I am moving. Should I sell my current house or rent it out?

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I am moving. Should I sell my current house or rent it out?

Chris Lefstad
Minnetonka, MN · Member since 2014 · 5 posts · 1 vote

Hi BP-

My wife and I have been looking to upgrade houses for about a year now, and finally closed on our new home just yesterday. We both have really enjoyed the search and have been considering making the leap into real estate investing by holding onto our current primary residence and renting it out. If we were to do this, we'd get a PM to find tenants and do the legal/leasing for us in exchange for one month's rent, but I would take the management from there.

I was introduced to BP through the podcasts, and have been reading up on real estate investing, and I'm pretty convinced that I want to get into buy & hold investing as a retirement strategy, but I need some advice as to if my current home is the right place to start. 

  • I owe $140,000, and could sell for about $175,000
  • After expenses, I'd cash flow about $100 UNTIL I pay off a $10K second mortgage that I have on it. So, if I buckle down and get that paid off quick, I would soon be cash flowing $350/mo

My thinking is that selling this thing would cost almost half of the equity that I have into it, but on the other hand I don't know if there are better things I could do with the equity I'd get. HELP!

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Jonathan Cope
Professional · Jersey City, NJ · Member since 2014 · 154 posts · 87 votes
12y

Chris,

Congratulations on the new home purchase and your consideration of real estate investing.

Consider listening to podcast 78 as a benchmark for entering investment as you are.

@Brie Schmidt discusses how budgeting could assist you with your $10k effort.

Consider reviewing craigslist for your area as a resource to confirm available area rents, as does @Michele Bruce per her podcast.

We don't give away fee to PMs for tenant sourcing or screening.

You'll need a relationship with your tenant and it should begin before you agree to have them rent your place.

Landlord work early in an investing career tends not to be an arms length effort.

Be wary of trying to make it so for any stage.

Yours is likely not really a question as to what to do with the equity you have in the home but more as to whether you want to be a landlord and whether your market is tenant rich.

Good luck.

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  • Jonathan Cope
    Professional · Jersey City, NJ · Member since 2014 · 154 posts · 87 votes
    12y

    Chris,

    Congratulations on the new home purchase and your consideration of real estate investing.

    Consider listening to podcast 78 as a benchmark for entering investment as you are.

    @Brie Schmidt discusses how budgeting could assist you with your $10k effort.

    Consider reviewing craigslist for your area as a resource to confirm available area rents, as does @Michele Bruce per her podcast.

    We don't give away fee to PMs for tenant sourcing or screening.

    You'll need a relationship with your tenant and it should begin before you agree to have them rent your place.

    Landlord work early in an investing career tends not to be an arms length effort.

    Be wary of trying to make it so for any stage.

    Yours is likely not really a question as to what to do with the equity you have in the home but more as to whether you want to be a landlord and whether your market is tenant rich.

    Good luck.

    1Reply
  • Jean BolgerPro Member
    Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
    12y

     For me, the decision would have more to do with the rest of your financial situation. Are you including that 10k second in  the 140k you owe (just checking)?  Even so, you're only looking at around 25k net on your sale after selling costs. You'll probably have to pay at least 20% down on a new investment property, so that's not going to buy you a lot unless you're in a really affordable market. My guess is that keeping the current house for a while would be a good idea...

    0Reply
  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    12y

    @Chris Lefstad 

    I don't know.  You mentioned that you'd make $350 after paying off a second note.  Does that $350 after paying for the following items on a monthly basis?  Some of these items may be paid by the tenant.  If you post all of the following items here, I'll post an evaluation of hold vs sell from my perspective.

    Taxes

    Sewer and Water (generally paid by tenant)

    Trash (generally paid/dealt with by tenant)

    Heat/Utilities (generally paid by tenant)

    HOA (probably not applicable)

    Cap Ex and Ops (my personal minimum is $150/roof/month)

    Insurance

    Mgmt Fee - as a % (general consensus here on BP is 10%. include it even if you think you are going to self manage)

    Vacancy- as a %. (8% represents 1 vacant month/unit/year)

    0Reply
  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    12y

    Welcome to BiggerPockets, Chris.  How long have you lived in your home?  How much will it rent for?

