Making a final decision—rent or sell my home

15 Replies

Hello, everyone. I've wanted to get into investment properties for some time, but am finally looking to make the switch. I just wanted to run some numbers by everyone and get feedback on if I'm missing anything.

First, what is prompting this decision. We have purchased a new home that will be our primary residence and initially wanted to sell our first home. We're in an area (Indianapolis suburbs) that has been particularly hot. I purchased our home five years ago for $150k. Homes in our neighborhood this past spring to summer sold for between $200k and $250k. I expected our home to go somewhere between that range, which is where it's been listed. The market has slowed with the fall season and our home doesn't have the latest updates, so it's not sold yet. I think we'd need to drop the price down to $200k most likely to get movement at this point. And that's just lower than what I was hoping to get and lower than comps in our neighborhood. That being said, our home is very basic and is set up well to be a rental property (clean but nothing fancy).

So we've secured financing for both the existing home and our new home and will still be in the area (close enough to manage the property ourselves). Here's the math I've come up with:

  • Remaining mortgage amount: $136k
  • Rental income: $1400 (this is right in the middle for our area), $16,100 less vacancy allowance.
  • Total annual expenses: $4721 (29.32%) This is low, from what I understand. I used the 1% rule for repairs/maintenance and it's in line with my own repairs since I lived here. The 50% rule would put it much higher, obviously and would create a negative cash flow. So expenses are somewhere I'm looking for someone to speak up if I'm way off. I also didn't budget for gas and electricity utilities, because I assume that for single family homes, the renter would pay those. So those expenses are based on the following:
    • Taxes: $1,700
    • Repairs and CapEx: $2805
    • Sewage Utility: $60
    • Insurance: $866
    • HOA: $100
  • NOI: $11,379
  • Mortgage: $9,345.12
  • Net income after mortgage: $2033.88
  • Cap rate: 8.37%—I calculated the cap rate based on my current mortgage amount remaining, since this isn't a new purchase. I hope that's right. 

These are the numbers I've come up with. I'm still not 100% decided, but will be deciding this week. Of course, if we drop our price to the $200k range, I expect it will sell. But like I said, I was hoping for a higher amount and if anything else, waiting until the spring should have a positive impact on the price. 

Any input would be appreciated, thanks!

No comment on your numbers, but I thought I would add a few more topics:

While it is your personal residence you might be able to get a HELOC on it, which you could use for future purchases or cap ex. Not many banks will give a HELOC on a rental property.

When you sell you are paying for realtors, closing costs and requested repairs. Let's call that 8% conservatively. 200K*.92 = 184k. 184-136 = 48k.  Are your options for starting fresh with a new rental property with 48k better than the numbers for your current home? I don't know your market, so I really couldn't say.
good luck!

Originally posted by @Amanda G. :

No comment on your numbers, but I thought I would add a few more topics:

While it is your personal residence you might be able to get a HELOC on it, which you could use for future purchases or cap ex. Not many banks will give a HELOC on a rental property.

When you sell you are paying for realtors, closing costs and requested repairs. Let's call that 8% conservatively. 200K*.92 = 184k. 184-136 = 48k.  Are your options for starting fresh with a new rental property with 48k better than the numbers for your current home? I don't know your market, so I really couldn't say.
good luck!

That's a great idea. So, to be clear, you're suggesting that I take out the HELOC on it while it's still my primary residence so that I can get equity out of the house while I still have it as a primary residence, correct?

Just a quick glances says that if you pulled your equity out of the house - let's say it is worth $200k - you'd be at negative cash flow. So that's not a very sustainable model. On the flip side, I would hope that you've maintained your house in good shape and thus repairs & capital expenses are listed high. 

Another thought: the definition of a hot area is one that houses just get snapped up when you list them. If you're thinking you have to start price dropping, I might dispute that definition of hot. 

Based on what you've posted here, I would sell. The numbers don't look like a good rental property to me. 

3rd option to consider.  Rent for no more than two years, then update it and sell it to owner occupier - get it closed within a year.  You want to take advantage of the home owner's tax exemption on the capital gain.  I believe you have to have lived in the home 2 of the last 5 years to do so.  Then you will pay no capital gains tax on the sale.  This is a really sweet tax incentive.

Originally posted by @Larry F.:

3rd option to consider.  Rent for no more than two years, then update it and sell it to owner occupier - get it closed within a year.  You want to take advantage of the home owner's tax exemption on the capital gain.  I believe you have to have lived in the home 2 of the last 5 years to do so.  Then you will pay no capital gains tax on the sale.  This is a really sweet tax incentive.

I’ve lived in the home for five years. 

So you’re saying that if I were to rent the home out (with me moving out at the same time) in October, I could rent it for up to two years and still get the homestead tax exemption? Clearly I need to read up on the tax code before I make a decision on this. 

Yes, you actually need to close on it within three years of moving out, so that's why I said 2 years to rent.  But check with your CPA or tax advisor on the details to be sure.  I am not a tax expert.

Originally posted by @Larry F.:

Yes, you actually need to close on it within three years of moving out, so that's why I said 2 years to rent.  But check with your CPA or tax advisor on the details to be sure.  I am not a tax expert.

 Thanks so much! Will do. 

Renting out your old home is one of the easiest ways to get experience with rental properties. Are the numbers good? Not particularly. But it's your quickest path to becoming a landlord.

The value of the home is too high to cash flow with rent as low as $1400. Additionally if you hold and markets possibly drop as forecasted you are going to lose your equity. You also do not want a tenant in a SFH when do try to sell so most likely that vacancy, while selling, would negate any possible gains.

This is not a good investment property at this time and I would be selling asap. Shed yourself of what most likely will be a major PITA.

Hi @Ryan Gibson

Why not consider an owner financing deal/wrap around mortgage?

You get a big down payment, you get monthly revenue and repairs/maintenance needed. Plus you might be abe to save on realtor fees. It's a win-win situation.