collect interest or collecting rent question.

[Enuff2Eat]

All,

could someone give me an advice on the following situation.

i have a townhouse, it is completely paid for (no mortgage) and currently we net around $650/mon. on rental. The house worth around $200,000.00 i think i would be an easy sell for $180k minus $20k commission minus $20k for taxes and misc. i would probably walk away with $160k +/-.

the question is as follow, should i

1) sell it and collect 5% interest (160k*5%) per year = no hassle but got to pay taxes on it

2) or keep it. deal with "crying and complaining" tenants, upkeeping and reparing and also hope for appreciation. benifits also includes tax right off, depreciation...


if anyone have the similar situation please share too

enuff

 

[WM]

We just started renting out a property this year, and our plan is to keep it until it becomes more hassle than we want to deal with. It's not paid off, but we'd make a good profit on it because we've had it for several years.

I'd compare the rent plus a reasonable estimate of appreciation versus investing the sale profits at 5%. If they come out close after 2, 5, 10, however many years, then it's more a matter of whether you enjoy being a landlord. One good thing about the rental income, though, is that it will rise with inflation.

If it's more lucrative to hang onto it but you don't like the hassle, have you thought about a property manager? The cash flow is enough that you'd still get a nice income.

 

[wabmester]

You're getting less than 4% yield by renting out your property, and that's assuming your net income reflects maintenance costs and vacancies.

At that historically low yield, I would sell. But yields on other investments are pretty low right now as well.

Some might argue that a 4% yield can be justified if you can reasonably expect high appreciation. But if you've seen recent high appreciation, that should lower your expectations of future appreciation.

 

[Sam]

enuff,

This is a very hard decision to make. I would approach it purely from an economics standpoint. Even so, it's still very complicate because you have to come up with future projection, which might or might not be right.

The least reliable projection is appreciation of the townhouse. Will that appreciation beat or trail inflation?

If expected appreciation is the same as inflation, then I would sell it. Your numbers tell me that you could do better investing that money, even conservatively.

Good luck

 

[ScaredtoQuit]

Don't forget you have to pay capital gains tax on it when you sell. That would knock another 15% off the difference between your basis and the net proceeds of the sale. Then there would be another x% for your State or Province.

I think a lot of your decision should be predicated upon things we don't know... the prospects for future appreciation, how much of a hassle it is to deal with the tenants, and how well padded your nest egg is. What I like about that type of investment is the inherent protection from inflation. Presumably, you have the ability to raise the rent each year. In doing so, you have one part of your portfolio which is totally inflation-proof.

Lastly, if you are somewhat adventuresome, you also have the ability to lever your equity. If you are fortunate enough to be able to secure a low cost mortgage, conceivably you could have your cake and eat it too. Refer to numerous threads on this Board about mortgaging your house and investing the proceeds.

 

[modhatter]

I am in the same delema. Only my situation is magnified as I am moving when I sell my residence here to Mexico. I also have no mortgage, but due to VERY high taxes and rediculously high insurance, I am only seeing $400 a month on a $200,000 property. The only problem now is that $200,000 property has taken a nose dive to $160,000 in the last two months due to an over abundance of rental property on the market not selling here in Florida. Proffits from rentals have decipated with the cost of new taxes and trippled insurance, so many people are trying to unload. So now my delema is do I sell in this slump and take this big loss, or wait another two years until we hopefully come out of this and sell for a more reasonable price. I have four of them here. Actually some of the TH's were selling in around the $230,000 range before the decline, so that is $70,000 decline in the last six months. At $230K I feel that was inflated, but at $160K that is undervalued. What to do-what to do.

So the long and short of it is. " I feel your pain."

 

[Sam]

modhatter, which city in Florida are your rental properties? 70K/230K is over 30%, in six months?

 

[modhatter]

Jupiter, Florida (Palm Beach County) It's a nice area.

 

[KM]

We fell into a similar situation about 6 years ago when my father-in-law passed away and we inherited the house. The market was bad then, so we decided to keep it and rent. The good news is we get $1350/mo rent (4 bedroom house). After taxes, insurance and basic upkeep, we still made a very nice profit. And the house has appreciated about $60,000 since then.

But reality did set in with horrible tenants, missed rent payments, damages, phone calls and so on. Not to mention the fights we had about all of this. Last fall we went to an agency and hired them to take over the management of the property. 9% of the rent - $121.50/mo. Smartest thing we ever did.

The property will appreciate. It may take time, but it will appreciate. I would never sell property, unless I couldn't get enough rent to take a profit. If managing it is too much of a headache, find someone to manage it for you. Your profit will be less....but so will your headaches. My parents sold my grandmother's house after she died. They always regretted it.

 

[wabmester]

The property will appreciate. It may take time, but it will appreciate. I would never sell property, unless I couldn't get enough rent to take a profit.

I posted a thread somewhere on the long-term returns from real estate. On average, RE returns something like 8%/year, and most of that is from rents. The appreciation component is about the same as inflation. So, figure 5% dividend yield + 3% appreciation.

Given that current yields are below the historic average, and future appreciation is likely to be below the historic average (IMHO), I think there are better investments with much lower headache-factors available.

