To rent out, or to sell?

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theRoCK
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To rent out, or to sell?

Post by theRoCK » Fri Jul 31, 2020 5:24 pm

We just bought a new home. I was very sure I was going to keep the current home and rent it out. But now, I am having second thoughts. This is the data about the house itself:

Location: Austin, TX
House built: 2005
Purchased for $270k in 2006
Market value (estimated): $480k
Mortgage balance: $75k, ~5yrs left
Estimated Rent: $2500
Prop Taxes: $9500

Reasons for wanting the keep the house:
Real estate diversification. We are not the kind of ppl to go out and buy investment properties. Since we already have this house, thought will keep it.
Future growth. Austin real estate is going like crazy. Hope to keep it so we can get any appreciation on top of the rents.

Reasons for wanting to sell it:
Not sure how much work is involved in renting it out. Have a toddler in the house, so would not want this taking a lot of time away. I keep hearing getting a property manager is not worth it, and you are better off selling it if you cannot manage on your own. Knowing other's experience in this regard would help.
Not sure if it would be a good return on the money. How do I estimate maintenance costs, vacancies? Any other costs I need to budget for to calculate return?

I am thinking of getting a property manager for the first couple of years and see how it goes. Even if I am cash flow neutral at that point, I would be ok keeping it for the long term. If not, I can sell it then and still be within the window of not having to pay capital gains.

Suggestions/Feedback?

PS: Since this was our primary home, we went for good appliances, nice exotic hardwood, custom closet installation etc. One thought is to sell it while they are still nice and not gamble with tenants maybe damaging it and affect the value when trying to sell it in a couple of years down the line if renting doesnt work out.

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Watty
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Re: To rent out, or to sell?

Post by Watty » Fri Jul 31, 2020 5:40 pm

theRoCK wrote:
Fri Jul 31, 2020 5:24 pm
Purchased for $270k in 2006
Market value (estimated): $480k
If you rent it for more that a few years you will lose the homeowners capital gains exemption and you would then have $210K (480-270) in capital gains that you will be taxed on when you eventually do sell it.

Selling it is practically a no-brainer decision.

If you have a burning desire to be a landlord you could then buy a rental property that would be a more appropriate rental with less high end features.

One problem with a higher end $500K rental is that you may have a hard time getting good long term tenants. People with good credit would be able to nice house $400(ish) for the same monthly cost. There will be a limited number of qualified people who have some special reason to rent a house in that price range instead of buying and they may move a lot more frequently so you may have higher turnover.

Chris001122
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Re: To rent out, or to sell?

Post by Chris001122 » Fri Jul 31, 2020 5:43 pm

I'm also voting for you to sell. Doesn't sound like a good time to have two houses. Pay off your new house and get out of debt.
"It's always been a mistake to bet against the United States since 1776." - Warren Buffett

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Raymond
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Re: To rent out, or to sell?

Post by Raymond » Fri Jul 31, 2020 6:03 pm

Maybe I missed it, but is your new house in Austin as well, or did you move away?
"Ritter, Tod und Teufel"

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theRoCK
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Re: To rent out, or to sell?

Post by theRoCK » Fri Jul 31, 2020 6:32 pm

Raymond wrote:
Fri Jul 31, 2020 6:03 pm
Maybe I missed it, but is your new house in Austin as well, or did you move away?
Yes, I will still be in Austin. If I was moving away, this wouldnt even be a question, definitely sell. I dont see myself renting out from out of town.
Watty wrote:
Fri Jul 31, 2020 5:40 pm

If you rent it for more that a few years you will lose the homeowners capital gains exemption and you would then have $210K (480-270) in capital gains that you will be taxed on when you eventually do sell it.

...

One problem with a higher end $500K rental is that you may have a hard time getting good long term tenants. People with good credit would be able to nice house $400(ish) for the same monthly cost. There will be a limited number of qualified people who have some special reason to rent a house in that price range instead of buying and they may move a lot more frequently so you may have higher turnover.
If I was cash flow positive and if there was appreciation in the first 2 years, I was planning to keep it long term as a rental, but yes, thats $210k gains on which I will be paying cap gains at some point unless I do the 1031 exchange. If renting didnt make sense, I was planning to sell within 3 years so I didnt have cap gains.

