Owned my house for 6 years, some questions about renting it out.
Member since 2018 · 7 posts · 1 vote
Bought the house as a short sale at 260k and it recently got appraised for 320k, Mortgage is $1692. House was built in 84 and is in great shape with new carpets upstairs. My only concern is my ac unit is from 84 and still running good but I know its on its last leg.
Im assuming I would need to fix that first before renting it out but I was just looking for any advice on why it would be good to rent out my house instead of selling for the profit and moving up? Makes me nervous but I have seen people on here say they wished they would have rented out their first house instead of just selling. Since I got this house as a ss foreclosure I figure I am in a good position here.
Any advice would be greatly appreciated!
Does the $1692 include property tax and insurance? If not, you need to factor that cost in.
The AC would need replacing before it breaks. Is the furnace also just as old? I just replaced both the AC and furnace in my personal SFH for just over $7200. They were both also from the 1980s!
What kind of rent can your home demand? Look up similar rentals nearby on Zillow and Craigslist. They need to truly be similar to get a good idea on what you can demand for rent. Also look to see if these rentals are including any utilities or not to further determine what you can get. Does your area have a strong rental demand on your type of home?
Once you have that number, does it pay for your FULL mortgage (to include property tax, insurance, any HOA, etc)? Hopefully it pays more so that it will fund future repairs/maintenance the house will need.
Does the house have any unfinished projects? Damaged items that need repair? Severely outdated rooms, appliances, and the like? How much money would it take to get it rent-ready? You say it's in great shape, so hopefully not much or nothing.
If the cost to get it ready is not worth the rent income, don't rent it. If the rental income will not more than cover the mortgage, don't rent it.
Generally speaking, we are in a seller's market right now. So that's always a good option if renting would only cost you money each month.
Don't be nervous based on other people's regrets. Just stay logical and listen to the numbers. And don't emotionally inflate numbers either such as saying you could get X amount more in rent because your house is so beautiful (when others just like it only get another lower amount).
Does the $1692 include property tax and insurance? If not, you need to factor that cost in.
The AC would need replacing before it breaks. Is the furnace also just as old? I just replaced both the AC and furnace in my personal SFH for just over $7200. They were both also from the 1980s!
What kind of rent can your home demand? Look up similar rentals nearby on Zillow and Craigslist. They need to truly be similar to get a good idea on what you can demand for rent. Also look to see if these rentals are including any utilities or not to further determine what you can get. Does your area have a strong rental demand on your type of home?
Once you have that number, does it pay for your FULL mortgage (to include property tax, insurance, any HOA, etc)? Hopefully it pays more so that it will fund future repairs/maintenance the house will need.
Does the house have any unfinished projects? Damaged items that need repair? Severely outdated rooms, appliances, and the like? How much money would it take to get it rent-ready? You say it's in great shape, so hopefully not much or nothing.
If the cost to get it ready is not worth the rent income, don't rent it. If the rental income will not more than cover the mortgage, don't rent it.
Generally speaking, we are in a seller's market right now. So that's always a good option if renting would only cost you money each month.
Don't be nervous based on other people's regrets. Just stay logical and listen to the numbers. And don't emotionally inflate numbers either such as saying you could get X amount more in rent because your house is so beautiful (when others just like it only get another lower amount).
@William Carr, @Nicole A. is right on the money. Many people here wish they had held on and rented, but just as many have horror stories of holding onto something that wasn't worth it just because they felt like selling an asset was giving up on appreciation potential.
What you need are some solid numbers. Like Nicole said, you need to have a firmer idea of what you could get for it, and what it would take to make it rent-ready. Big ticket items like HVAC, boiler, etc will need to be replaced if they are still original. Even if they were replaced in the 90s or 00s, you might be looking at a replacement sooner than you think. Other big items like flooring wear out A LOT faster with a rental - and I know the carpet is new, but you'll likely be looking at replacing that with something tougher in a few years time if you decide to rent it out.
Now, if you can rent it out for a good amount ($2500 maybe? I don't know your market) and assuming your mortgage above includes insurance and taxes, then maybe it's worth it, but you need to have a realistic idea of what you can get and what your costs will be, both short and long-term.
