, you get market high prices, especially with spring approaching. If the housing market tumbles (it does happen) and you sell later......say at a price lower than you even bought at, will you kick yourself? I did exactly that when moving away for grad school, on my employer's dime. I rented my house after having purchased for $125k in 1985. The market was super hot and 3 agents priced it at $150k. So 2 years later, after grad school is done, we return and live in the house while looking for a nicer one. Found the nicer one and sold. So this is 5 years after that $150k quote. Sold for $123k. Something like this could happen to you.

Bird in the hand and all that.
Bogle: Smart Beta is stupid
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dual
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Re: Sell home or keep as rental?

Post by dual »

Now is not a good time for rental property. Many states such as California and Oregon have instituted onerous rent control laws and other regulations. For example, here in the Frisco Bay area many cities do not allow property owners to get background checks on prospective tenants. There is rampant squatting including a famous case that just concluded in Oakland where the property owners lost their house to squatters.

I would sell the house and take the money and invest it in financial assets.
niceguy7376
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Re: Sell home or keep as rental?

Post by niceguy7376 »

You are currently single as per tax purposes. The max tax free gains for you is 250K and you are fairly close to the limit if you sell. I will take that to my bank.
onourway
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Re: Sell home or keep as rental?

Post by onourway »

Say you make $700/month after covering expenses. That's your guaranteed income. Anything you sell the property for in the future is unknown. You could hold it and find you need to sell for some reason in another terrible market. You sell and you clear near $300k right now. That takes a lot of months of rent to make $300k. I wouldn't think twice.
Topic Author
TSR
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Re: Sell home or keep as rental?

Post by TSR »

dual wrote: Mon Jan 27, 2020 12:38 pm Now is not a good time for rental property. Many states such as California and Oregon have instituted onerous rent control laws and other regulations. For example, here in the Frisco Bay area many cities do not allow property owners to get background checks on prospective tenants. There is rampant squatting including a famous case that just concluded in Oakland where the property owners lost their house to squatters.

I would sell the house and take the money and invest it in financial assets.
Good point. I will note that I live in the southeast where even if our progressive city decided to create such a law, our conservative state legislature would "veto" it immediately with counter legislation. But you never know the future.
Topic Author
TSR
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Re: Sell home or keep as rental?

Post by TSR »

niceguy7376 wrote: Mon Jan 27, 2020 12:48 pm You are currently single as per tax purposes. The max tax free gains for you is 250K and you are fairly close to the limit if you sell. I will take that to my bank.
I'm trying to think through the implications of this. Serious question: would it make sense to hold onto it for a year and then sell it when I'm married? I.e., bump that $250k up to $500k? Does it even work that way? Thanks.
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Watty
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Re: Sell home or keep as rental?

Post by Watty »

niceguy7376 wrote: Mon Jan 27, 2020 12:48 pm You are currently single as per tax purposes. The max tax free gains for you is 250K and you are fairly close to the limit if you sell. I will take that to my bank.
+1

If you pay a 15% long term capital gains tax rate that is worth over $35K to you. If you lose that then you will need to make around $50K just to break even after you pay the taxes on the $50K.

One other thing to consider is if you want to buy a home in the city you move to you would need a 20% downpayment to avoid PMI and lenders may partly or completely discount the rental income until you have several years of good rental history. You might not be able to easily buy a home there without selling your current house.

If you do decide to keep it you should have a long term business plan with professional tax advice and several possible exit strategies. You will be running a business that is worth about half a million dollars so you need to do a detailed analysis and treat it like a good size business.
TSR wrote: Mon Jan 27, 2020 12:26 pm Moving from a mid-to-high-COL city to LCOL-town, so it would be nice to leverage the difference.
I would suspect that you could buy a similar house there for cash and not have a mortage payment.

You could then invest your "mortage payment" each month.

I would sell it in a heartbeat. Even if the numbers look ok it does not fit your needs.

There is an old saying, "Buying an elephant for a dime is only a good deal if you need an elephant and have a dime."
Last edited by Watty on Mon Jan 27, 2020 1:23 pm, edited 1 time in total.
SR II
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Re: Sell home or keep as rental?

Post by SR II »

onourway wrote: Mon Jan 27, 2020 12:58 pm Say you make $700/month after covering expenses. That's your guaranteed income. Anything you sell the property for in the future is unknown. You could hold it and find you need to sell for some reason in another terrible market. You sell and you clear near $300k right now. That takes a lot of months of rent to make $300k. I wouldn't think twice.
A lots of months of rent....if it is rented all the time! And even more months when someone moves out and it is empty and needs rehab before renting again! Sell it!
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Watty
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Re: Sell home or keep as rental?