    0Reply
  • Chris Lefstad
    OP
    Minnetonka, MN · Member since 2014 · 5 posts · 1 vote
    12y

    Thanks, all, for the quick response. Here are more details:

    @Aaron Montague 

    • I owe $140,000 (would only owe $130K after paying off second mortgage)
    • My mortgage payment is $1050 (including taxes & insurance)
    • Lets just say $1350 for rent a month, as that seems pretty realistic
    • I would pay the PM one month's rent just to do leasing
    • I was planning on managing the property from there myself, but I like the idea of including 10% to justify my own time spent managing the property
    • Based on my discussion with a potential PM, 8% vacancy seems reasonable here

    @Jon Klaus 

    I've lived in this house for 10 years, and expect it to rent for $1350.

    0Reply
  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    12y

    If you sold it your gain would be tax free.  I'd be on the fence about renting or selling with your numbers, still I'd probably sell and look for a more ideal rental or two. 

    0Reply
  • Curtis BidwellPro Member
    Rental Property Investor · Olympia, WA · Member since 2014 · 781 posts · 744 votes
    12y

    Remember that you have costs on both sides of the selling and repurchasing equation. With the numbers given it looks like you will only net out almost $20k after sales costs -not much to work with toward the purchase a new property.  Also, you already know this property well.  I think you have the basis for a decent long-term rental, especially after you get that second dealt with. Rents will go up about 3% a year and you'll do fine.  

    Don't be afraid of interviewing prospective tenants and doing a contract yourself.  Most competent people are more than capable. Standard contracts are readily available to get started with.  After you do it once you'll build some confidence and realize that $1350 is a good wage for a few hours work (as apposed to handing it to a PM).

    Podcast Guest on Show #95
    0Reply
  • Account Closed
    Investor · Santa Barbara, CA · Member since 2014 · 96 posts · 23 votes
    12y

    Hi Chris, and welcome. I'm someone who likes to have options. Right now, it seems like you definitely have options.  When looking at your cash flow, be sure to factor in repairs, capital expenses and any maintenance you might provide. 

    If I were in your position, I think I'd rent it out if at all possible.  If you don't like landlording, you could always sell, although there would be tax consequences - you should consult someone knowledgable in that area.  

    I think that with a little research here on BP, you could easily handle screening tenants and setting up a lease. The info is all here.  

    And keep in mind that if you end up liking landlording, having equity in 2 properties can help you get financing for another.  Best of luck to you.  

    0Reply
  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    12y

    @Curtis Bidwell makes a good point about conducting the rental process yourself.  Even if it takes 10 hours, an extra $1350 in your pocket is huge.

    The numbers on this place will tell the story:

    Rent $1350

    Mortages, Interest, Taxes, Insurance $1050

    $300 left for everything else

    $150 budgeted for Capital Expenditures (new roof, new water heater, etc) and maintenance  (minor plumbing repair, fixing a busted screen door, etc) - $150 left

    Vacancy - $108/month - $42 left

    That is what you get to put in your pocket at the end of each month.  You can't afford to pay a PM to put a tenant in there without losing money for the year.  Your 10% monthly PM fee isn't in there either.  

    This is not a property that will make a good long term rental.  I don't know much about the Minnetonka area, but I do know it is right outside of Minneapolis.  I agree that you might get a 3% increase in rent, but by the time your rents reach a solid profit margin, you'll be quite a bit older.

    I recommend selling and grabbing yourself a 4 family in the area.

    0Reply
  • Marc Jolicoeur
    Investor · Minneapolis, MN · Member since 2012 · 187 posts · 117 votes
    12y

    @Chris Lefstad I found this thread because of a Minneapolis keyword search.  I have a few comments to add here.

    - $1350 per month sounds like too low rent for a single family home in Minnetonka. If your place is in Minnetonka, I would have expected it to rent it higher.  How many bedrooms, baths and garage?  It's a single family home and not a townhouse right?

    - Western burbs are hot and expected high growth in population and jobs.   I would expect you can bet on pretty good appreciation in the next 5 years if your place has good bones.  Your $175000 home is also below median so it will continue to be attractive to first time home buyers. In 5-10 years when millennials start making families, there will be even higher demand for good homes in good school districts.

