Rent or sell this SFH?

13 Replies

I'll try to keep it short, sweet, and factual. 

Kickstarting my investment life after many years of reading and planning, it's time to take action. I own a SFH and I'm deciding whether renting or selling is the best option. It seems rather obvious but pulling the trigger for the first time has me in an over analyzing paralysis. Looking for feedback.

Here are the financial statistics.

- Purchased in 2011 for approx $145,000 @ 4% on a 15yr fixed mortgage. Originally a foreclosure an investor flipped but sold at a lost due to market and financial pinch.
- Current mortgage left is a shade over 100k. House value has bounced back and appreciated to 190k, give or take a few thousand. This value is from a realtor valuating the home, not a website estimate so I'm confident in the value.
- Market in this area is very strong; homes are lasting an average of 9 days on the market.
- Selling would net somewhere between 70k-100k, depending on the sell price and if I use a realtor.

However using this as my first property is also attractive.

- After refinancing, the new combined payment of mortgage, taxes, and insurance (no HOA) would be about $950.
- Rent would be somewhere between $1500-$1700.
- Brand new roof installed a couple weeks ago plus the indoor HVAC Unit and Hot Water Heater have both been replaced in the last 5 years, so major maintenance costs should be low for some time if nothing goes incredibly wrong.
- This puts my cash need at basically 0 to acquire my "first investment" and the cap rate is about 17% depending on what numbers are used to assume monthly costs.


I feel like if I saw this deal online, I'd think it was too good to be true and that I should make this my first income property. Seems like it's clearly the best idea but the allure of a quick, easy sale to net a large profit to use to acquire more than a single property and have the option to really accelerate my portfolio keeps biting at my heels.

I need someone to shake the tree so I stop holding on so tight and make a call one way or the other. These first steps seem overly daunting, which I'm sure is a surprise to no one.

Thanks in advance!

@Maxwell Morrison

The answer to your question is really what you want to do in real estate. If you want to start a portfolio of rental properties rent this home out and use it as a learner property and sell it down the road. If you are stuck in analysis paralysis do something low threat. Renting out your current house is low threat because if it does not work out you can sell it for the profits later.

Remember, if you sell the house now you will lose the opportunity to try your hand as a landlord with a minimal risk of financial loss.

Good Luck,

Allen Fletcher

I second Allen here. I am going through the same thoughts now but will go with the route of renting my first property. Think about the financial freedom you are starting  when you begin building your portfolio that way.

Good Luck,

Asem

If I were in your shoes I too would rent this place out. Getting your first investment property is by far the hardest. Is that refi number current or one you were quoted? If that's your current martgage then yes this seems like a good investment property.

What will you do for housing though? You don't want to pay more for your own rent, that would offset the money you would be making here.

As a investor I do not see this as a good rental property choice. With a value of $190,000 and climbing your rents are too low. Not worth the time and effort for negative cash flow. Take the money and invest in a multi rather than play around with a poorly producing SFH.

You have to live somewhere so combine both and investment in a multi plex.

@Mike Hanneman That is the current rate if I refinance. Working with a few lenders/brokers to find the best rate and that's the best I found.

I would move to an apartment close to work. I currently work about 30 mins away and the cost of living in this house is not worth the principal. While my monthly payment is roughly $1500 (principal, interest, taxes, insurance) there are a lot of additional costs that really rocket the price. My toll bill to use the highways (which is unavoidable) is $200, gas is another $150, water bill to keep the foundation healthy is $250-300. I'm paying well over $2k per month for around $800 in principal. And that's not including repairs/upkeep. I'd rather find an apartment within walking distance to work and half my bill, save the rest.

@Thomas S. I've certainly wrestled with the idea of selling but the problem is it's such a seller's market here, it will be difficult to find a property. I might get lucky but the odds are not in my favor. While the rent certainly doesn't equal the total value of the home, I look at it as I'm buying a 100k home that rents at $1500+ per month. If the value continues to climb, that's a bonus. If there was a slam dunk multi-unit available where I could live-in, I probably go that route but nothing worthwhile has popped up over the past few months. 

There is no right answer for this its all up to you. I personally look at buy and hold properties as investments in my future. Make small money now and big money later. If you were to sell it now you would pay a chunk in taxes as well as cap your self on the profit at the the time of the sale. If you were to hold on to it and rent it out then you can potentially make profit on this property for the rest of your life while your tenant pays off the rest of your mortgage thus increasing your gain if you were to sell it 15 yrs down the road. With that much equity in a such a small amount of time I understand the desire for the quick buck. On the other side of the equation if you were to sell now you do stand to make good money off of it and maybe tenants are not your thing. I know which route I would take because I know what I want to do with my real estate. Either way, good luck to you!