The great thing about selling will be that you can get all your capital gain tax-free, since the Sec 121 exemption allows for $250k (single)/ $500k (married) of tax-free gain on the sale of a primary residence that you've occupied for at least 24 of the past 60 months, which it sounds like you definitely have. So that's some tax-free cash in your pocket. You would still need to pay the depreciation recapture tax, however.
If you don't need the cash and your primary goal is to keep that capital working for you as an investment, you could always sell and use the tax-free equity to buy something in a cheaper market. Heck, with $100k or so in equity (just guessing based on purchase price and how long you've held it) you could put down payments on 4 solid cash flow properties here in Birmingham (and likely other markets in the South and Midwest). Ours rent for an average of $950 per month, just as an example, so it might behoove you to run the numbers on what you could get with that money and which scenario makes the most financial sense. If you need to spend $15000 to get the house rent ready and then can only barely cover your mortgage, you could most definitely be putting your existing capital to work in a more efficient way.
I would suggest your first step is to determine how much you could make selling it, how much it would cost to make it rent-ready, and how much you can reasonably rent it for (and be conservative). Then do some research on good rental markets and take a crack at seeing what your sales proceeds could buy you. Runs some numbers and compare your options logically. The answer will present itself.
As Nicole said, don't let the regrets of other people drive your decision. Everyone in REI has regrets and successes, and everyone's start is a little different. Just do what makes the most financial sense.
If you have any questions about the Birmingham market, feel free to reach out any time!
Good luck!
Clayton
Hi William! I think it really depends on the market rent in your area. If you think that you can make a profit after taking the cost of the mortgage into consideration, I'd say go for it!
If you do decide that renting is the right move for you, there is plenty of free landlord software out there that can make self-managing your property an easy process. Feel free to reach out to me directly through PM if you have any questions about software or getting started as a landlord.
Best of luck!
@William Carr, @Nicole A. is right on the money. Many people here wish they had held on and rented, but just as many have horror stories of holding onto something that wasn't worth it just because they felt like selling an asset was giving up on appreciation potential.
What you need are some solid numbers. Like Nicole said, you need to have a firmer idea of what you could get for it, and what it would take to make it rent-ready. Big ticket items like HVAC, boiler, etc will need to be replaced if they are still original. Even if they were replaced in the 90s or 00s, you might be looking at a replacement sooner than you think. Other big items like flooring wear out A LOT faster with a rental - and I know the carpet is new, but you'll likely be looking at replacing that with something tougher in a few years time if you decide to rent it out.
Now, if you can rent it out for a good amount ($2500 maybe? I don't know your market) and assuming your mortgage above includes insurance and taxes, then maybe it's worth it, but you need to have a realistic idea of what you can get and what your costs will be, both short and long-term.
The great thing about selling will be that you can get all your capital gain tax-free, since the Sec 121 exemption allows for $250k (single)/ $500k (married) of tax-free gain on the sale of a primary residence that you've occupied for at least 24 of the past 60 months, which it sounds like you definitely have. So that's some tax-free cash in your pocket. You would still need to pay the depreciation recapture tax, however.
If you don't need the cash and your primary goal is to keep that capital working for you as an investment, you could always sell and use the tax-free equity to buy something in a cheaper market. Heck, with $100k or so in equity (just guessing based on purchase price and how long you've held it) you could put down payments on 4 solid cash flow properties here in Birmingham (and likely other markets in the South and Midwest). Ours rent for an average of $950 per month, just as an example, so it might behoove you to run the numbers on what you could get with that money and which scenario makes the most financial sense. If you need to spend $15000 to get the house rent ready and then can only barely cover your mortgage, you could most definitely be putting your existing capital to work in a more efficient way.
I would suggest your first step is to determine how much you could make selling it, how much it would cost to make it rent-ready, and how much you can reasonably rent it for (and be conservative). Then do some research on good rental markets and take a crack at seeing what your sales proceeds could buy you. Runs some numbers and compare your options logically. The answer will present itself.
As Nicole said, don't let the regrets of other people drive your decision. Everyone in REI has regrets and successes, and everyone's start is a little different. Just do what makes the most financial sense.
If you have any questions about the Birmingham market, feel free to reach out any time!
Good luck!