But your second point is interesting, didnt consider it. I hear the rental market is pretty good in my area, so didnt worry about finding tenants, but the point about having higher turnover is something to ponder, and yes, swings the needle towards sell to avoid the hassle.
Chris001122 wrote:
Fri Jul 31, 2020 5:43 pm
I'm also voting for you to sell. Doesn't sound like a good time to have two houses. Pay off your new house and get out of debt.
That is also one of the motivation to sell. With the down payment saved for the new house, and the equity from selling the current one, we can actually pay off the new house, and be debt free. But since the new loan is a 15yr at 2.25%, that is not a primary motivation for me.

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Watty
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Re: To rent out, or to sell?

Post by Watty » Fri Jul 31, 2020 7:47 pm

theRoCK wrote:
Fri Jul 31, 2020 6:32 pm
If renting didnt make sense, I was planning to sell within 3 years so I didnt have cap gains.
There is a risk that you could need to sell in a bad housing market and that can be brutal. You would also be limited to trying to sell it when a lease ends.

SR II
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Re: To rent out, or to sell?

Post by SR II » Fri Jul 31, 2020 8:22 pm

I wouldn't even think twice. I'd sell it in a heartbeat and pocket the profit. Can you afford to make payments when no rent is coming in? What happens when it is either vacant for possibly months OR you have renters that don't/can't pay the rent (Covid rent exemption)? Yikes!!!

How about diversifying your portfolio with REITs, rather than putting your real estate dollars all in one rental?
Last edited by SR II on Fri Jul 31, 2020 8:34 pm, edited 2 times in total.

denovo
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Re: To rent out, or to sell?

Post by denovo » Fri Jul 31, 2020 8:25 pm

theRoCK wrote:
Fri Jul 31, 2020 5:24 pm
We just bought a new home. I was very sure I was going to keep the current home and rent it out. But now, I am having second thoughts. This is the data about the house itself:

Location: Austin, TX
House built: 2005
Purchased for $270k in 2006
Market value (estimated): $480k
Mortgage balance: $75k, ~5yrs left
Estimated Rent: $2500
Prop Taxes: $9500

Reasons for wanting the keep the house:
Real estate diversification. We are not the kind of ppl to go out and buy investment properties. Since we already have this house, thought will keep it.
Future growth. Austin real estate is going like crazy. Hope to keep it so we can get any appreciation on top of the rents.

Reasons for wanting to sell it:
Not sure how much work is involved in renting it out. Have a toddler in the house, so would not want this taking a lot of time away. I keep hearing getting a property manager is not worth it, and you are better off selling it if you cannot manage on your own. Knowing other's experience in this regard would help.
Not sure if it would be a good return on the money. How do I estimate maintenance costs, vacancies? Any other costs I need to budget for to calculate return?

I am thinking of getting a property manager for the first couple of years and see how it goes. Even if I am cash flow neutral at that point, I would be ok keeping it for the long term. If not, I can sell it then and still be within the window of not having to pay capital gains.

Suggestions/Feedback?

PS: Since this was our primary home, we went for good appliances, nice exotic hardwood, custom closet installation etc. One thought is to sell it while they are still nice and not gamble with tenants maybe damaging it and affect the value when trying to sell it in a couple of years down the line if renting doesnt work out.
Read this thread

viewtopic.php?f=2&t=226980
"Don't trust everything you read on the Internet"- Abraham Lincoln

000
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Re: To rent out, or to sell?

Post by 000 » Fri Jul 31, 2020 8:27 pm

Another vote for sell.

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geerhardusvos
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Re: To rent out, or to sell?

Post by geerhardusvos » Fri Jul 31, 2020 8:57 pm

theRoCK wrote:
Fri Jul 31, 2020 5:24 pm
We just bought a new home. I was very sure I was going to keep the current home and rent it out. But now, I am having second thoughts. This is the data about the house itself:

Location: Austin, TX
House built: 2005
Purchased for $270k in 2006
Market value (estimated): $480k
Mortgage balance: $75k, ~5yrs left
Estimated Rent: $2500
Prop Taxes: $9500

Reasons for wanting the keep the house:
Real estate diversification. We are not the kind of ppl to go out and buy investment properties. Since we already have this house, thought will keep it.
Future growth. Austin real estate is going like crazy. Hope to keep it so we can get any appreciation on top of the rents.