    - 25K in cash from your equity does not give you enough 20% downpayment to buy anything better as a rental around here.  $100,000 houses in Minneapolis may cashflow better but are risky purchases due to location or condition. 

    Even if you only paid down mortgage principle and only made positive cashflow when there were no vacancies and no major repairs, I would suggest you keep the house and practice being a landlord for a few years.  

    Also consider leasing it with an option to buy.  When you get paid off by your tenant buyer, you would have probably $40K or $50K or more in equity.

    0Reply
  • Leon Y.
    Real Estate Investor · Las Vegas, NV · Member since 2011 · 117 posts · 28 votes
    12y

    If you use agents to sell your property, chances are you won't be netting much if anything at all after the sale (I generally estimate about 8% selling expenses in my market). Don't waste that equity. Keep holding on to it. Besides, having debt on your property helps you save money on taxes too. Don't necessary use all the money you have to pay off debt (unless you have a 10% interest mortgage or something crazy like that). Save the money for purchasing the next property.

    0Reply
  • Chris Lefstad
    OP
    Minnetonka, MN · Member since 2014 · 5 posts · 1 vote
    12y

    Awesome. Thanks, everyone for the great insight. I'm going to call a PM to take a look at the property and give me a second opinion on what it would rent for. It sounds like $1350/mo would make it a tough decision, but maybe they think I could get more for it, in which case I'd want to hold. I'll let you know how that goes!

    0Reply
  • Jay LohnBusiness Member
    Real Estate Agent & Investor · Champlin, MN · Member since 2014 · 179 posts · 43 votes
    12y

    I am with Marc on this one $1350 sounds way to low for a rental in Minnetonka.  Call renterwarehouse.com and they will be able to give the accurate rent rate in a minute.  Then you can have accurate numbers to help influence your decision.

    Lohn/Paulno Property Management, LLC53 Reviews
    WebsiteView Page
    0Reply
  • Chris Lefstad
    OP
    Minnetonka, MN · Member since 2014 · 5 posts · 1 vote
    12y

    @Jay Lohn @Marc Jolicoeur -

    I'm not sure why BP lists me as Minnetonka, and its not allowing me to change it, but the actual property is in Buffalo.

    All-

    I met with a Property Management company yesterday, and they said $1400/mo ($50 more  than I expected) is reasonable. They recommend an 18 month lease so that the renewal will happen in the summer, which is a more competitive time for tenants. They seemed confident that we could bump up rent to $1500 then.

    As @Aaron Montague outlines above, I'm not really getting much cash after all expenses are taken into account. I'm beginning to realize that this is not a no-brainer investment situation, but on the other hand this is easily my best chance to get my feet wet in real estate investing. I'm leaning towards holding and using this as a learning opportunity at the very least (to @Account Closed 's point).

    Someone please talk me out of this if its a dumb idea! Thanks again for all of the helpful insight!

    0Reply
  • Jay LohnBusiness Member
    Real Estate Agent & Investor · Champlin, MN · Member since 2014 · 179 posts · 43 votes
    12y

    what is your cash flow breakdown per month vs. the net gain you could get on the sale of your property?

    Will you have any problem getting approved for financing on your new place if your were to hold on to your current property?

    Lohn/Paulno Property Management, LLC53 Reviews
    WebsiteView Page
    0Reply
  • Jay LohnBusiness Member
    Real Estate Agent & Investor · Champlin, MN · Member since 2014 · 179 posts · 43 votes
    12y

    where in buffalo is your property, I went to high school in buffalo?

    Lohn/Paulno Property Management, LLC53 Reviews
    WebsiteView Page
    0Reply
  • Chris Lefstad
    OP
    Minnetonka, MN · Member since 2014 · 5 posts · 1 vote
    12y

    @Jay Lohn - Small world! 

    The property is a few blocks South of Lake Pulaski beach. We're just upgrading and moving across town.

