Renting out vs. Selling Advice

8 Replies

I've been reading and learning a bit here, but never posted. Hope you can offer some advice on what to do--to rent out my house or sell it.

I'm expecting to move out of state (Utah) in the next 3-4 months, and don't think I will be returning anytime soon. I own a single family home, two bed/one bath that I bought in 2006 for $205,000. The mortgage is down to 151,000 at 5% on a 30 year. Its in a good neighborhood close to downtown, could probably get about 1100/mo for rent. Currently paying $990 for mortgage, tax, and insurance. No HOA or any other major fees. Just appraised at $175,000, which seems about right.

Market seems to be going up here, in the last few months nice houses in the area are selling quickly. No foreclosures in the area. Rental market is pretty strong.

So do I take a $30k loss and sell, or hang a couple years on until the market returns? If I do keep it, I can refinance now down to 3.625.

I've heard about the 50% rule...so
1100 (rent)/2 = 550
550-847(p+i) = -297 (or with at 3.625% loan 550-770(p+i+pmi) = - 220)

Would indicate I should just sell from a business standpoint...is this about right? The rule seems very conservative.

50 percent rule applies to the long term average on expenses. In the short term, you may have much greater or much less expenses depending on the condition of the structurea and mechanicals and any wild card tenants (super bad or super good).

One thing is for sure, you will loose money if you rent it. Will the market continue to climb? If so, at what rate? For how long? Basically, you have to assume these things. Keeping the house is purely speculative. If you keep the house for, say, 5 years, you might loose around $18,000. By then, will the house be worth more than 175000 + 18000? If so, you made the right decision. If not, you didn't.

My opinion (and this is just that, an opinion) is that you should sell it. I would not want to manage out of state. If you sell, you will end up putting some cash back in your pocket. If you sell for 175K but paid 205K (ignoring closing costs) you paid 30K to live somewhere for 6 years. Thats about 416/month in rent had you rented an apartment instead of buying that house. Not a bad deal even though you will "loose" money. Plus you will pocket some cash on your way out (as if you were able to save that money while paying such cheap rent).

OTOH, if you rent it, you will definitely pay money from your paycheck every month as a stop gap to hold on to future (possible/speculative) equity. You will also have the mortgage counting against your DTI ratio if you want to take out another mortgage. Would you go out and buy that deal? Heck no! So why not get out if you can? Coulda shoulda woulda will not replace the loss.

In a somewhat similar spot, we rented our old home. So far, we managed to get a good, paying tenant in which has helped bring the loan balance down a little. Renting the place was not our plan, but it's what the market, at the time, forced us to do.

IMO, Since you're already in the property, any rules don't matter a whole lot. Your payments are already set, etc, you're already there.

Personally, I would rent it for 2 years or so or even do a rent to own on a 2 year term. This would allow you favorable tax advantages as the home will be depreciated which will offset most, and probably all of the profit and more.

If you sell within 3 years of moving out, your gain is tax free. I'm not sure if recapture applies in this situation and maybe @Steven Hamilton II can kindly let us know.

In 2 years time, the market could come back a bit better and if your lease option buyer can't get it done, you could get them out and stick a sign in the yard.

Of course, I'm not an accountant, so consult with one to make sure this lines up.

I really think it is best for you to just sell. You are definitely going to be writing checks every month for this place and that's even if everything goes well.

Once something starts going bad with the tenant, property manager, or property itself this could become a long distance heartbreaker.

Like Brian Hoyt said I don't think you'd reach out for this deal so do you really want to leave it attached to you?

No, the numbers on thhe rental scenario don't look good for you. That is mostly no cashflow that you are looking at IF it rents for $1,100. However you have not mentioned if you need to buy a house somewhere else. Because if you do then you might not be able to get a loan if you do a short sale on this house.

Also, you might take a hit on selling this one but you might make up for it if you get a great deal buying somewhere else.

Just make sure you consider all the factors involved in this decision.

I think your investment opportunities should drive your decision here. If you have the opportunity to make money and need a large sum of cash, then you should sell and get your capital out so that you can put it in another vehicle of your choice.

The last thing I would do is rent it out, as it is only one property, and I personally am very biased against long distanced landlording.

Another option would be to refi to the 3.6% rate you've been offered, then sell via owner-carry on a wraparound. You can take your equity in the form of a down payment, and make a 2-3% spread on the borrowed money.

@Ed O. ,

Thanks for the suggestion to check out this thread.

@Matt J. ,

Have you considered the possibility of refinancing or streamlining the loan? After you move out you must sell within three years to be eligible for the Section 121 exclusion (home sale). You will incur some recapture; however, depending upon your current income you may be helping yourself. If the market doesn't improve and you sell at 174, you will not incur any recapture due to selling at the lower price than you paid.

@Loc R. provided a good suggestion similar to where I was thinking. If you can get that payment down it can be a good deal. If the numbers don't work now, maybe you can make them look better. Even if you are breaking even, you have someone else buying you a house.

-Steven the Tax Guy

Your guide to IRS laws, rules and regulations.

Thank you to everyone for your advice, really appreciate your help in thinking through this decision. Still not sure what to do, but it is helping me think through the options.

@Loc R. ,
My current loan is assumable, but at 5% don't think any deal could be made...had to go look up what a wrap-around was. Current refi @3.6 I'm looking at is not assumable. I'm not sure I could line up a better investment as I seem to be a terrible investor...at least none of my investments seem to be doing well except for $200 I'm playing with on a peer to peer lending site.

I think I need to do a little more research on rental properties to confirm that $1100 is reasonable rent. If higher, it might work, but at or below this, I agree with Larry K, that its speculation on the real estate market going up. I think it will significantly improve in the next two years but not enough to sell for 205k. Low unemployment and strong growth in the local economy, good hip neighborhood popular for young couples makes me think there is a chance of recovering more money from the home.

Steven Hamilton II,
The 3 year rule (section 121) would only apply if I got more than the original purchase price from the sale of the property right? If I could I would happily sell at that point, otherwise I've been thinking more about the situation of having someone pay the mortgage off for me and keeping it long term as an investment. Just not sure how to make that work by getting the payment down. I don't have significant funds to pay down the principal. I can get a refi down to 3.6, but that still means a negative -220 cash flow...any suggestions?

I know the best move is probably to sell. I think I needed some confirmation or assurance of that given the huge loss this represents to me...close to year's salary in a job I don't like. I started adding up costs of the house and realized I'm looking at a $50k loss from closing, a refi, improvements, plus cost of selling. Being out of state would cause some headaches too. Selling would allow me to buy a home wherever I end up moving...instead of renting. And maybe I've learned enough lessons that I won't get burned next time around.

@Matt J. I would ask some of your local escrow companies if they are doing AITDs/wraps on non-assumable mortgages in your state/county and whether the underlying lenders are calling those non-assumable mortgages due...

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