Reasons for wanting to sell it:
Not sure how much work is involved in renting it out. Have a toddler in the house, so would not want this taking a lot of time away. I keep hearing getting a property manager is not worth it, and you are better off selling it if you cannot manage on your own. Knowing other's experience in this regard would help.
Not sure if it would be a good return on the money. How do I estimate maintenance costs, vacancies? Any other costs I need to budget for to calculate return?

I am thinking of getting a property manager for the first couple of years and see how it goes. Even if I am cash flow neutral at that point, I would be ok keeping it for the long term. If not, I can sell it then and still be within the window of not having to pay capital gains.

Suggestions/Feedback?

PS: Since this was our primary home, we went for good appliances, nice exotic hardwood, custom closet installation etc. One thought is to sell it while they are still nice and not gamble with tenants maybe damaging it and affect the value when trying to sell it in a couple of years down the line if renting doesnt work out.
Sell.
VTSAX and chill

Xrayman69
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Re: To rent out, or to sell?

Post by Xrayman69 » Fri Jul 31, 2020 8:59 pm

Sell and move on with your life. Being a landlord is not an enjoyable hobby, it’s a business. Rent and landlord if cash flow was at least 10% so as to make the potential risk and hassle worth it. Otherwise take the profit and pay down mortgage and instantly gain about 3% or invest the money in an S&P low cost fund and bet on historically average over the next 20-30 years without the hassle (but still has risk as past performance doesn’t predict future performance....)

Expenses property taxes, mortgage, insurance, routine maintenance (hope this is low but a roof or water accident is a pain), month without renter if not long term renter ..... and the costs go on. This all doesn’t count against your time, effort and potential stress. That cash flow doesn’t look so appealing based upon your numbers.

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theRoCK
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Re: To rent out, or to sell?

Post by theRoCK » Fri Jul 31, 2020 9:04 pm

denovo wrote:
Fri Jul 31, 2020 8:25 pm
Read this thread

viewtopic.php?f=2&t=226980
Actually, reading your thread was what started giving me second thoughts about renting it out!!! :happy

At this stage in my life, I would rather spend more time with my toddler than worry about managing a rental. If hiring a rental management company would be financially feasible, would have gone with that option, but consensus seems to be thats not worthwhile.

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Ralph Furley
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Re: To rent out, or to sell?

Post by Ralph Furley » Fri Jul 31, 2020 10:08 pm

So $405,000 in equity? If you had $405,000 in cash today, would you purchase this property in order to rent it out for $2,500 per month?

I believe I know your answer. I suggest that you sell the house. It's a great time to be a seller -- especially in a market like Austin. Rates are low, most properties receive multiple offers.

I have a friend who owns 60 rental houses. He once told me that keeping your old house as a rental is almost always a bad move. If you want to invest in real estate, do so, but don't do it by hanging on to your old primary residence.

denovo
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Re: To rent out, or to sell?

Post by denovo » Sat Aug 01, 2020 12:25 am

theRoCK wrote:
Fri Jul 31, 2020 9:04 pm
denovo wrote:
Fri Jul 31, 2020 8:25 pm
Read this thread

viewtopic.php?f=2&t=226980
Actually, reading your thread was what started giving me second thoughts about renting it out!!! :happy

At this stage in my life, I would rather spend more time with my toddler than worry about managing a rental. If hiring a rental management company would be financially feasible, would have gone with that option, but consensus seems to be thats not worthwhile.
Do you max out your 401k/IRA, same for your spouse? How much non- home mortgage loan debt do you have? How much did you borrow on your new home?
"Don't trust everything you read on the Internet"- Abraham Lincoln

Planner01
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Re: To rent out, or to sell?

Post by Planner01 » Sat Aug 01, 2020 9:48 am

Following the 1% rule, this property would not rent for enough to cover all your bags long term.

Sell.

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theRoCK
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Re: To rent out, or to sell?

