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Updated over 1 year ago, 08/27/2023
Sell or Rent
Hi All - I bought a primary home in 2018 @ 2.75% for 650k and have ~450k remaining on the mortgage. I have my property listed for rent for $8500 and will likely rent between 7k-8K (similar homes rent for this amount). A potential renter just offered to buy my home off market for $1.1M, all contingencies waived.
Also, I'm in FL where climate change is a consideration of mine for long term stability of the market, as I've seen flooding and increases in insurance costs.
My ultimate goal is FIRE and I'm planning on moving to a lower cost of living area to increase my savings rate (Midwest, Portugal, AZ).
Recap:
Sell: 1.1M ( ~$500k Profit)
Hold: Rent for $7500
Do you want to be a landlord? Do you have a handyman and/or realtor that will assist with issues that come up or when the property needs to be prepared for another renter and rented? If you are never going back, I would probably just sell. $250k of your gain is also tax free (possibly $500k if you are married). That leaves you with ~$460k-$500k after taxes to invest somewhere else. Your return on equity is only 5.4% if you rent it.
Quote from @Charles Carillo:
Do you want to be a landlord? Do you have a handyman and/or realtor that will assist with issues that come up or when the property needs to be prepared for another renter and rented? If you are never going back, I would probably just sell. $250k of your gain is also tax free (possibly $500k if you are married). That leaves you with ~$460k-$500k after taxes to invest somewhere else. Your return on equity is only 5.4% if you rent it.
Thanks @Charles Carillo. This makes sense and I don't currently have any good property management team in place. Thanks for your input.
There are several aspects of renting a SFR and many things to consider. Chad Roberts was spot on about considering a Property Manager if you don't want to manage the property yourself. I would add taking time to seriously consider if you want to get into the Real Estate Investment Industry. There are many upsides but just as many pitfalls if you don't know what you're doing. If it's a healthy property with low maintenance renting is a good strategy but environmental conditions is certainly a concern. With a soft offer on the table yielding a solid return on investment and desires to move to another area I would recommend selling.
Sell to take advantage of the $250k/$500k tax free sales proceeds and reinvest in properties with better ROI.
We think the Midwest is a GREAT place for OOS investors to consider!
YES, we may be a little biased, but check out our blog here on BP comparing Detroit to other cities and Deep Dives on Metro Detroit cities & neighborhoods:
https://www.biggerpockets.com/...
(BP search feature can be problematic, so we’ve also added links @ our website under View Cities & Neighborhoods We Service)
Your biggest question shouldn't be WHERE to invest, but HOW you will invest!
Many OOS investors set themselves up for failure because they don't invest the time to ACTUALLY understand:
1) The Class of the NEIGHBORHOOD they are buying in - which is relative to the overall area.
2) The Class of the PROPERTY they are buying - which is relative to the overall area.
3) The Class of the TENANT POOL the Neighborhood & Property will attract - which is relative to the overall area.
4) The Class of the CONTRACTORS that will work on their Property, given the Neighborhood location - which is relative to the overall area.
5) The Class of the PROPERTY MANAGEMENT COMPANIES (PMC) that will manage their Property, given the Neighborhood location and the Tenants it will attract - which is relative to the overall area.
6) That a Class X NEIGHBORHOOD will have mostly Class X PROPERTIES, which will only attract Class X TENANTS, CONTRACTORS AND PMCs and deliver Class X RESULTS.
7) That OOS property Class rankings are often different than the Class ranking of the local market they live.
8) Class A is relatively easy to manage, can even be DIY remote managed from another state. Can usually allot 5-10% vacancy factor and same for maintenance.
9) Class B usually also okay, but needs more attention from owner and/or PMC. Vacancy and maintenance factors should be higher than for Class A as homes will be older, have more deferred maintenance and tenants will be harder on them.
10) Class C can be relatively successful with a great PMC (do NOT hire the cheapest!), but very difficult to DIY remote manage. Vacancy and maintenance factors should be higher than for Class A or B. Homes will have even more deferred maintenance and tenants will be even harder on them.
11) Class D pretty much requires an OWNER to be on location and at the property 3-4 times/week. Most quality PMCs will not manage these properties as they understand most owners won’t pay them enough for the time required and even then it’s too difficult successfully manage them.
***Only exception is if an owner has plan & funds to reposition Class D to Class C or higher.
Also, SERIOUSLY consider - do you really have the time to be a DIY landlord or should you hire a PMC?
Good luck with whatever you decide😊
- Michael Smythe
Quote from @Chad Roberts:
Hi All - I bought a primary home in 2018 @ 2.75% for 650k and have ~450k remaining on the mortgage. I have my property listed for rent for $8500 and will likely rent between 7k-8K (similar homes rent for this amount). A potential renter just offered to buy my home off market for $1.1M, all contingencies waived.
Also, I'm in FL where climate change is a consideration of mine for long term stability of the market, as I've seen flooding and increases in insurance costs.
My ultimate goal is FIRE and I'm planning on moving to a lower cost of living area to increase my savings rate (Midwest, Portugal, AZ).
If the 1.1m offer is serious and you really plan on completely moving out of the area and not rebuying later within south FL, it might be worth selling. Even with the climate issue, people are still flooding (see?) in here. You can probably make a lot better investments in a cheaper area like AZ or midwest , especially if you plan to manage it yourself. If not, you could use the profits for other investments if you are not really into RE.
If you plan to keep the house and rent it out, you could make a good income every month but it will be a much slower process plus you'll be paying rent somewhere else (unless you have enough to buy another primary). You'll need a good PM here and in my experience there are not a lot of them. I know a couple good ones, however.
You got a bit of a tough decision but it is easier if you know your longer term goals. From what I gather, you are probably better off selling.
@Chad Robertsto everyone's point, especially @Ray Hage's. I think this is a personal decision based on your end goal. However, don't let not knowing a good PM company deter you from retaining the home if that's ultimately what you want to do. I own a PM company and I'm happy to provide you with some insight into our services if you need it. But again, do what's best for you, and the rest will work itself out. Best of luck with your decision.
Regardless of your intents, I'd sell and take the cash some to mostly tax free. This is awesome. As you have mentioned climate change and the sky rocketing of insurance costs (or with companies pulling out, entire lack of it), will only eat into you.
Besides, as I am finding there are other investments, even in real estate to provide similar or better returns. Goodluck.