Newbie in Hudson Valley NY - Sell current home or rent it out?

Question

Hi all,

I'm a true newbie from Orange County, New York. My path here seems quite similar to many - stumbling upon and reading Rich Dad, Poor Dad and I've been a regular viewer of Dave Ramsey's YouTube channel. As a result, I've decided I need to eliminate consumer debt and start investing in real estate.

I currently own and live in a 3 BR, 1.5 BA home that has become a bit too small for our family of 4. We now have an accepted offer on a larger home and we have the option to either sell our current home or rent it out. Here are the financial details:

Current home value ~$200k

Current loan payoff amount ~$170k

Current mortgage (prinicipal, interest, taxes, insurance) $1,550/mo

Estimated rent $1,700/mo (tenants pay for all utilities)

So here's my question: Do I try to sell my current home and get a modest amount of cash or do I hold the property and rent it? Once I factor in vacancies, repairs, capex, etc. I expect I would actually have a small negative cash flow. Obviously that's not attractive, but it would give me the opportunity to learn what it's like to be a landlord, with the hope that in a few years I could sell for a higher price with a lower loan payoff amount.

If it were you, would you take the modest cash-out now and use it to kickstart your savings to target a first rental property that will cash flow on day 1? Or would you hold the property for 2-3 years, learn "the ropes" of being a landlord, and hope to sell with more cash in your pocket?

If I'm missing anything obvious feel free to point that out as well. Thank you all in advance for even reading the post. If you have some wisdom to share please feel free. :)

-- Jared

CJ Ashton · Answer

Are you at the lowest possible interest rate for the home you are leaving? If not, refinancing and bumping the loan payoff out to 30 years again may drop your mortgage a bit and help with the cash flow problem.

Allyssa Compton · Answer

Hi @Jared Romaine

I typically never recommend a 1 year lease; I always recommend month-to-month as it gives much greater control to the landlord if there is a problem. And to answer your question - yes, the buyer would just need to know that it is already rented.

In many cases, this will open you up to a wave of investor buyers who will appreciate that it is already rented. Once they purchase the property, they can restructure the lease once it is up, if they choose to.

Allyssa Compton · Answer

Hi @Jared Romaine

I ran a quick CMA for your area so that I can hopefully help you with this decision! I'd be happy to send it over to you as well so that you can see what I'm looking at. (I am assuming the house is in Walden!)

First and foremost, I think your numbers may be off just slightly which will definitely impact your bottom line. In the Walden area, the average actual rental (what the tenant actually ended up paying) for a 3 bedroom is $1200-1300 which is quite a bit lower than what you were thinking. Now, there are obviously a number of factors and I don't have access to even close to all the information, so if you know that it would go for $1700, go with that! But I also think you may have a more difficult time renting that you anticipate. The average time on the market for rentals in your area was 44 days. So that's a vacancy rate closer to 8%. Again, you may have more information specific to your market that I don't, so if you know this to be untrue, go with what you know!

As a Realtor, I would suggest you list it for rent and for sale simultaneously and see what happens. If the house sits on the market for months and months before selling, you will be glad you had someone in there in the meantime to bring you in a little bit of cash.

As an investor, though, I would suggest you examine your goals for the long-term and evaluate the house as if it were something you were thinking of buying. If your goal is to learn as much as possible with a low barrier to entry, this could be a great opportunity for you. And, at the end of the day if you have negative cash flow, you can always view it as owning a second home for only $X per month. If your goal, on the other hand, is to get a certain dollar amount per unit, you may be better off selling and putting that money towards a deal that gives you a better return.

I hope this helps! Please feel free to reach out to me if you need anything. I primarily work in Rockland County but would be happy to help with the research side or refer you to an investor-friendly agent in Orange.

Moshe H. · Answer

Hi @Jared Romaine, interesting conundrum. I can see it's a tough call. After broker's and attorney's fees and taxes you won't end up clearing much on selling the home. And if it takes a while to sell you'll also be paying taxes on an empty house, which will eat into your profits (especially in NYS!). On the other hand, a negative cash-flow house is rarely a good idea, especially for a beginning investor. Your vacancy and maintenance rates are pretty optimistic - hopefully they do turn out that way but it's possible things will end up costing you more. One thing I've heard from more seasoned investors is that a negative cash flow property might sound like a good idea in some circumstances, but in real life, boy do people get tired of writing checks to pay for something they're not seeing the benefits of right now. If your area is commutable to the City then it will appreciate eventually, but in the medium term prices might stagnate if the Fed raises interest rates. And all the smart people seem to be saying that we're near the top of the market cycle right now. My vote is I'd be leaning toward selling.

Much luck to you!

Allyssa Compton · Answer

@Jared Romaine That's great! It's always helpful as an investor to have an many agents in your pocket as possible. If they're your parents, even better!

Best of luck to you and keep us on BP updated! We'd love to hear how it turns out for you.

Ozzy Sirimsi · Answer

I would rent the house for a while and let renter pay the house , if it is in a %0vacancy market, and house will appreciate in the future.

If not, sell it and move on, but do not forget REA commission and other fees you might pay.

Good Luck

Dave Friedman · Answer

Hi, @Jared Romaine. Welcome! I'm very new, too, both to the site and the RE game.Have you put together a spreadsheet to actually see what the cash-flow numbers might look like?

Moshe H. · Answer

Great answer from @Allyssa Compton, I have nothing to add but wish you the best of luck on your first deal.

Jared Romaine · Answer

Interesting idea @CJ Ashton - I may look into that as an option as well.

Jared Romaine · Answer

Thanks @Allyssa Compton for more great insight!

Newbie in Hudson Valley NY - Sell current home or rent it out?

Newbie in Hudson Valley NY - Sell current home or rent it out?

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