    Using what I've learned from earlier posts, here is a summary of my two options:

    Sell

    • Expect a $175K sale price. I owe $140K now
    • After Real Estate fees I'd take home about $20K tax-free
    • Not sure what I'd do with the money. Probably buy a rental after saving for another year

    Hold

    • At first, the tenants would strictly pay off my mortgage (w/ insurance & tax), so I'd have to foot the bill on any maintenance, repairs, etc
    • However, once I pay off my $10K second mortgage on the property (which I should be able to do within a year), that would free up $350/mo to save up for CapEx, Vacancy, and PM (per @Aaron Montague 's post)

    Here is my line of thought. I'll have $30K tied up in this property ($20K that I could get out by selling, and another $10K to pay off that 2nd note). I'll have it cash flowing at least a bit, the renters will be paying $400/mo principle, and I can write off the interest on this property, its not a bad investment for the money. RIGHT? I guess my main hesitation is that I don't trust myself to consider all of the hidden expenses.

    0Reply
  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    12y

    @Chris Lefstad 

    I still vote sell.  Even after the increase to $1500 in rent.  From an investor point of view, I'd pay $99k for this place AFTER the rent went to $1500.  If you can get the $175k, take it and move on to another 4 family rental property.

    Here is what your place looks like to me, by the numbers, AFTER the increase in rent to $1500:

    Mortgage Rate 5.00%

    Length of Mortgage in years 30

    Monthly Mortgage payment $751.55 (PITI = $1050)

    Taxes $150.00 (made up but PITI = $1050)

    Sewer and Water $-

    Trash $-

    Heat/Utilities $-

    HOA $-

    Cap Ex and Ops $150.00

    Insurance $150.00 (made up but PITI = $1050)

    Mgmt Fee $150.00 (this does NOT include paying a month's rent at each turnover)

    Vacancy $120.00 (slightly less than 1 month per year)

    Total Expenses $1,471.55

    Total Revenue $1,500.00

    Cashflow/month $28.45

    Cashflow/year $341.40 

    Why I would pay $99k after the jump to $1500:

    I look for SFH investments where I can make $150/month cash flow AND 15% Cash on Cash return.

    Mortgage Rate 5.00%

    Length of Mortgage in years 30

    Monthly Mortgage payment $398.59

    Taxes $150.00

    Sewer and Water $-

    Trash $-

    Heat/Utilities $-

    HOA $-

    Cap Ex and Ops $150.00

    Insurance $150.00

    Mgmt Fee $150.00

    Vacancy $120.00

    Total Expenses$1,118.59

    Total Revenue $1,500.00

    Cashflow/month $381.41

    Cashflow/year $4,576.92

    Cash on Cash Return 15.13%

    0Reply
  • Eddy OgbekhiluPro Member
    Investor · Lutz Florida . · Member since 2018 · 103 posts · 34 votes
    4y
    Quote from @Chris Lefstad:

    Hi BP-

    My wife and I have been looking to upgrade houses for about a year now, and finally closed on our new home just yesterday. We both have really enjoyed the search and have been considering making the leap into real estate investing by holding onto our current primary residence and renting it out. If we were to do this, we'd get a PM to find tenants and do the legal/leasing for us in exchange for one month's rent, but I would take the management from there.

    I was introduced to BP through the podcasts, and have been reading up on real estate investing, and I'm pretty convinced that I want to get into buy & hold investing as a retirement strategy, but I need some advice as to if my current home is the right place to start. 

    • I owe $140,000, and could sell for about $175,000
    • After expenses, I'd cash flow about $100 UNTIL I pay off a $10K second mortgage that I have on it. So, if I buckle down and get that paid off quick, I would soon be cash flowing $350/mo

    My thinking is that selling this thing would cost almost half of the equity that I have into it, but on the other hand I don't know if there are better things I could do with the equity I'd get. HELP!


    0Reply
  • Eddy OgbekhiluPro Member
    Investor · Lutz Florida . · Member since 2018 · 103 posts · 34 votes
    4y

    Post: I am moving. Should I sell my current house or rent it out?

    Hello Chris,

    This is a follow-up to a post u made about 8years ago regarding whether to sell or rent out ur property in Buffalo...what did you end up doing with the property? Would you have any idea as to the current market value is  today, what are the lesson learnt from this ?

    Looking forward to hearing from you in this regard and any other related issues  .

    Thanks

    Eddy.Ogbekhilu. 

    0Reply
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