Should I sell or rent out

43 Replies

I'm newbie to all of this. I have a rental property in Austin, TX that has almost doubled in value since purchasing in 2008. I Have had amazing renters for the last 4 years that have said they are moving out. My wife and I are debating if we should renovate and rent again for a higher price or do some renovation and sell. House was purchased for 138k and Zillow says it's value is 235k. It was our first home and we put nothing down so we only have about 45k in equity. 

We now live in Oklahoma and are debating on if we should do the renovation and rent or sell. Also what would be the best way to fund the renovations? We dont have enough equity in our primary. Any advice would be greatly appreciated. 

Need more information such as monthly rent, property taxes, age of the major components, area where the property is at etc. in order to make a more educated decision. 

Sometimes, it is not necessary to renovate. I understand you want the top rental or best resale prices after you renovate.

If the property is decent / clean enough, you can list to sell or rent cheaper than your competition, and you will attract more interest. (e.g. listing it as $199K vs $235K will definitely get more buyers in the door) . 

Key is you want the property to be "move in" condition, so that first time home buyers can finance it via FHA.

Do you want to be a long distance investor? It seems like you have been for a while but if you lose great tenants everything could change. Finding great tenants is the golden ticket for buy and hold investing. 

Austin, TX has had some major appreciation but how long will it last? If it was my property I'd be renovated and listed for sale by the start of April (HOT buying season). If you didn't live in the property for 2 of the last 5 years taxes may bite you. I'd speak with a CPA before you sell to minimize depreciation recapture and capital gains tax.

Originally posted by @Chris T. :

Need more information such as monthly rent, property taxes, age of the major components, area where the property is at etc. in order to make a more educated decision. 

Thanks for your response Chris.

Rent is $1550 but haven't raised it the entire time they have been there. I would try to get about $1800 if renting now. Property taxes are $3500. Mortgage is $1220. Home is 11 years old. Location is about 15 minutes to downtown in southeast of Austin and lots of development headed that way from what I'm seeing. It's basically the last area of Austin city limits that isn't developed. 

I know I've been lucky to have such amazing renters. Just trying to weigh the options. 

Originally posted by @Jaron Walling :

Do you want to be a long distance investor? It seems like you have been for a while but if you lose great tenants everything could change. Finding great tenants is the golden ticket for buy and hold investing. 

Austin, TX has had some major appreciation but how long will it last? If it was my property I'd be renovated and listed for sale by the start of April (HOT buying season). If you didn't live in the property for 2 of the last 5 years taxes may bite you. I'd speak with a CPA before you sell to minimize depreciation recapture and capital gains tax.

Thanks these are our biggest concerns. 

I know we've been lucky to have amazing renters. The taxes are definitely scaring us into just holding it for now.  

Originally posted by @Thomas Lundy :
Originally posted by @Chris T.:

Need more information such as monthly rent, property taxes, age of the major components, area where the property is at etc. in order to make a more educated decision. 

Thanks for your response Chris.

Rent is $1550 but haven't raised it the entire time they have been there. I would try to get about $1800 if renting now. Property taxes are $3500. Mortgage is $1220. Home is 11 years old. Location is about 15 minutes to downtown in southeast of Austin and lots of development headed that way from what I'm seeing. It's basically the last area of Austin city limits that isn't developed. 

I know I've been lucky to have such amazing renters. Just trying to weigh the options. 

Long term at $1800 I suspect it will have negative cash flow.  The 50% rule is probably conservative except for the lowest of rent locations (i.e. the areas that historically appreciate no faster than inflation) so is possible a bit conservative for your RE. 

If we apply the 50% rule to $1800 rent we get a cost of $900 not including mortgage service.  $900 (50% rule) + $1220 (mortgage) = $2120.  $1800 minus $2120  indicates a $310/month long term negative cash flow.  As indicated I suspect 50% rule is a little too conservative for your area and that actual long term negative cash flow will be less than I calculated.  However, I suspect the long term cash flow will be negative.  Long term cap expense is very easy for inexperienced investors to under estimate.

Negative long term cash flow is easy to absorb when you have experienced $97K of appreciation (is your equity so low because you took money out of the property?).

I would not let the negative cash flow by itself be the determination to sell.  Other factors deserve consideration such as expected continued rent and market appreciation, OOS issues, effort to own, etc.  Some of those factors are personal and others best estimates (estimate conservatively) but I would likely sell it due to it being OOS unless I already had a very trusted team there.

Good luck

@Thomas Lundy If you can re-rent it out at $1800/mo. keep it! Your mortgage on the property is in the pay-off years (after 8-9 years), meaning your loan paydown is going to start moving fast! Your vacancy rate sounds pretty low %5 or less. Assuming your setting aside %20 of your rent for vacancy, repairs, maint, cap ex... and your mortgage is $1220. you are cash flowing just over $200. Your loan paydown is also moving faster like a snowball. So if you are happy with those numbers, Keep it. If not Sell it. Good luck to you!

