Sell the house or keep it as a rental?

Austin, Texas
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Sell the house or keep it as a rental?

David Kimball
Member since 2022 · 14 posts · 4 votes

Sell the house or keep it as a rental?

Curious to get the group's thoughts.

We are moving and have already got another house. We were going to sell our current primary residence, but are having a hard time doing it with interest rates in the 6%+ range, so we decided to give rental a shot.

Last it was appraised at 460k, our mortgage is on a 15-year fixed with 2.75% interest.

Monthly payments (incl. escrow for tax and insurance): 1830/mo

Property insurance will go up $500/mo as soon as we don't have the homestead exemption.

In my estimation, we can rent it out for $2100/mo and will have to put in new carpets and a fresh coat of paint.

We tried listing the house for $450k - no interest. Offered special financing with seller rate buydown - no interest.
I'm curious how to think through whether we should keep the house as a rental, or try to sell it by lowering the price.

Our remaining balance is 135k on the mortgage.

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Robin SimonBusiness Member
Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
4y
Quote from @David Kimball:
Quote from @Jeremy Nault:

Hi David, 

The Numbers seem a little tight to work as a rental.  You mentioned that the insurance would just to 500 a month after you move, would that increase the 1830 or is that number already taking the increase into account.  

The biggest question that you need to ask yourself is if you didn't already own it, would your purchase this house to use as a rental property? If the answer is no I would sell, if the answer is yes I may hold onto it.  

I hope this helps! Good luck with your decision!


 Yes for sure. I would sell it, I think my main question is... how low to go to sell it now vs., keep it afloat for a year or two until valuations are back up (if).


 Is the property in Austin?  If so, I'd think about keeping it even with mediocre cash flow considering you've got a good rate/mortgage

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  • Account Closed
    Member since 2021 · 240 posts · 300 votes
    4y
    If your options are sell for $300k profit or rent for a couple hundred, maximum, per month? I'd sell and use that money for a better return somewhere else.
    3Reply
  • Jeremy Nault
    Real Estate Agent · Manchester, NH · Member since 2015 · 160 posts · 148 votes
    4y

    Hi David, 

    The Numbers seem a little tight to work as a rental.  You mentioned that the insurance would just to 500 a month after you move, would that increase the 1830 or is that number already taking the increase into account.  

    The biggest question that you need to ask yourself is if you didn't already own it, would your purchase this house to use as a rental property? If the answer is no I would sell, if the answer is yes I may hold onto it.  

    I hope this helps! Good luck with your decision!

    4Reply
  • David Kimball
    OP
    Member since 2022 · 14 posts · 4 votes
    4y
    Quote from @Jeremy Nault:

    Hi David, 

    The Numbers seem a little tight to work as a rental.  You mentioned that the insurance would just to 500 a month after you move, would that increase the 1830 or is that number already taking the increase into account.  

    The biggest question that you need to ask yourself is if you didn't already own it, would your purchase this house to use as a rental property? If the answer is no I would sell, if the answer is yes I may hold onto it.  

    I hope this helps! Good luck with your decision!


     Yes for sure. I would sell it, I think my main question is... how low to go to sell it now vs., keep it afloat for a year or two until valuations are back up (if).

    0Reply
  • David Kimball
    OP
    Member since 2022 · 14 posts · 4 votes
    4y
    Quote from @Account Closed:
    If your options are sell for $300k profit or rent for a couple hundred, maximum, per month? I'd sell and use that money for a better return somewhere else.

     Thanks for the input. I'm curious though how low would you consider going to sell, as prices are dropping in the neighborhood and also have to account for fees and commissions.

    At 450k sell price, net profit would be somewhere around 220k.

    It's not even showing for 450k... and I'm concerned we'd have to sell it 40-50k less for someone to buy it

    1Reply
  • Robin SimonBusiness Member
    Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
    4y
    Quote from @David Kimball:
    Quote from @Jeremy Nault:

    Hi David, 

    The Numbers seem a little tight to work as a rental.  You mentioned that the insurance would just to 500 a month after you move, would that increase the 1830 or is that number already taking the increase into account.  