Post by Watty »

TSR wrote: Mon Jan 27, 2020 1:08 pm
niceguy7376 wrote: Mon Jan 27, 2020 12:48 pm You are currently single as per tax purposes. The max tax free gains for you is 250K and you are fairly close to the limit if you sell. I will take that to my bank.
I'm trying to think through the implications of this. Serious question: would it make sense to hold onto it for a year and then sell it when I'm married? I.e., bump that $250k up to $500k? Does it even work that way? Thanks.
In calculating the capital gains you subtract out the purchase price, real estate agent commission,and some other things to figure out out gains. You have likely have less than $250K in capital gains and even if you went over that it would not be by much.

If you do that then when the lease expires you will need to refurbish the house to get it ready to sell and even if things go well it could take a several of months from the time the lease ends until the sale closes. There would be a lot of costs associated with doing that.

I don't think you would gain anything.
rj342
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Re: Sell home or keep as rental?

Post by rj342 »

Re expected rental income.

A very long-time big landlord in town told my father years ago, when he got in to the business with a few houses, to plan for only 10 months of rental income a year, on average. Somebody moves away, lease or not, you need time to refresh it, make any repairs, AND then find a new tenant. That's when everything goes right.
Then from time to time you may have a problem tenant. More damage to home, state's waiting period to evict. Or on their own they move away suddenly, leaving you in the lurch with unpaid months.
medic
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Re: Sell home or keep as rental?

Post by medic »

Take the fact that you own the home out of the equation. It's an asset you can sell or hold on to.
First, check your investment plan, is real estate part of it?

If so, is this the best use of your investment dollars?
Calculate the cap rate to find out - http://visulate.com/rental/?m2=investme ... Calculator

Then compare that to other rental properties, REITs, syndications, etc you could purchase in the same town or elsewhere. You're an absentee landlord, so you don't need to limit your choice to this one home.

The horror stories or great sayings of random people on this DL don't really matter. People make a fair amount with real estate. The people that lose their shirts are the ones who go in with unrealistic expectations or, in a lot of cases, start with a home they bought to live in and think it makes sense to covert to a rental. Often this is not the best use of funds but the endowment effect is a strong force.
Run the numbers and let them tell you what to do.


P.S. "so there are a TON of property management companies who find it relatively easy to cover the long-term-rental market"
Finding a property manager and finding a good property manager are wildly different items. 90% of the time it's just collecting fees and the likely recourse you have when they screw up is to fire them. Be wary of conflating ease of access with quality.
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JoeRetire
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Re: Sell home or keep as rental?

Post by JoeRetire »

Ask yourself these questions:
- If you didn't already own this home, would you take around $500k of your money to purchase it for purposes of being a landlord?
- Is this the best possible rental house that you could purchase for that price, or just the most convenient?
- Have you always wanted to be a landlord, or is it just recency bias that makes you think this way?

I'd rather have the money so that I could invest it, rather than sinking it into the walls of a former home and having a second job. But I never wanted to be a landlord. Your mileage may vary.
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rich126
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Re: Sell home or keep as rental?

Post by rich126 »

I'm always concerned when you move from a higher cost of housing area to a lower cost of housing. When prices rise and you are in a LCOL area, you often fall further and further behind if you want to move to a HCOL area down the road due to the leverage you lose in housing. For example, a $500K house, 20% down and it goes up 20% over the next 5 years. That means on your $100K investment the housing went up $100K. Compare that to a $250K house, then the house went up $50K (still 100% on the lower $50K down payment) but you "lost" $50K to the higher price house. Maybe with the cheaper house you can make it up via investments but I'm doubtful about that.

Obviously I'm leaving out a lot of stuff like taxes but I've seen people unable to make the move back w/o it being painful. A similar thing happens when someone stays in a lower end neighborhood too long and the problem is multiplied because the appreciation of the lower end neighborhood is often lower than the more desirable areas.

As you mentioned you think housing is getting very expensive so maybe taking the profit and running with it is best. I don't know where you are at, but the areas I'm familiar with, I also think housing is getting "peaky" and I'm toying with selling my place if I move for a new job. It is tempting to keep it since it is virtually paid off but I don't know if I want to be a landlord again (no issues the first time around but being closer to retirement I don't want to have a ton of money in one property that someone could trash).

