Should I Sell or Rent it Out - What Would You Do?

21 Replies

I have a question for you seasoned Investors.

We bought our first house 2 years ago - a really good deal on a foreclosure and we paid $84K. The same house was valuated at $135,00 from the outside only. Due to improvements inside and the shortage of houses in that price range in our area, I think I could sell it for around $140K. We bought a bigger house to move into, and I'm currenlty working on fixing it up before we move. My RE agent thinks I can get around $1000/month for rent and our mortgage payment (with escrows) is around $475.

What would you do? Would you take the profit and reinvest or go through the hassles of renting it out for the long haul? Or rent it out for a couple years and then sell?

@Joe Maciag  I think you need to ask yourself what you would do with the money if you sell.  If you're going to be able to put it to work performing better than it is now, then I'd consider selling.  I don't know your market but you might be able to buy a property (or 2) with that money that will cashflow better than this property.  Plus, maybe the "improvements" you did are too much for a rental and would just end up costing you more to repair down the road after tenant damage.

I do find it interesting that your question distinguishes between reinvesting or "going through the hassles of renting".  If you reinvest, what do you plan to do with the money that doesn't involve "the hassles of renting" ?

I do find it interesting that your question distinguishes between reinvesting or "going through the hassles of renting". If you reinvest, what do you plan to do with the money that doesn't involve "the hassles of renting" ?

Good point. I would only be delaying "dealing with the hassles of renting"

It really depends on your personal short and long terms goals and personality. My husband has a transient job (active duty military) so part of our acquisition plan (we buy pure rentals too) has been turning our personal houses into rentals when we move on. I self manage them and enjoy doing so! So this has been a great strategy for us. 

If you are willing to separate yourself from treating it like your "home" to it's a business. The numbers look good for a rental. On the other hand if you have added so many upgrades and will be devastated/micromanage your tenants your should sell!

I'd run the financials of the rental option side by side with other investment options, weight the softer issues (location, suitability as rental, likelihood of appreciation), then decide.  I'd also do more research on true market rent, not take the agents word for it.

@Joe Maciag  you already have lots of good feedback above to consider.  One more factor that wasn't mentioned yet is the tax free capital gain you will bypass if you hold the property.  I'm a buy/hold guy, but I've sold my personal residence when I had a huge capital gain that I could take tax free.  Tax free is hard to come by and you are in the ball park of 50k for your gain.

If it was my decision, I would sell and take the gain.  Then I would look to reinvest in two properties with minimal repairs needed that I could put 20% down payment on.  I would keep 20% of the cash available for a cash reserve. 

This is based on my experience and what's possible in my market.  You have to decide what you are comfortable with and whether or not your are ready to become a landlord.

One other thing that comes to mind is you said you bought a bigger house. Were you able to put 20% DP to avoid PMI? If not, you stand to make an "automatic" ROI by paying down your principal to get rid of the PMI. Unless you have an FHA loan that now has PMI for the life of the loan. Just another thought to consider.

I think the first question that you need to answer is: Do you want to be a landlord? Not just what pays the most. It's not for everyone, and without property management knowledge, it can end in a nightmare. 

Do both!  Get it rented first and then sell it.  In many cases the income approach could add more value to the property in the appraisal.  The new buyer who wants to be a landlord would probably pay a higher price if it is rented out.  

The time equivalent of cash is also in play here.  You sit on it for a couple of years (collecting rents) or do you take your profits, and roll them into several other projects like this current one.  Which one gains you more money over a 2 year cycle?

The state you live in has to be considered when thinking of renting properties.  In some states (red)  it is much easier to evict than a blue state.  I have heard some stories of 5 months and 2 years of lawyers, courts, etc and still cannot get the deadbeat out.

@Joe Maciag  as mentioned by @Robert Leonard  you do have an excellent opportunity to minimize or eliminate taxes since you lived in for 2 of last 5 years, as I recall you can exempt $250/500k single/married every 2 years or so years as you move, heard it said that millions are made tax free by living in renovated houses for 2 years and selling to move into next or selling rentals by moving into them for 2 years.  Another one on the other end of the spectrum is if a property is passed to kids, the taxable value is stepped up to current values at time of passing, so a 30k place that was held for 30 years and is worth 280k could have had $0 estate tax and then sold for $0 capital gains but if sold or transferred before death would have tax on 280-30=250k, ouch!

now i'm not a lawyer, tax advisor, and not staying in a holiday inn so go to irs.gov and get the info yourself. 