    The biggest question that you need to ask yourself is if you didn't already own it, would your purchase this house to use as a rental property? If the answer is no I would sell, if the answer is yes I may hold onto it.  

    I hope this helps! Good luck with your decision!


     Yes for sure. I would sell it, I think my main question is... how low to go to sell it now vs., keep it afloat for a year or two until valuations are back up (if).


     Is the property in Austin?  If so, I'd think about keeping it even with mediocre cash flow considering you've got a good rate/mortgage

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    5Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    4y
    Quote from @David Kimball:

    This is not a good rental.

    When calculating cash flow, you want to cover the mortgage, taxes, and insurance, but you also want to set aside a significant portion of the rent to cover maintenance, vacancy, capital expenditures, and property management. As a general rule of thumb and quick assessment, you can assume 50% of the rent going into a savings account to cover those expenditures. Then pay the mortgage. Whatever is left over is cash flow.

    In your example: $2,100 - $1850 = $250. Insurance is $500 so you will be spending $250 out of pocket each month and that's before you spend the average 10% on maintenance. You'll have nothing to set aside for capital expenditures, cover vacancies, or hire someone for property management. An all-too-typical scenario is a tenant causes $2,000 in damages, doesn't pay their last month of rent, and it takes you a month to turn the unit around before you can rent it again. That's over $6,000 in losses and you're already losing at least $250 per month. 

    Sell the property and move on. If you want to invest in real estate, learn how to calculate cash flow the BiggerPockets way and make a wise investment that produces money instead of sucking more money out of your pocket.

    Here's a guide that describes what good cash flow looks like and how to analyze a property.

    https://www.biggerpockets.com/...

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    4Reply
  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    4y

    @David Kimball Only if you could have listed 6 months ago.... anyways these numbers feel stuck in a grey area. Selling is the best option but now were moving into late fall early winter. It's a bad time to sell anything. Lets be honest as a rental it barely works. The cash-flow isn't great but I suppose if you had $5K in reserves (day 1) you'd be just fine. No reserves = huge risk.

    Biggest question for you to answer is what is the direction of the Austin market in 2023? I think it's really positive. The appraisal you got is inaccurate. Trust me. We just locked in a $30K HELOC and the bank's appraisal was easily $25K over what market prices are commanding. The lender got it wrong and it's benefiting us. Maybe consider leveraging HELOC? Hold the property and keep 2.75% interest rate. It's a winner long term but it's work in the form of management. If you're moving OOS who is going to manage the property? If that's a challenge you're ready for it's game on. If not it's time to sell and another price reduction.

    0Reply
  • Jeremy Horton
    Rental Property Investor · Somewhere over the Rainbow · Member since 2021 · 1k+ posts · 1k+ votes
    4y

    I personally would sell - if it's not getting showings at 450k - there could be a few things: bad location, needs work or priced too high (very common these days) - the market shifted pretty quick and it's not 2020/2021 anymore - lots of people still think their house is worth 2021 prices. Lots of areas have dropped 10%+ in price so dropping 40-50k off the price is not unheard of - it's fairly common where I'm at, especially on the more expensive properties. We had a house just down the street listed for 499k, dropped to 449k and sold for 435k

    On top of that a $250/month cashflow is a really low return on equity - I'd drop the price, sell it and move that 220k somewhere where it can do some good for you. Even if it did "work" as a rental the ROI will be so low, I don't think it's worth the time, hassle, or opportunity cost. How many other rentals to you have to potentially offset this one? IF you have several, you could keep it as a appreciation play, if it's the only one, I'd personally move on.

    IF you did decide to make it a rental, you will likely lose money - at the very best you could break even. Unless the house is in a perfect location (which I have to assume it's not because it hasn't had any showings) I'd keep it. 

    Sounds like you'll do fine if you decide to sell it anyways - likely make a nice profit and get to move on with life. You just won't be getting top dollar, which is the case with most things 

    3Reply
  • Jordan MoorheadBusiness Member
    Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
    4y

    @David Kimball keep it. You can also run a furnished monthly rental and get $3500-4000 a month off of it I bet

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    2Reply
  • David Kimball
    OP
    Member since 2022 · 14 posts · 4 votes
    4y
    Quote from @Nathan Gesner:
    Quote from @David Kimball:

    This is not a good rental.