Clayton
Wow thank you very much for the info! I did not know about the tax free capital gain that is huge! Thank you all for the help, I have a lot more learning to do and might end up just selling the place after all. The house is in a smaller rural area but it is getting more built up slowly and home costs there have gone up and there are lots of houses getting flipped.
@Nicole A. I see you are from the Maryland area also! I live 20 mins from Annapolis. Currently looking for investing clubs around here and trying to meet some mentors.
@William Carr oh yes! The Sec 121 capital gains tax exemption is a MASSIVELY powerful tool. As long as you've lived in the property for at least 24 months (can be non-consecutive) out of the previous 60 months, you qualify for the $250k (if you're single) or $500k (if you're married filing jointly) of tax-free capital gain (note that this for capital gains tax, not depreciation recapture, so you'll need to speak with a CPA to make sure you file correctly). You can use this exclusion once every two years, so some people will just move to a property they think is going to increase in value every two years or so. Not always a solid plan, but for people that are moving anyway it can be a very useful little tax benefit.
If you think the area is going to continue to improve and prices go up, and the cost to make the house rent-ready doesn't make the numbers fall apart, you could always rent it out for up to three years and then do a combo 121 and 1031 exchange. You'd need a good CPA and a Qualified Intermediary (for the 1031), but basically, you could take the Sec 121 exemption mentioned above (since you'd still have lived there for 2 out of the past 5 years if you only rent it out for 3) and then use the remaining value to purchase another investment property through a 1031 exchange, deferring taxation on the sale entirely. This would allow you to take advantage of an appreciating market and keep your capital working for you as an investment. If, after three years, you decide you don't need the cash from the Sec 121 but you like where the market is going, you could continue renting it out until you want to sell it, then use the 1031 exchange to leapfrog into new investment property(ies) while deferring taxes on the sale. You wouldn't be able to pocket any cash, but sometimes that isn't the best course of action anyway.
Long story not-so-short: you have lots of options now and going forward. Once you have a clearer idea of what your numbers look like you'll be able to decide whether holding it as a rental is the right move.
Good luck!
Bought the house as a short sale at 260k and it recently got appraised for 320k, Mortgage is $1692. House was built in 84 and is in great shape with new carpets upstairs. My only concern is my ac unit is from 84 and still running good but I know its on its last leg.
Im assuming I would need to fix that first before renting it out but I was just looking for any advice on why it would be good to rent out my house instead of selling for the profit and moving up? Makes me nervous but I have seen people on here say they wished they would have rented out their first house instead of just selling. Since I got this house as a ss foreclosure I figure I am in a good position here.
Any advice would be greatly appreciated!
From a financial standpoint let's look at the numbers.
Assumption debt is $1,692/monthly
Rent amount $2,500
Add 10% management fee of $250
$2,500
- $1,692
- $250
= $558 cash flow monthly
$558 × 12 = $6,696 annually
$6,696 ÷ $240,000(assuming principal paid from $260k) = 2.79% net return without any maintenance expenses
Horrible return for that level of financial investment
Or
$60,000 to spread out as downpayments
That's 3 $100k houses or 6 $50k houses
$3,000 in rent using the 1% rule for 3 $100k houses (still...horrible return for that level of financial investment)
$4,500 in rent averaging $750 per with 6 $50k houses.
I would much rather have 6 houses than 3 or 1.
If you needed cash in the event of a life emergency it's easier to clear a house for $50k than it is for $100k. You have 5 houses still & able to still cover debt. Sell 1 house with $100k & you're left with 2 while back at break even or losing money.
Real Estate works on 4 year cycles with mid term elections. If a blue wave shows up come November a lot of people on the 1% are going to lose their backside.
Democrats give entitlements. Republicans limit existing entitlements issued by Democrats. Go entitlements when renting. They never go away regardless of who holds the chambers of Congress.
Flip that house & buy 6 houses then rent to Section 8 tenants.
Best of luck to you.
@William Carr You've gotten a lot of great advice on selling vs renting so I'm not going to add to that. Just wanted to give my $.02 on the AC: If it aint broke, don't fix it. I had a 20 something year old furnace, hot water heater, and AC in my first house. Did great for the 1.5 years I was there and I sold it that way. Those old units last way longer than the new units, they're just not as efficient. If you rent, wait for it to break. If you sell, replace before listing. I didn't because well, I couldn't afford it lol.