Selling vs Renting out?

29 Replies

Good Afternoon,

I have a single family home in Minneapolis south suburb (worth $250K-currently owe $150K on the mortgage) which I've lived in for 14 years. Last year I spent close to $40K to replace the windows and the siding (I have one year to pay off before getting hit with a big interest rate; planning to do a cash refinance and pay the $40k that way) but now, I've decided to move to TX. Would it be wise to sell or rent at this point? I appreciate you helping me to figure this out in advance.

@Aria Aref Adib I see this alot. There was no need to replace siding on a house that people are renting. Typically, siding doesnt improve rent.  Because you spent so much on siding and windows, I would sell because now your expensive windows and siding are depreciating. 

@Aria Aref Adib  

Rentals don't need to be that great.  The brrrr method gets taken out of context to much on BP. Rehabbing should be kept at a minimum to get the most rent.  

@Aria Aref Adib Do you know what you could rent it for? And would you self manage from a distance or use a property manager? SFH homes under $250k are in very high demand right now so I think it would depend on the rental income numbers.

@Aria Aref Adib - I think you could do either, but if I were you I would sell for 2 reasons. 

1. If you don't have the infrastructure in place to support rental then it may be difficult to manage from Texas

2. If you sell now, your gains would be tax free since you lived there for 2 out of the last 5 years. 

I don't think it's a bad thing to rent it because depending where it is you'll cash flow pretty well, but I would think you could do more with that $100K+ in Texas, I could be wrong though.

Word of caution, if you plan to refinance it to get your $40K out you may need to stay for a year depending on the type of loan, otherwise you could be committing mortgage fraud. 

DISCLAIMER: I am not an attorney or CPA and my post shouldn't be considered "advice".

Originally posted by @Alyssa Strom :

@Aria Aref Adib Do you know what you could rent it for? And would you self manage from a distance or use a property manager? SFH homes under $250k are in very high demand right now so I think it would depend on the rental income numbers.

Thanks for the feedback. I should be able to rent it out for $1800-$1900 a month and I will be managing it myself from TX.

Originally posted by @Armin Nazarinia :

@Aria Aref Adib- I think you could do either, but if I were you I would sell for 2 reasons. 

1. If you don't have the infrastructure in place to support rental then it may be difficult to manage from Texas

2. If you sell now, your gains would be tax free since you lived there for 2 out of the last 5 years. 

I don't think it's a bad thing to rent it because depending where it is you'll cash flow pretty well, but I would think you could do more with that $100K+ in Texas, I could be wrong though.

Word of caution, if you plan to refinance it to get your $40K out you may need to stay for a year depending on the type of loan, otherwise you could be committing mortgage fraud. 

DISCLAIMER: I am not an attorney or CPA and my post shouldn't be considered "advice".

Thanks for the feedback Armin. Actually if I sell, I would get $60k instead of $100k because I have to pay for the upgrades I made last year ($40k).

Originally posted by @Darius Kellar :

@Aria Aref Adib 

Rentals don't need to be that great.  The brrrr method gets taken out of context to much on BP. Rehabbing should be kept at a minimum to get the most rent.  

@Aria Aref Adib If you were going to refinance out, how much of a mortgage would you take out?  What would be the interest rate?  Without knowing the taxes of the property, I'm guessing it would be hard to cash flow.  I'm thinking it would cost you at least $1,100-$1,200 a month just in debt coverage.  Is it safe to assume that this is older inventory, ergo, higher repair and maintenance expenses?  

All this to say, I would cash out and sell.  Armin made a good point about capital gains exclusion due to the primary residence and living in the property 2 out of the last 5 years.

I also want to say, I fundamentally disagree with the perspective of @Darius Kellar .  I don't agree with over improving properties, however, if you have quality housing, it's easier to rent out, have a better class of tenants, etc.  I've had my pick of tenants and haven't had any major issues with tenants trashing the place, etc.  If you have houses/units that aren't "all that great," I think you're opening yourself up to problems and problem tenants.  Just my two cents.

@David Barnett   @Aria Aref Adib The quality of the property and location has nothing to do with the quality of the tenant. And I was not talking about trashing the place. I was referring to ROI. Investors as small as me and as big as Ben Mallah have purchased in low income areas. It baffles me that BP members spend 100K to make a little 1200 maybe 1400 a month rent.

In my town we have purchased rentals for as low as twenty five hundred dollars and rent them for 950 no problem.  Even properties at 30K and rent them at 1100 a month. 

Based on  my income level I would consider myself as upper class. I just choose to live where I invest. 

@Darius Kellar It baffles me that people think that location and condition don't affect quality of tenants.  The location and quality of the unit itself is the competitive advantage of the landlord.  If you have a quality property in a quality location, you are much more likely to attract a quality tenant that will take great care of the property.  Also, it helps minimize the days on market, too.  