How do you do these at symbol things?

As @Rob Leonard said, I would seriously consider the tax advantages to selling.

One way I personally would think of it as buying it from myself for the full value.  It doesn't matter that you only paid $85K.  What matters now is it is worth $140K.  So, would I buy that property for $140K and keep it as a $1000/mo rental?  That is not a particularly attractive investment.

There are other factors to consider, but I'd have to be convinced to keep it.

Thanks everyone for all the great advice!  @Robert Leonard  I forgot to mention it in my original post, but the tax advantage is one of the big reasons I am considering selling the house.  The tax break applies if you had lived in the house a total of 2 years of the 5 years prior to selling the house.  Doesn't that mean I could rent it out for 3 years and then sell it, as long as I have owned it a total of less than 5 years?  There isn't a rule that you have to live in it at the time you sell it is there? 

I am interested in buy and hold for the long term.  That being said, I may try to get my feet wet renting this house out and then sell it 3 years from now in order to fuel future investments.

One other thing that comes to mind is you said you bought a bigger house. Were you able to put 20% DP to avoid PMI? If not, you stand to make an "automatic" ROI by paying down your principal to get rid of the PMI. Unless you have an FHA loan that now has PMI for the life of the loan. Just another thought to consider.

Good point about the PMI. I used a 5% Conventional with PMI. My plan was to get the house re-appraised after fixing it up in the hopes that I'd have 20% equity afterward. Using the equity or profit from the first house to get rid of PMI is something I'll definitely keep in mind.

@Joe Maciag  you need to execute the sale before you get to 3 years after you move out. If you want to go that rout, I would put it for sale after 2 years of renting so you don't risk going beyond the 3 years.

@Joe Maciag  

There is some great advice on here and @Robert Leonard  offered a great point on the taxes with some advice on how to handle it.

My advice is more from a personal point and not necessarily business.  I look back with regret on every property I lived in and sold.  When I purchased my first home, it was not for investment and I wasn't even considering it.  When I sold that house (back in the 90's), it went for the highest price per square foot in that neighborhood of about 800 homes and that is still the case to this day!  I thought I had hit the jackpot selling it for over 30% more than I paid for it.  Had I held onto the property, I would have more than tripled that income at this point and have a property free and clear with a value at close to what I originally paid for it due to foreclosures in that area.

Point is, I wish I had held that property and every property I purchased and moved into there after.  

There are other things to consider and a big one is management of a rental unit.  But, do not discount the value of an existing mortgage that you acquired without thinking of the property as a long-term buy & hold and the ability to have a renter retire that loan for you at an accelerated rate.  You could own that property free & clear very quickly.  

Best of luck to you and whatever decision you make! 

@Chris Clothier  

Thanks for sharing your personal experience.  I think your advice holds a great deal of value for my particular situation because of two reasons: 

1)  I'm 27 and will hopefully have many years of income generation from this house.

2) We're about 70 miles from DC, and the area around DC seems to be constantly developing and expanding.  There's an area between us and DC that used to be all farmland not too long ago.  Now that area is full of new housing developments, shopping, and dining and the real estate values have skyrocketed.  Who knows, our area might be next.

Joe, 

The first question is what do you want, since that is paramount.  Is this what you want to do full time, part time or dabble?  If full time is what you are looking for, then pull down the profit and roll to the next.  You can find plenty of properties that are outdated, put some lipstick on that pig and roll a quick 25K.   If you put pen to paper and do simple arithmetic, how long would it actually take you to equate the same cash using the rent & hold method.  

You would eliminate virtually all long term risk of market conditions (and losing all your equity), eliminate vacancies, eviction and litigation.  You will eventually come across one that is too good to pass up and has a great rental income.  These you hold after you have built enough seed capital and it will not impair your capacity to rehab.  

Taxes are a different bird.  Seek your professional out and talk to them. 