Having seen my house previously bottomed out at 50% of its prior high value only to see it go back up 100% (to the previous high), I'm kind of concern about it dropping again since I'm beginning to think it will not be my retirement home after all.

Good luck.
manatee2005
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Re: Sell home or keep as rental?

Post by manatee2005 »

Rent it
manatee2005
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Re: Sell home or keep as rental?

Post by manatee2005 »

JoeRetire wrote: Mon Jan 27, 2020 2:07 pm Ask yourself these questions:
- If you didn't already own this home, would you take around $500k of your money to purchase it for purposes of being a landlord?
- Is this the best possible rental house that you could purchase for that price, or just the most convenient?
- Have you always wanted to be a landlord, or is it just recency bias that makes you think this way?

I'd rather have the money so that I could invest it, rather than sinking it into the walls of a former home and having a second job. But I never wanted to be a landlord. Your mileage may vary.
I don’t agree with this advice.

He has a low cost basis in this house which makes the rental work. Also he would save on transaction costs but renting this house compared to selling it and buying a “better rental”.
hudson
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Re: Sell home or keep as rental?

Post by hudson »

Consider selling unless you want to be a landlord.
Looking at the potential rent money is very seductive.
As you know being a landlord is a big job.
I personally would not want to take one phone call to deal with a tenant.
Your choice; being a landlord is great for some.
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JoeRetire
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Re: Sell home or keep as rental?

Post by JoeRetire »

manatee2005 wrote: Mon Jan 27, 2020 3:07 pm I don’t agree with this advice.

He has a low cost basis in this house which makes the rental work.
How is this "low cost basis" any different from the amount he could get by selling it?
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chevca
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Re: Sell home or keep as rental?

Post by chevca »

TSR wrote: Mon Jan 27, 2020 12:26 pm As I've posted elsewhere, I'm moving to another state soon. This fact alone would tend to make me want to sell my home rather than keep it as a rental, but the details make it a closer call.
If one fact alone would make you sell, it would take a lot more than a closer call to make me change my mind. If keeping it as a rental isn't a clear winner, stick with your initial thought.

I like the advantages of selling you list much better than the advantages of renting.

Do you want to get into the rental business... own 5 or 10 rentals? If yes, keep this one.... if no, sell it.
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TSR
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Re: Sell home or keep as rental?

Post by TSR »

Great points made by all. Seems like a decent consensus on "sell," with a few strong "rent" proponents. You will not be surprised to learn that this is the opposite advice I've gotten from a lot of people who have real estate fever in this town. I appreciate the sanity check.
chevca
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Re: Sell home or keep as rental?

Post by chevca »

Sounds like you have plenty of buyers already lined up then? :happy
stan1
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Re: Sell home or keep as rental?

Post by stan1 »

niceguy7376 wrote: Mon Jan 27, 2020 12:48 pm You are currently single as per tax purposes. The max tax free gains for you is 250K and you are fairly close to the limit if you sell. I will take that to my bank.
I agree with this. Tax law does favor this approach. Sell, book the tax free gain while its still your primary residence, and if you want to start a business renting out houses buy another property suited to being a rental. The 1/4 acre lot in my mind is a liability not an asset for a rental. Some 100 year old houses are built like tanks; others are a maintenance nightmare waiting to happen. You know which describes your house.
Easy sale without even using an agent: $475,000
Outside chance when properly marketed using agent: $550,000 or more
You may be over-estimating the value of marketing. Markets are all local but there is no way in my market that staging a house will get 15% more over putting a clean but mostly empty house onto the MLS. Upgrades such as appliances, new roof, new HVAC, paint, floors depend on the condition of the house to begin with. You may get a little more back than you put in and it may sell quicker, but in a very hot market it may not matter even for a 100 year old house. In my area the 100 year old houses that are built like tanks and considered to be lower maintenance than a 20 year old tract house.
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snackdog
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Re: Sell home or keep as rental?

Post by snackdog »

If I understand you math, you have invested $78,000 into this property (purchase price minus amount owed). If you rent it for $2500/month, you will have monthly costs of $2475 comprising mortgage ($1550), project mgmr ($125) and maintenance ($800) for a return of $25/month or $300/year. That is .38% return on your investment. If we assume $500 of your payment goes to principal, this improves to $525/mo and $8000/yr or 8% return.
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