@Thomas Lundy Don't sell.  You shouldn't sell it. If its in southeast Austin then don't sell it. And if you are selling it then call me first : ) Did you know that area is booming? If you think that the city will contract any time soon then check out the data to be certain. The unemployment in the metro is 2.73% according to the latest data anddddd even more major employers are moving here with big plans.  Anybody that wants a job can get a job. There are unemployment signs everywhere. There is significant demand for housing. Capital gains are cheaper than income taxes and you can always do 1031. Raise the rent and buy yourself a gift with the passive income.  

  

Thanks for the input Aaron. I know I'd regret selling it. I hope we have the same luck with our new renters. 

@Thomas Lundy

Never ever ever go by what Zillow tells you it’s worth. Bring a realtor over, and get their input as to what it’s worth.

What are you doing with the equity, tax consequence and plans?

I know we will be taking a hit on the depreciation recapture and gains. I would basically invest about 25% equity into our retirement accounts and HSA to offset some of the taxes. The rest would be used to have as liquid and invested into our primary residence and into ETFs. Do you suggest any other ideas if we sell? 

At that rate of appreciation (and it will likely continue), I would not sell.  Texas properties (San Antonio, Austin, DFW, Houston, etc) have history of great appreciation.  If you are receiving cash flow now, hold and do upgrades here and there so you get more income your way  once new tenant is in place, especially if you have not raised the rent for these 4 years.  

Originally posted by @Aaron Gordy :

@Thomas Lundy Don't sell.  You shouldn't sell it. If its in southeast Austin then don't sell it. And if you are selling it then call me first : ) Did you know that area is booming? If you think that the city will contract any time soon then check out the data to be certain. The unemployment in the metro is 2.73% according to the latest data anddddd even more major employers are moving here with big plans.  Anybody that wants a job can get a job. There are unemployment signs everywhere. There is significant demand for housing. Capital gains are cheaper than income taxes and you can always do 1031. Raise the rent and buy yourself a gift with the passive income.  

  

 Agreed, if he is selling, then we may have to compete :).  Just kidding, closed on one property last week and not really ready to get another one this year... perhaps next year or so.  

I would advise you sell for two reasons, first not raising your rent annually means you are not properly managing your property, second base on rent to value and the fact you have no reserve funds to do reno this property will have negative cash flow when capitol expenses start to roll in. It is going to go negative very soon. You have been very lucky so far but that luck will not hold. Those advising you to hold are not looking forward. It is going to start to hurt very soon. 

I agree with @Thomas S. on this one. I didn't even consider the age of the HVAC, roof, and other cap ex stuff in my first comment. If those systems are old be ready to spend a lot of money in the future. I'm dealing with this on my property but I based my offer on it and had a reserve ready.

@Thomas Lundy I like your investment strategy for money (if you sell) and it's diversified nicely. This is a great situation to be in! Good luck man. 

Originally posted by @Cam Jimmy :

@Thomas Lundy If you can re-rent it out at $1800/mo. keep it! Your mortgage on the property is in the pay-off years (after 8-9 years), meaning your loan paydown is going to start moving fast! Your vacancy rate sounds pretty low %5 or less. Assuming your setting aside %20 of your rent for vacancy, repairs, maint, cap ex... and your mortgage is $1220. you are cash flowing just over $200. Your loan paydown is also moving faster like a snowball. So if you are happy with those numbers, Keep it. If not Sell it. Good luck to you!

20%????   Really???   Have you filled out a cap expense estimate worksheet?  The 50% rule likely is a bit conservative at that rent price but 20%?  I know that you have not filled out a cap expense worksheet based on your estimate.  Hot water heater install via contractor provided by a professional PM $1K, expected life 12 years.  The hot water heater is $7/month expense.  Do the same for roof, windows, foundation, plumbing, electrical, kitchen, bathrooms, flooring, hardscape, fencing, HVAC, landscaping, etc.

Your estimate is likely off by at least a factor of 2.  There is a reason why the 50% rule is used as a quick basis for costs for the small unit count RE (apartment buildings can easily beat 50% in most markets).

I do agree that the equity pay down does have value that can be used to offset the negative cash flow.  Taking into account the equity pay down, the property likely has a small amount of positive monthly value (I do not want to refer to equity pay down as cash flow due to the limitations in accessing it).

Equity pay down is worth zero unless you can free it up or when you sell assuming the markets have not taken a dive and you equity has vanished. Equity pay down and appreciation do not exist  till you sell and only then if your timing is right. Never count on it to make up for low or negative cash flow. 

@Dan Heuschele %20 of 1800/mo = $360. Multiply that by 12 gives you $4320/yr. In 5 years time that should easily cover all repairs and maintenance, and have some left over for unexpected vacancy. While still collecting his $200+/mo cashflow on top of that. I think %50 is way too conservative for a SFR. Keep in mind that I'm assuming his mortgage payment of $1,220 includes taxes, insurance, mortgage, interest, etc. If his goal is to acquire SFR, I say keep it. If his goal is to buy MF apartments, I say sell it and use the equity to do so.