    When calculating cash flow, you want to cover the mortgage, taxes, and insurance, but you also want to set aside a significant portion of the rent to cover maintenance, vacancy, capital expenditures, and property management. As a general rule of thumb and quick assessment, you can assume 50% of the rent going into a savings account to cover those expenditures. Then pay the mortgage. Whatever is left over is cash flow.

    In your example: $2,100 - $1850 = $250. Insurance is $500 so you will be spending $250 out of pocket each month and that's before you spend the average 10% on maintenance. You'll have nothing to set aside for capital expenditures, cover vacancies, or hire someone for property management. An all-too-typical scenario is a tenant causes $2,000 in damages, doesn't pay their last month of rent, and it takes you a month to turn the unit around before you can rent it again. That's over $6,000 in losses and you're already losing at least $250 per month. 

    Sell the property and move on. If you want to invest in real estate, learn how to calculate cash flow the BiggerPockets way and make a wise investment that produces money instead of sucking more money out of your pocket.

    Here's a guide that describes what good cash flow looks like and how to analyze a property.

    https://www.biggerpockets.com/...

    Thank you! This is exactly what I'm thinking -- but hard to think about lowering the price significantly, compared to what it was just a few months ago.
    1Reply
  • David Kimball
    OP
    Member since 2022 · 14 posts · 4 votes
    4y
    Quote from @Jeremy Horton:

    I personally would sell - if it's not getting showings at 450k - there could be a few things: bad location, needs work or priced too high (very common these days) - the market shifted pretty quick and it's not 2020/2021 anymore - lots of people still think their house is worth 2021 prices. Lots of areas have dropped 10%+ in price so dropping 40-50k off the price is not unheard of - it's fairly common where I'm at, especially on the more expensive properties. We had a house just down the street listed for 499k, dropped to 449k and sold for 435k

    On top of that a $250/month cashflow is a really low return on equity - I'd drop the price, sell it and move that 220k somewhere where it can do some good for you. Even if it did "work" as a rental the ROI will be so low, I don't think it's worth the time, hassle, or opportunity cost. How many other rentals to you have to potentially offset this one? IF you have several, you could keep it as a appreciation play, if it's the only one, I'd personally move on.

    IF you did decide to make it a rental, you will likely lose money - at the very best you could break even. Unless the house is in a perfect location (which I have to assume it's not because it hasn't had any showings) I'd keep it. 

    Sounds like you'll do fine if you decide to sell it anyways - likely make a nice profit and get to move on with life. You just won't be getting top dollar, which is the case with most things 


     I like this! Thanks

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y
    Quote from @Nathan Gesner:
    Quote from @David Kimball:

    This is not a good rental.

    When calculating cash flow, you want to cover the mortgage, taxes, and insurance, but you also want to set aside a significant portion of the rent to cover maintenance, vacancy, capital expenditures, and property management. As a general rule of thumb and quick assessment, you can assume 50% of the rent going into a savings account to cover those expenditures. Then pay the mortgage. Whatever is left over is cash flow.

    In your example: $2,100 - $1850 = $250. Insurance is $500 so you will be spending $250 out of pocket each month and that's before you spend the average 10% on maintenance. You'll have nothing to set aside for capital expenditures, cover vacancies, or hire someone for property management. An all-too-typical scenario is a tenant causes $2,000 in damages, doesn't pay their last month of rent, and it takes you a month to turn the unit around before you can rent it again. That's over $6,000 in losses and you're already losing at least $250 per month. 

    Sell the property and move on. If you want to invest in real estate, learn how to calculate cash flow the BiggerPockets way and make a wise investment that produces money instead of sucking more money out of your pocket.

    Here's a guide that describes what good cash flow looks like and how to analyze a property.

    https://www.biggerpockets.com/...

