Sell or rent?

Question

I have to relocate. I see no way I will breakeven if I sell my home. I am considering renting and using a property management group to take care of the property. The home is paid for, so renting will not impede my move. I have been looking to get in to rentals and see this as a possible way to do so.

What should I consider while making the decision to sell or rent.

McKellar Newsom · Answer

Sell the property. If you mentally feel that you have lost $42500 after paying a realtor and closing costs, why don't you plan to buy at least 42,500 in equity from rental properties.  Now your net worth is back to where it was. In fact, with your cash to use, you can "buy" way more equity than 42500.  Looking at the bigger picture though, it's more about cashflow than equity.  Good luck. Mck

Joel Owens · Answer

Steve you are making a huge common mistake.You are thinking about the mental loss of 20k an not the bigger gain you could be making by putting your money elsewhere.

Say in a few years the market is a little better but interest rates have RISEN because of inflation.That will make a buyer be able to afford less house and offer less of a price.The renters you get could trash the place and you have to put money into it to get re-rented again.

Another factor is how old is the property?? For instance if it is 7 years now the property will not look outdated and buyers might accept buying it that way.

If you go to sell in 4 years now you have a 11 year old property and the countertops,lighting fixes,layout,mechanicals might all need work.

There goes that 20k you thought you were gaining.

With the money you have multifamily is definitely a great choice for investment.

This one is a no brainer.

Nathan Emmert · Answer

So lets look at the numbers.  You have about $325k of value in your house (will cost you upwards of 10% to liquidate the asset).  Per the management company you'll receive $1,600 a month in rents.  Using the ole 50% rule on expenses long term, you'll see about $9,600 free and clear every year.  That's about a 3% return on that $325k of equity.

If you're happy with 3%, sell the house and put the money in ING Direct or some other low yield bond.  To get 3% in real estate when you have to actively manage a Property Management company (read some stories here, you definitely want to watch them like a hawk) to get it?  That's crazy.

Even buying all cash deals you can generate 6 - 8% returns day in and day out.  Using leverage you're in the 15% range without breaking a sweat.  If you want to really work at it you could be generating 20+% returns on that $325k with rentals.  What do you want, $9,600 a year so you can say you didn't lose money in this house like the last one or $50,000 a year?  Your choice. How much is your pride worth to you?

Jon Klaus · Answer

Sell it.  Sorry, I mis-spoke.  SELL IT!

You could take the $350k proceeds and buy a million dollar apartment complex that yields $100k net per year.  After your debt service on $650k, you'd have better than $60k cash flow. That's before tax benefits and with outsourced property management. Just one of many examples of a higher and better place for your home equity.  Sell the house.

Steve Maye · Answer

I bought the house about 1.5 years ago at $367,500 and have put about $20K in it since.  I have also have a HELOC on it that was used during the purchase of the property, but have no money borrowed against it.  As part of the relocation I have had 3 property appraisals.  None showing me breaking even.  At best I could maybe get the $367,500 back out.  The $20K lost.  I took enough of a beating on my previous home sale.  Not too interested in losing all over again.

As far as rent, I asked the property management group to give me a very conservative estimate of what it would rent for.  They said $1,600/mo.  Seems to be inline with what i am seeing on Craigslist and other.

Nathan Emmert · Answer

ROI.  There is no "break even"... the money you've spent is gone.  You currently have an asset worth some amount of money.  You now have to figure out how to maximize that asset.

It might be renting it as is.  Generally the ROI of a house fully paid for is lower than using leverage because of how cheap money is.  Essentially you could sell your house and get financing to buy the same house 3 times renting all 3 instead of just the 1.

IMO, the "reluctant" landlord business is a poor way to start.  I would liquidate the asset and get into investments you actually do want to rent, not one you just happen to have lying around.  Sell.

Jon Klaus · Answer

Need more info.  How much would it sell for?  How much would it rent for?  Where are you moving?

Is the house the highest and best place for the money?  Or would it do better in other investments?