Hi Joe, I agree with Brett, if you have a direction to reinvest your profits that will yield higher return, then definitely sell and reinvest. You might consider speaking with a financial adviser about this. If this looks like the highest preforming asset for you, you can use a management company to minimize the "hassles of renting". 

Myself I would rent it.  If you are staying in the area it really does not take that much to manage a single rental property if it is in good shape.  Put the free cash flow towards paying down the mortgage and you will own it free and clear in no time.  If you decide being a landlord is a good deal, use some of the equity to buy the next one or buy a new house to move into and rent the one you just bought.  If you don't care for being a landlord then hire a PM and enjoy the monthly check.

@Joe Maciag  and Elizabeth Colegrove

Did you purchase the home with any sort of first-time homebuyer tax breaks or benefits like taking distributions from an IRA? If so, is it legal to convert that property into a rental property?

We used the va loan and now use conventional 5%. We put as little down as possible.

@Joe Maciag  A lot of great points brought up in the above comments.  I'd agree with @Michele Fischer  that you need to do your due diligence and seriously investigate the market and it's ability to sustain rents and at what price (not just ask your realtor).

Where/what are the jobs in Front Royal?  My father retired from NoVA onto 26 acres at the base of Skyline Drive just outside of Front Royal (Bentonville/Browntown).  I visit him (frequently) and it seems that there isn't a lot going on out there anytime soon (that's why he retired out there).

True, there is ridiculous money in the DC/NoVA area all the way west out to Loudon County and Centreville/Manassas, but the farther away you get, the jobs go away too…  There is a solid 45+ minute drive on 66 just to get to Manassas/Centreville with no traffic, and you're still 20+minutes out of DC (without traffic).  Easily double those times if you hit an accident or rush "3-5 hours"…

Hoping that the DC/NoVA daily commuters are going to head west all the way to Front Royal for a 1-2 hour commute each way instead of south towards Fredericksburg/Quantico in the next 30 years is just speculation.  It could happen, or maybe the retiring baby boomers will head west out of the gridlock once they retire like my father did.  I'd say if they do head west, they are more likely to end up in Winchester on Rt. 50 through Loundon County than out 66 to Front Royal.

I don't mean to bash Front Royal, its a beautiful place, especially once you get up into the mountains or down along the Shenandoah River.  I agree with @Chris Clothier regarding selling. If you do determine that the rental market supports it and decide to keep the house and rent it out, have you considered ways to access the equity you have instead of selling? Once you crunch the numbers on market rents, instead of cash flowing a couple hundred a month could you possibly re-fi or find a HELOC to put 20-30% down on another property that you could also fix/rent or flip if the market supports it?

If you could cash flow your current house ~$100-200/month after accessing equity (accounting for higher mortgage/loan payment), someone else would pay down your mortgage while you speculate that the DC/NoVA sprawl ends up creeping all the way to Front Royal in the next 30 years (it is definitely possible...) and drives the price up.  If you secured another cash flowing property with the equity from the first, you'd be doubling down on that bet while hedging at the same time (cash flow).

Either way you win, unless you can find a better return on your investment by selling and re-investing your tax free capital gains elsewhere, OR... the US economy could collapse due to the financial ineptitude/corruption taking place w/in the beltway and it could be an all out Zombie Apocalypse headed your way!

It all comes down to doing the math, market analysis for rents and sales prices, financing or ability to access existing equity, jobs now and future job growth for renters within easy commute distance, increasing infrastructure between Front Royal and NoVA/DC for speculative significant appreciation, your investment philosophy (buy/hold vs fix/flip, desired return on investment, etc).

Best of luck and keep us here at BP informed of your decision and the results!

-Jeff

One of the considerations for renting may be the learning experience. Whether you plan to manage it yourself, or have someone else manage it, the process of planning and preparing the house to be rented will make you more aware of other options you can have for that property and for future properties. You'll likely be exposed to a wider circle of real estate investors and professionals.

I found this to be the case with one of my family's properties. We planned on renting the property, with a sale as an exit strategy. Getting the home rent ready took more time and money than we planned, and along the way we realized that a more sensible option was to sell it with owner financing. The cash flow was much higher, and if the new owners had issues with paying the mortgage, we'd have the opportunity in the future to renegotiate more favorable terms or taking the house back for resale or as a rental.

Todd