    Wrong,...this is a terrible rental.  Even if he sold it for 375k you'd walk away with around $200k.  Take that $200k and use it as a 20% DP on a total PV of $1M...and all the cash flow that would come with that.
    2Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y
    Quote from @Jordan Moorhead:

    @David Kimball keep it. You can also run a furnished monthly rental and get $3500-4000 a month off of it I bet


    Wild guess, and inconsistent at best. Even if all of this was able to generate $1500/month in PCF, that's $18k a year. It would take 17 years of CF to equal the equity that's in there now...that could be pulled out and put to better use...much better use. Add the increase in equity over those 17 years, and the PCF would never catch up to the equity he has now. Take the equity, convert it to cash with a sale, and get a better PV and CF than he has even now.

    2Reply
  • Matthew CrivelliBusiness Member
    Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
    4y

    @David Kimball The house is simply not worth what you think it is anymore. Lower the price and you will find a buyer. You only owe 150k so its not like your arm is being twisted to pay off a huge note.

    [email protected]413-348-8346
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    2Reply
  • Cameron MoorePro Member
    Insurance Agent · DFW, TX · Member since 2021 · 348 posts · 245 votes
    4y

    Insurance SHOULD usually go down when it changes from Homeowners to Landlord. I would shop this with a broker before making your decision as it could affect cash flow greatly. 

    [email protected]682-593-4016
    0Reply
  • David Kimball
    OP
    Member since 2022 · 14 posts · 4 votes
    4y
    Quote from @Cameron Moore:

    Insurance SHOULD usually go down when it changes from Homeowners to Landlord. I would shop this with a broker before making your decision as it could affect cash flow greatly. 


     property tax , not insurance

    1Reply
  • Giridhar Sathyanarayana
    Member since 2021 · 2 posts · 0 votes
    4y

    I can relate to this. The math does not work out on Rental because the Loan Term is 15 years. If it was 30 years, there would have been opportunity for a +ve Cash flow. I have made this mistake by going in for 15 Year fixed on a Rental property.

    0Reply
  • Melanie ThomasBusiness Member
    Real Estate Broker · San Antonio · Member since 2022 · 1k+ posts · 489 votes
    4y
    Hello, if you decide that you would like to pursue the rental route I am happy to offer you a rental CMA. Happy Investing!
    [email protected]
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    0Reply
  • David Kimball
    OP
    Member since 2022 · 14 posts · 4 votes
    4y
    Quote from @Giridhar Sathyanarayana:

    I can relate to this. The math does not work out on Rental because the Loan Term is 15 years. If it was 30 years, there would have been opportunity for a +ve Cash flow. I have made this mistake by going in for 15 Year fixed on a Rental property.


     yep .. it was our primary residence, but have to move so it doesn't really work as a rental. It would have worked great on a 30 yr mortgage!

    0Reply
  • Ke Nan Wang
    Developer · St. Augustine, FL · Member since 2018 · 311 posts · 384 votes
    4y

    IMHO, the answer is depend on do you want to own a piece of real estate in that area or not? Nobody can give you any advise on sell vs rent because nobody knows the future. You could sell for 460k now and what if something crazy happened next year and your house double the value? In that scenario, renting would obviously be a superior decision but do you know that? Of course no. 

    If I was in your shoes, the first question I'd ask myself is that, do I like the area? Does the area have potential? population growth? job opportunities? When you drive around the neighborhood, do you like to live in that area? If the answer is yes, and I can afford to hold the property, I'd hold it. Historically, holding onto a piece of real estate in a good area for the long run always has the most upside. 

    If I think the area is stagnant or going downhill, and I either have an opportunity or I'm planning on looking for a bigger/better opportunity in the near future, then I'll sell this piece of real estate. 

    Once the decision is made to sell, I'd hire the best realtor in town to market the property to the best way possible and get the best dollar out of it and move on and don't look back. In my experience as an investor and real estate agent who helps other investors, this mindset works the best. The one always suffer is the one who's on the fence, wants to half *** the listing and see if the property can net them top dollars. This type of mentality always produce a bad experience for both the owner and the agent. The market is always changing and it's the market that sells real restate. And most of the cases, the first offer is the best offer. 

    So in summary, if you are on the fence, make your decision first then execute the decision. Doing things on both sides of the fence usually doesn't work out in your favor. 