Originally posted by @Greg S.:

As a investor I do not see this as a good rental property choice. With a value of $190,000 and climbing your rents are too low. 

So you are saying if the property increases another $45,000 he will be losing money?

I can only offer what I would do. Given your current tight market. I would rent that sucker out. Refinance it to get the cash. Buy second property. Live like a mouse in an apartment as you suggested until you have several properties flowing cash. Of course there are several options and this is only what I would do. Try to extend your search area out beyond your current market area. Best deals are often just beyond the center of the action. 45 min to 1 hour from a metropolitan center, and close to a main artery.

Good luck in your adventure, looks like you are considering all the right things!

Income properties have two separate income sources. Obviously the property itself generates a income from the tenant but additionally there is a income stream generated from the equity in the property itself.

If this property was 100% financed the cash flow would be X, if bought with cash the cash flow would be XX. The additional cash flow would be generated from the equity not the property.

When you calculate cash flow on a property it must be based on being financed 100% at market value, as market value rises or falls you must recalculate cash flow. This insures that the income generated by equity is not confused with income from the property itself.

Cash flow generated by equity is paid at a rate at least equal to the mortgage rate. This is of course a very low return on equity and should be adjusted much higher by true investors. This is another reason why investors must raise their rents every year if appreciation is rising.

If we look at this property there is $100,000 left owing and he has put capitol money into it as well prior to deciding to rent.

With rent at $1500 minus mortgage and HOA at $950 he has $550 to cover all costs.

If we attribute a 4% return to the $90,000 equity that works out to $300/month reducing his money available for maintenance to $250/month. That is just slightly under 17%. As we all know expenses on a SFH are way beyond 17%.

This property will have negative cash flow regardless of the rate of appreciation.

Add another $45,000 to the equity and you need another $150/month income to cover a 4% return.

Personally I require my cash to work way harder than 4% and I do not trade negative cash flow for appreciation.

It is, as a extreme example, crazy business math to pay 1M cash for a property and be happy with renting it for  $3000/month when a 5% return on 1M cash is over $4000/month by itself.

Cash buyers, equity hoarders, are a strange breed of investor if they do not understand the value of money.

You should keep it as a rental. If it cashflows, that is great, but the real values is the education you will get from your first rental.

Set a deadline for the next few years to purchase another one so you can cash in on the lessons.

Originally posted by @Greg S.:

Income properties have two separate income sources. Obviously the property itself generates a income from the tenant but additionally there is a income stream generated from the equity in the property itself.

If this property was 100% financed the cash flow would be X, if bought with cash the cash flow would be XX. The additional cash flow would be generated from the equity not the property.

When you calculate cash flow on a property it must be based on being financed 100% at market value, as market value rises or falls you must recalculate cash flow. This insures that the income generated by equity is not confused with income from the property itself.

Cash flow generated by equity is paid at a rate at least equal to the mortgage rate.  This is of course a very low return on equity and should be adjusted much higher by true investors. This is another reason why investors must raise their rents every year if appreciation is rising.

If we look at this property there is $100,000 left owing and he has put capitol money into it as well prior to deciding to rent.

With rent at $1500 minus mortgage and HOA at $950 he has $550 to cover all costs.

If we attribute a 4% return to the $90,000 equity that works out to $300/month reducing his money available for maintenance to $250/month. That is just slightly under 17%. As we all know expenses on a SFH are way beyond 17%.

This property will have negative cash flow regardless of the rate of appreciation.

Add another $45,000 to the equity and you need another $150/month income to cover a 4% return.

Personally I require my cash to work way harder than 4% and I do not trade negative cash flow for appreciation.

It is, as a extreme example, crazy business math to pay 1M cash for a property and be happy with renting it for  $3000/month when a 5% return on 1M cash is over $4000/month by itself.

Cash buyers, equity hoarders, are a strange breed of investor if they do not understand the value of money.

Greg,  I don't see where you are including the $750 a month "income" from appreciation in your calculations.    

I agree with Graig's assessment. I would never purchase a property with those numbers, but I also agree with Paul regarding your first property. This is not the best way to leverage your funds. BUT, you will get yourself a tenant and along with that comes an education. This is huge. It also allows you to start looking at properties as a landlord would see them. Your next purchase needs to be a DEAL and now you will know just how much of a deal it must be to qualify as an good investment property.

If you decide to keep this home as a rental, I don't think you will necessarily loose money.  You will need to consider dumping it for better investments however once you get a little experience.