I'm an investor just like most people on this site. However, I don't believe one can boil everything down to ROI. There are things that are intangible and aren't quantitative (and are more qualitative). If you buy in a quality location and keep up the property, you are likely to have quality tenants, less turnovers, stable cash flow, and a better chance at appreciation. Last, and certainly not least, if you focus on qualitative factors (on top of ROI), there is an opportunity to create value and brand recognition by word of mouth (marketing, and your current tenants telling their friends that you provide a quality product/service). I also strongly believe that quality tenants and quality people flock with other quality people. These are items that you can't measure in ROI terms. If $30k properties work for you, more power to you. I'd rather be in the $100k-$125k a unit price point, in good locations, with solid B type properties that attractive good, long term tenants. As the brand grows, so does the competitive advantage over other landlords that don't take as good of care in maintaining their properties.

@David Barnett Good thoughts. However, in low income areas the tenants really don't have a way out. Most low income tenants just like many millennial's will be "trapped" into only renting. For example I had a tenant who made 50K per year. Because there credit was not very well and savings were not very high they were forced to only rent. Factor in 50 to 70K household income can't really take you far here. In my location this is not common as most low income people can't afford the 100K to 120K house and if they wanted to move into another location they would have to travel at least 25 miles out. So, In my location City of Pontiac we are completely surrounded by high income cities. Even with a 100K income I can still see many people turning to rent here. And this is why buying here is so attractive. GM and Chrysler Headquarters borders the small town, ect. 

@Darius Kellar do you think $250K house in suburbs on Minneapolis is a low income housing?

How does it help to decide if he should rent or sell it? 

On the subject: once these expensive improvements were done, it's better to sell without capital gain and recapture depreciation. Rent $1200-1400 won't bring much cash flow on $250K property, it's better to cash out the equity

@Darius Kellar I'm coming at this from an investment point of view.  I invest in small multifamilies that are between $100k-$125k per unit (I only own duplexes at this point).  My median rents are somewhere in the $1,200-$1,350 per unit area in most of my properties (there are a few outliers).  I usually have roommates in my properties, and if they make $40k or so each, they can usually afford the rent based on the standard 3X income, etc.  To be direct, my business model isn't to target the $30k houses, and where I invest (in the Twin Cities), anything in that price point would be in pretty rough neighborhoods.  I understand that every city and town is different, and if you can make it work, more power to you.  Where I invest, keeping the property maintained, without over improving it, has worked out very well for me (and for the tenants.  They have a nice, well maintained property in a good location).

@Irina Belkofer From my experience in the Twin Cities market, a $250k single family home is likely in the 60th percentile for pricing and neighborhood.  It's pretty close to middle of the road, and probably a pretty nice neighborhood overall.

Aria would be lucky if he were to make $200-$300 a month on the rental, even with self managing.

@David Barnett that's what I thought: mortgage is $150K plus $40K in improvements (HELOC?) - the mortgage alone might eat that Rent....and then there are taxes, insurance, maintenance (OOS - paying contractors).

Definitely, Rent won't make sense - sell it!

@Aria Aref Adib

Looks like you got lots of good replies. Upfront I’m nowhere near as knowledgeable as others on here and am learning everyday. However, I’m a numbers guy so to me the best way to figure out whether to rent or sell is to figure the numbers on both options. Sell- how much do I walk away with and then what’s my plan to invest from there, etc. Rent- what’s the realistic cash flow every month (thorough due diligence on all the expenses, sinking funds, estimates, and forecasting future rent adjustments etc). I’ve been in your situation several times and every time I’ve ignored the numbers that make sense I’ve been “burned”. Sorry I’m not any help but again analyze the numbers and I think your decision will be easy.

Also, I might not have understood it correctly but the $40,000 in siding, to me is a sunk cost. Money already spent so should be a factor in future decisions.

Generally, I would say sell.  If you are not a landlord, then this will be a distraction.  Also, you will be leaving the area.   Unless you have some great, irreplaceable and appreciating real estate, sell.

@David Barnett

Thanks for the feedback. Right now, my mortgage is $1250 a month which covers the taxes ($2800 per Year) and insurance ($2200 per Year). If I refinance, I'll have to leave 20% equity and take the rest out as cash. The house can rent out for $1800-$1900 per month. I guess my new mortgage payments will be about $1500 per month which will leave me with $300-$400 cash flow per month.

@Aria Aref Adib

I’d eat the 40k mistake, take it as a lesson moving forward (if you plan to own more rentals) and let it continue to appreciate/grow. No need in getting rid of a house you know and understand to using the cash to buy one you’ll have to learn. It will probably be easier to manage from out of state since you know it’s quirks.

@Aria Aref Adib the answer will depend on your long term goals. @Alyssa Strom would be the perfect person to meet and discuss it. She is truly amazing at what she does. The fact is you can’t make a good decision with out all of the data and she can handle either option sell or 3rd party manage. 

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