    1Reply
  • Peter Albanese
    Springfield, IL · Member since 2009 · 33 posts · 31 votes
    4y

    I’m going to offer another option. Refinance the house 135k at new rates and push loan out to 20-25 year amortization, albeit higher than your current rate. This would lower your payments and probably allow this to cash flow. This would mostly solve the issue with carrying the house and turn it into cash flow generator, although I don’t feel like it would be a great return on investment. Generally speaking a house should be able to get 1% of cost via rent in order to work out, so if you paid 400k for this house, you’d want to collect 4k/month in rent, but I don’t know your cost basis. It’s up to you to choose the option that works best for you. 

    1Reply
  • Leo R.
    Investor · Member since 2021 · 591 posts · 695 votes
    4y

    @David Kimball   I think @Ke Nan Wang  brings up some important points--the numbers should certainly be a major factor in your decision, but RE is more than just the numbers.  There are properties that are cashflow monsters that I personally wouldn't touch with a ten-foot pole because they'd be such a hassle to own and manage...and there are properties that are mediocre cashflowers, but I hold them because they're minimal work to manage and have incredible appreciation.

    What is the grade of this property and neighborhood, and what types of tenants would it attract?  (your decision may be different if it's a D-class property that's impossible to find good tenants for, versus if it's an A-class property that will rent to highly qualified tenants the moment you list it).

    Other considerations: what type of Capex do you see on the horizon? (if a new roof is just 5 years away, that might impact your decision). What type of appreciation (or depreciation) could this neighborhood experience? How well (or poorly) would managing this property fit into your lifestyle? (if the house is just down the street from your new home, it may be easy to manage...not so much if it's on the opposite side of the city).

    If you sold it, what would you do with that money? If your plan is to buy other real estate with the money, could you find properties that are better deals than this one? (obviously, it would probably be impossible to beat your 2.75% rate right now if you borrowed anything to acquire more properties).

    I agree with the others who mention that this property sounds like a mediocre cashflower...possibly even a poor cashflower...but cashflow isn't the only consideration.

    On the bright side: even if you have to bring your price down considerably to sell, it sounds like you have a solid equity position... deciding whether to pocket 100k vs. 125k (or whatever your expected net is) is a good problem to have!

    Good luck out there!

    1Reply
  • John Mathew
    Real Estate Agent · Member since 2019 · 143 posts · 74 votes
    4y

    Hello David! One of the most important question you should ask yourself is whether you would buy this house to utilize as a rental property if you didn't already own it. If the response is no, you  would sell; if the response is yes, you can keep it. However from my stand view, Sell the house and go. If you want to invest in real estate, try to learn how to calculate cash flow the Bigger Pockets way so that you can make a smart decision that generates income rather than drains your bank account further. I hope this helps you in some way. Good luck on your endeavors :D

    0Reply
  • Eric S.Pro Member
    Investor · Concord, NH · Member since 2018 · 28 posts · 19 votes
    4y

    Please sell it. My first house I did what you want to do and turned into a rental for 3 years – you can go back to the first post I ever wrote about it. My mortgage/taxes and insurance were $1710 and I made $2400 in rent. Everyone screamed at me to sell, because I was not accounting for CAPEX, maintenance or vacancies out of the $690 I had leftover. I sold it in 2020 before I owed cap gains (or had a huge expense to pay for) and took most of the money and bought a much larger value add-duplex with a partner. It was a lot more work to renovate vs a single family and we had to get hard money to fund the reno, but now its fully rented and my cut after all expenses ( PITI and the others mentioned above) is over triple the $690. Take the equity and run, and you can look for a better deal with higher return!

    1Reply
  • Jimmy Lin
    Investor · Houston, TX · Member since 2017 · 49 posts · 36 votes
    4y

    @David Kimball

    I think you already know selling is better. $200k plus profit is already pretty crazy. Sell it and take the capital gains exemption if you qualify.

    Since you said you need to do a fresh coat of paint and new carpet to rent it, why not do it now to help it sell faster? If it doesn’t sell, then your rental is ready.

    Paint and carpet it, then hire a company to stage it for $1500 - $2000. Do some landscaping, maybe even provide some seller assistance on the closing end. Drop the price to around $420-425k. Theres always a chance that multiple buyers will bid up if you under priced it.

    1Reply
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