Advice Needed - Sell or Rent
I currently have a home that is worth anywhere between $300k - $400k. We have lived here for 3 years and owe $260k (purchased for $280k). We are relocating out of state and I'm interested in using this as an opportunity to begin making money through real estate.
I'm trying to decide whether to rent (I've been told I could rent it at around $2,250/mo) or sell. Based on current estimates, we stand to make a profit of $20k - $100k depending on how much we can sell for after all the seller fees are paid.
With all the costs of renting I don't stand to make very much if anything off of the rental. But I would be able to keep the house as an investment for the long term, and it could pay off down the road as I pay down my mortgage. Plus it could be a safety net for us if the relocation doesn't work out.
I could also sell, and reinvest in more appropriate rentals, like town homes or condos. As I'm concerned that I'll have a hard time getting $2,250/mo for my home.
Any advice would be greatly appreciated!
First, you need to figure out a realistic rent. That will form the basis of your decision.
After that, you have to consider all your expenses, Property Management, PITIA (Principle, Interest, Taxes, Insurance, Association Fees), CapEx and maintenance.
If you are happy with the cash-flow amount that is left, then you can consider renting. If not, you'll most likely be better off selling.
Completely agree with Jeremy. In addition, I would try to narrow the estimated sell price. 100k is a big range and if you're on the high end of that you could sell and use your earnings as down payments on a couple lower priced units potentially.
Thanks to both of you for your help! Unfortunately I'm not able to sell or rent until March of next year - so I'm trying to keep my expectations in check. I'll try my best as a novice to lay out the numbers of both:
Based on today's values, I've been told by a couple of realtors that list price would be just under $400k, with the expectation that negotiations would bring that down to a conservative estimate of $365k (which seems high to me because it's almost $100k more than I bought the house for 3 yrs ago). If I sold for $365k, that would be a gross profit of $115k (assuming my loan payoff is $250k at that point). Minus 6% realtor fees and I'm at $93k. I'm not clear on all other fees that I would need to pay, as I've only sold one other home before & I can't remember what else I would need to pay. So I'm going to assume $3k in additional costs to close for easy math. That leaves me with a net profit of $90k.
Now for the rental numbers. I've been checking comparable rentals in the area - and honestly there isn't a lot that have specs in the range of my home ( 6 beds, 4 baths, and 4,200 sq ft.). I have an older home ('78), but it is updated and sits on a park with 1/4 acre. In discussions with a property management company, they suggested a rental rate of $2,250/mo. Guest pays all utilities. So from that I would need to subtract my mortgage, taxes, insurance, property management fees (if I go that route), and maintenance/repair savings. That brings me down to a margin where I may not even break even. So I would consider not using a property management company, but I'm not sure the added stress would be worth making an extra couple hundred dollars.
So if I were to simply rent, I would really like to go for something near $2,400/mo, but I'm afraid there isn't demand enough to justify the price.
If I sell, I could just pocket the cash and use it as a down payment towards our next home in a more expensive market.
Or I could sell and use some or all of the cash as down payment(s) on a more suitable lower cost rental property(s).
Given this information, I'm curious what the consensus would be in your opinions. Thank you in advance!
I would be inclined to sell and use the money to invest in other properties. The rental numbers aren't looking great.
Originally posted by @Mike Farr:
If something happens to the renter -- they loose a job, break a lease etc. and you are out of state, can't readily find another renter, would there be a problem servicing the $280,000 mortgage? What is the local rent market like and house price movement?
Hi Greg,
It would probably be difficult at first to pay the mortgage initially. I could handle a couple of months (their deposit + personal savings), but any longer and it would be a real strain. I've found what appears to be a good property management company, so they would be instrumental in helping in that case.
The local market appears to be doing well, I live in Utah. My agent thinks that my home may appreciate by about 3 - 6% over the next couple of years. It is more heavily owner occupied than renter however.
Personally, If I were in your shoes, I would sell the house and find a good deal on SFH that needs work. Live in it, rehab it and then sell it. Then move on to the next one. If you stayed in it for a year you could qualify for an FHA 203K loan which will allow you to buy with 3.5% down and roll in the rehab costs. If you stayed in it for 2 years, you could avoid the capital gains tax.
Talk to the property management company about the prospective tenant pool for this size of home. In my experience, larger homes (at least up here) don't make the best rentals. How is it that a tenant needs 6 bedrooms, can pay over $2000/month and isn't buying? It's usually a temporary situation or distress. The great, 3-5 year tenants are not the majority.
If the place gets beaten up by tenants, because of the square footage, it will cost a lot to get market ready if you decide to sell it later.
The only two arguments for keeping a property like this is if you have a killer loan that you can no longer get or if you are in a soft market and can't sell for what you need. It's unlikely that either one of those scenarios are the case.
Hope this helps.
Wm
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I agree with @Jim Brown and @William Hochstedler.
Given the info you have provided (and assuming you have more like $100k equity and not $20k) I would sell.
You stated that you have lived there for 3 years, so you can also take all that gain tax free and roll it into your next one. How many years would it take you to make $100k after taxes from renting it? (hint: it would take a LOOOONG time, even assuming it rents for full price, is never vacant, never needed maintenance or repairs and you manage it yourself).
Hey Mike, that really is the big question...20k or 100k, or anywhere in between. One thing to note, I used an FHA loan on my existing home, so the PMI goes off of that in a couple of years. That will make the rental of my existing home about $270 more profitable at that time. It would still take forever to match the profit I could realize from selling now though.
It seems like the consensus is to sell, and reinvest. I'm interested in doing so if we can get a high enough profit from selling. I guess the question then becomes whether I should reinvest in one or multiple properties. If so, then I need to figure out what kind of properties to invest in. Off the top of my head a duplex would be nice or a couple of condos. We won't be able to live in these, as we are moving to California, where the price of real estate is too high. So I'm interested in investing in Utah, and managing from California.
I was thinking about @Mike Palmer's choice. You'd still have the equity ($100K) if you rented it, but the future capital gains or 1031 baggage is something to consider when you can get off scott free with the primary residence exception. So the number should be more like how many years would it take to make $20K after taxes from renting it. Hint: same hint.
There are a bunch of slick new-construction multi's in the planning stage right now. If you've got until next March, watch what happens this fall and familiarize yourself with what's coming to market. You should have some good options.