Rent Out or Sell in Austin area

11 Replies

I'm moving to a nearby neighborhood so the decision is: Do I sell or rent out?

Info:

House value: 850K in a top public school district next to the top school. This is in central Texas, close to Austin TX so it's likely to increase with the big companies moving in.

Rental rate: 3.5K/month (Tenants would be middle-to-high income families with school-aged kids)

The house is almost 20 yrs old so could use some paint touchups, flooring buffing, toilets, etc. but overall in decent condition.

I'm thinking I'll fix these things as a rental so I can deduct it from the rental income and then plan to sell in 3 years to keep the cap gains exclusion as a primary residence.

Rental rate doesn't pass the 1% rule of thumb. How would you make the decision in this case?

Any feedback would be appreciated.

@Sean Craigg - If I were you, I would do a cash out refinance or a HELOC (I prefer this b/c no closing costs and can be interest only for the first 10 years) and then rent it. You can then utilize those funds to expand your real estate portfolio, hopefully into a small multifamily in the area. That's what I would do at least.

At the end of the day, building wealth is all about keeping cash flowing assets. If you have a cash flowing asset in one of the hottest markets in America, I honestly don't think its smart to sell. I would love to own a SFH home in Austin Texas that is cash flowing.

Lastly, have you considered a rent by the room model. You could increase that rental income dramatically if you employ this sort of model, however the management costs would be more expensive. Let me know if you are considering this, I can connect you with some agents and organizations who manage properties like this in the Austin market. 

@Sean Craigg there is an Austin form if you want to post there as well. I’d need a lot more info to be able to provide you an opinion. Here are some additional questions:

- What did you pay for it?

- How much do you owe?

- Will your estimated rents cover all expenses (mortgage, taxes, insurance, property management, etc)?

- Do you own other rentals?

Nothing meets the 1% rule, and most not even close in Austin. That rule of thumb has long been revised for most major metro areas. The key is cash flow so you can maintain the asset.

@Sean Craigg how long have you owned the home? 

have you had an Agent run the rental comps for you? In my opinion RedFin etc are not always accurate on comps. 

with your current payments, at market rent - what is your Rent Ratio? As @Ryan Kelly mentioned, long gone is the 1% rule IF you are buying in today's market, but you should be using the calculation based on what you bought it for and therefore your current PITI (if you've already refi'd then based on that value).

I'm a big proponent of house hacking, so if you can keep it rent it out to one family (I also like the rent by the room model; you just need to see if there is demand in your neighborhood/area) and then buy next (bigger and better if it's close to where you live now) as a personal residence and repeat.

Best wishes,

Thank you for your replies. I bought it at around 550K about 3 yrs ago and now should sell around 850-950k according to comps. Mortgage is almost paid off and I looked at cash-out refinance but with the higher rates of 3.5% and that you can't deduct taxes on it (unless you do improvements or invest in another rental property). I also have another mortgage for a new primary residence. 

I don't think multi rooms will be the demographics here. Families live here for the school district.

@Sean Craigg

Keep it! I'm not an Austin guy, but I follow it because it reminds me of Denver where we work, and I've had some Austin real estate agents as clients before, so they're always talking to me about it. 

It sounds like there's still a lot of room for those values to go up. If you're cash flowing now and can still realize a lot of appreciation, then hold on to that sucker. You can access that equity through a HELOC or cash-out refi to have capital for another purchase if you want.

My two cents at least. We have several properties in Denver and Colorado Springs and see only upside on the appreciation (at least long-term -- 10+ years), so we're holding everything we can get our hands on. 

Whatever you choose, good luck!

@Sean Craigg The taxes are the monster in the room. If you sell then you won't have to pay capital gains tax on it. That is what I would be mindful of in this situation. If you keep it for a rental past the threshold then you will have to pay a big tax on it unless you decide to do a 1031 exchange out of it after that threshold time frame. You can always do a cash out refi regardless of whether or not you keep it but the cash flow will change, of course. Buy and hold is golden in the metro though as the metro has been a long term appreciating machine. Chat with your CPA. Each persons situation is different.