@Dan Heuschele @Thomas Lundy Ah, one thing nobody asked you... do you pay for property management?? If so, that will most likely take all of your cash-flow, and then I'd say sell it, or 1031 exchange that thing into a bigger better cash-flowing property.

Originally posted by @Cam Jimmy :

@Dan Heuschele %20 of 1800/mo = $360. Multiply that by 12 gives you $4320/yr. In 5 years time that should easily cover all repairs and maintenance, and have some left over for unexpected vacancy. While still collecting his $200+/mo cashflow on top of that. I think %50 is way too conservative for a SFR. Keep in mind that I'm assuming his mortgage payment of $1,220 includes taxes, insurance, mortgage, interest, etc. If his goal is to acquire SFR, I say keep it. If his goal is to buy MF apartments, I say sell it and use the equity to do so.

>%20 of 1800/mo = $360. Multiply that by 12 gives you $4320/yr. In 5 years time that should easily cover all repairs and maintenance, and have some left over for unexpected vacancy. 

Not a chance on a single SFR unless the owner is active in doing the repairs/maintenance which is not possible OOS. The 50% rule as a quick test exists because filing out a spreadsheet of costs and lifespans takes time/effort. The exercise of putting in costs and lifetimes to calculate projected maintenance/cap ex is a good exercise because it shows where a particular market fits with respect to the 50% rule. Unless you have actually calculated the expected maintenance/cap expense on a RE, you should base the estimate starting from the 50% rule.

I have had a property with a $30K foundation issue.  I have had a property with a $60K sewage issue (complicated as to why it is so high).  I have had slab leaks with total costs over $10K.  Roofs are expensive.  Hardscape is expensive.  Foundations are expensive.  Kitchens are fairly expensive.  Etc.  We used to have a duplex that the insurance alone was more than your entire cost estimate (it was in a high risk area on the beach).

The 50% rule is the standard starting place for estimating expenses not including mortgage costs (principle and interest). I am not stating there are not markets that are noticeably less (class A, high rent markets). I am also not stating that the landlord that takes care of maintenance items directly cannot save significantly on repair costs. What I am saying if that an OOS landlord (not doing the work himself) of a single SFR renting for $1800 in Austin will have fixed costs somewhat close to 50% over the long-term. It is why the 50% rule exists.

@Dan Heuschele Like I said if he is paying for property Management then sell. The %50 rule is based on owning the property outright. Meaning %50 should include taxes, insurance, and Property management, which are expensive. His mortgage payment includes the the taxes and insurance. So we are basically saying the same thing. 

I originally said %20 for repairs, vacancy, maintenance. Add %10 for property management another estimated (I really don't know whats his taxes are) %10-%20 for taxes and insurance and were at %40-%50. So were literally saying the same thing. 

Originally posted by @Cam Jimmy :

@Dan Heuschele Like I said if he is paying for property Management then sell. The %50 rule is based on owning the property outright. Meaning %50 should include taxes, insurance, and Property management, which are expensive. His mortgage payment includes the the taxes and insurance. So we are basically saying the same thing. 

I originally said %20 for repairs, vacancy, maintenance. Add %10 for property management another estimated (I really don't know whats his taxes are) %10-%20 for taxes and insurance and were at %40-%50. So were literally saying the same thing. 

OP stated: "Property taxes are $3500. Mortgage is $1220."

He listed his property taxes as a separate item from his mortgage which I concluded to imply that the mortgage was principle and interest with no escrow. The property taxes as listed is virtually $300/month. I do not know why you believed mortgage included property tax and insurance except maybe you use an escrow account. If I see "mortgage" I interpret it to be principle and interest. If I see "PITI" I take it to include the escrow items of taxes and insurance. When I see taxes as a separate item, I feel more comfortable with the belief that the mortgage did not include the taxes.

If you are correct that the taxes are included in his mortgage numbers (which I believe you are likely incorrect) then his cash flow increases ~$300/month which would get him to where he may have a small amount of positive cash flow.  Similar if the insurance was included in the mortgage that would increase the cash flow more.

My belief is that the mortgage did not include taxes and insurance and that the RE is cash flow negative but has appreciated significantly and has equity pay down.   The decision to keep or sell is not crystal clear and likely depends on the priorities of the owner.  I would not sell it solely because it had a little negative cash flow that is easily absorbed by the appreciation.  I feel comfortable assuming the OP manages himself, but I also would not sell solely on the need to use a PM.  Granted the loss of ~10% of the rent cuts into the cash flow, but it also reduces how active the investment is and that has value.  Good PMs earn their money.  A good PM likely would not have let the rent get so below market rent and the resulting extra rent would have paid for some/much of the PM costs.

Originally posted by @Cam Jimmy :

@Dan Heuschele @Thomas Lundy Ah, one thing nobody asked you... do you pay for property management?? If so, that will most likely take all of your cash-flow, and then I'd say sell it, or 1031 exchange that thing into a bigger better cash-flowing property.

I do not pay property manager. Also the $1220 mortgage covers my escrow for property taxes and insurance. Thanks KS for all of the advice and insights.

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