Post by theRoCK » Sat Aug 01, 2020 4:49 pm

denovo wrote:
Sat Aug 01, 2020 12:25 am

Do you max out your 401k/IRA, same for your spouse? How much non- home mortgage loan debt do you have? How much did you borrow on your new home?
Yes, we both max out our 401k, back door Roth IRA, and HSA accounts. No non-mortgage debt, and pay off our CCs in full each month. We have enough income to pay both mortgages if need be in a pinch. We will be taking ~$360k loan (about 60% of value) on the new house @ 2.25%, 15 years. We will still have ~6mo emergency fund in HY savings even after the large down payment (maybe 5mo due to the larger mortgage payment on the new house!!)

If I think about it more, I think the reason I want to keep the house is because I like it, the location and the potential for future growth, not necessarily for the rental income. But I am not sure if the ROI is worth it even if the house increases in value 7-8% annually over the years, as the net rental income would just be break even or a very small %. With the Covid related uncertainty, and the time and effort involved if I want to manage it myself, and the costs if I dont, I think renting out such an expensive house might not be the most financially sound decision. I am heavily leaning towards just selling it at this point.

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anon_investor
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Re: To rent out, or to sell?

Post by anon_investor » Sat Aug 01, 2020 5:16 pm

theRoCK wrote:
Sat Aug 01, 2020 4:49 pm
denovo wrote:
Sat Aug 01, 2020 12:25 am

Do you max out your 401k/IRA, same for your spouse? How much non- home mortgage loan debt do you have? How much did you borrow on your new home?
Yes, we both max out our 401k, back door Roth IRA, and HSA accounts. No non-mortgage debt, and pay off our CCs in full each month. We have enough income to pay both mortgages if need be in a pinch. We will be taking ~$360k loan (about 60% of value) on the new house @ 2.25%, 15 years. We will still have ~6mo emergency fund in HY savings even after the large down payment (maybe 5mo due to the larger mortgage payment on the new house!!)

If I think about it more, I think the reason I want to keep the house is because I like it, the location and the potential for future growth, not necessarily for the rental income. But I am not sure if the ROI is worth it even if the house increases in value 7-8% annually over the years, as the net rental income would just be break even or a very small %. With the Covid related uncertainty, and the time and effort involved if I want to manage it myself, and the costs if I dont, I think renting out such an expensive house might not be the most financially sound decision. I am heavily leaning towards just selling it at this point.
Sell the house, enjoy the tax free appreciation. Sounds like you do not have a burning desire to be a landlord, so why add the extra headache?

mattsm
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Re: To rent out, or to sell?

Post by mattsm » Sat Aug 01, 2020 5:20 pm

Rent a $500k home for $2.5k / month?

The numbers simply DO NOT work. I'm in Austin thinking about renting or selling a place for $350k that rents for $2.3k-ish and the numbers don't work.

EDIT: my home like yours is also upgraded, makes it worse for renting since you don't really get any extra premum for that upgrade and the tenants destroy it.

-M

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willthrill81
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Re: To rent out, or to sell?

Post by willthrill81 » Sat Aug 01, 2020 6:17 pm

In HCOL areas, residential real estate usually ranges from tough to impossible with regard to making the numbers work. In your situation, it's close to impossible. Betting on property appreciation that may or may not materialize is not a good plan, just a nice bonus if it happens.

Sell.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Watty
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Re: To rent out, or to sell?

Post by Watty » Sat Aug 01, 2020 7:16 pm

theRoCK wrote:
Sat Aug 01, 2020 4:49 pm
If I think about it more, I think the reason I want to keep the house is because I like it, the location and the potential for future growth, not necessarily for the rental income.
There was a post a while back by someone who inherited the family home they were raised in. They kept it as a rental for similar reasons. They did not have any epic problems but they had all the normal problems that go with dealing with a rental property and renters.

They posted that they did OK financially but they regretted having kept it as a rental. The problem was that all their great memories of living in the house were replace by the bad memories of the normal hassles of dealing with a rental property.

Bobby206
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Re: To rent out, or to sell?

Post by Bobby206 » Sat Aug 01, 2020 7:19 pm

I would sell and look at diversifying in place like Memphis, Kansas City, etc.... Let's say you net $400k. You could buy 4 $100k houses and each one will rent for around $1,000/month and property taxes will be way lower than Texas.

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