 

[Buckeye]

Some people are suited to be landlords and enjoy all the work (physical and mental) that goes with managing rentals. Personally, I hated being a landlord but real estate values were flat or declining in Sacramento for 10 years so I held on. The property tripled in value in the last three years so by hanging on long enough I actually made some money. Even so, the happiest day of my life was the day the sale closed and my stomach no longer went into knots when the phone rang. I beat the bursting of the bubble by about a year. I didn't hit the top but close enough. Because I only had a $4,400 initial investment, I think I came out ahead when all the repairs, lost rent, time value of the money invested, CA state taxes, and federal income taxes at sale are accounted for. Never, ever again.

 

[Nords]

Given that current yields are below the historic average, and future appreciation is likely to be below the historic average (IMHO), I think there are better investments with much lower headache-factors available.

I think we're going to keep our rental unit until it's clear that none of the family members are interested in it. That may take another 20 years...

 

[calmloki]

All,

could someone give me an advice on the following situation.
....the question is as follow, should i

1) sell it and collect 5% interest (160k*5%) per year = no hassle but got to pay taxes on it

2) or keep it. deal with "crying and complaining" tenants, upkeeping and reparing and also hope for appreciation. benifits also includes tax right off, depreciation...
if anyone have the similar situation please share too

enuff

Ok, here's my read on it: If you sell and get $160,000, by the time you pay Federal taxes (and state?) I would expect it to eat about 10% at least of the $160k: figure sales price minus basis minus costs = profit. Then figure your normal tax rate (25%?) x amount you have already depreciated (recapture), subtract from profit, and multiply 15% times the remainder. What you've got left is yours unless the AMT whacks you for some more - Tryan says he's been hit with AMT on every property sale. If you are left with $144,000 you could easily plug that into a 5% account and make $7200/year or $600/month. Tough call. No more tracking inflation with the increased annual value of the place. I'm thinking to grind it out for a few more years - I think 2008 is when the 15% LTCG rate is scheduled to end.

One thing we are doing a bit of is funding property loans through a local private lending company. We are put in a first position, 60% LTV, 9.9% interest, 5 year call. We check out the local properties, decide if we wish to fund the loan, if the loan goes bad we would have to repo the place - of course that will rack up legal fees, but figure about the worst would be that we get the place for today's property tax assessor's market rate value . Keeps us in real estate, earns great interest, has security we can go out and see, all collections are through the lending company, so no headaches so far.... Worth calling around your area to see if something similiar is around?

 

[Sam]

Jupiter, Florida (Palm Beach County) It's a nice area.

Wow. 30% drop in 6 months is just too much. Is it the overall market, or just a few specific cases?

I just read this article, it's scary. An exodus will certainly do major damage to the Real Estate market.

School enrollment declines in Palm Beach County
http://www.tcpalm.com/tcp/schools/article/0,,TCP_24434_5357010,00.html

 

[jdw_fire]

All,

could someone give me an advice on the following situation.

i have a townhouse, it is completely paid for (no mortgage) and currently we net around $650/mon. on rental.

...

1) sell it and collect 5% interest (160k*5%) per year = no hassle but got to pay taxes on it

2) or keep it. deal with "crying and complaining" tenants, upkeeping and reparing and also hope for appreciation. benifits also includes tax right off, depreciation...

I don't think this is an apples to apples comparison. Managing rental property is work and as such anyone (even the owner) doing it should get paid a wage. The amount you get as a wage should be removed from the cash flow before you compare that cash flow to a bond/MM account/CD's yield. The easiest way to do this is to introduce a hypothetical management company and reduce the cash flow from the rental by the amount you would have to pay said management co. Now how does it compare?

 

[tryan]

enuff,

I am in the same position with everything I have left. I believe current interest rates make this one a coin-toss. If you're really tired of it that may be the deciding factor.

I am "holding" for higher interest rates.

One caveat ... if you've lived in the house 2 of the last 5 years, then selling is a NO BRAINER because the gains will be tax free.

Also, your commision number (20k) seems high and the tax number (20k) seems low .... probably a wash.

 

[modhatter]

Sam
in conversations with a couple of realtors, I am told that many people are leaving the state or at least this high priced county for more affordable digs. Taxes and insurance have more than trippled in recent year. Taxes on my home are $7,800 now and my insurance went from $1,300 to $3,700.

Current TH (now on market for $172,000- totally remodeled 1064 sq. ft. near beach)
New kitchen and appliances with granete tops, brand new bathroom, flooring, ac, the works etc, etc. (just put nearly $20,000 in it)
Currently Another unit is same complex same as mine on for $160,000 but has not been remodeled. Neither unit has sold.
Last year I sold another unit in same building last for $212, 000

This is why rentals are not very appealing to investors now. As an example on my unit for sale.
Taxes: $300 mo.
HOA $225. (was $135 last year until insurance trippled) and insurance only covers outside to sheetrock.
Flood insurance: $30 mo.
Total expences $555. pr mo.
Rent (max) $975. (Others in complex rented for between $900-$950
Proffit $420 per mo.

Now to me, if the values don't recover in the next few years, selling (if I could) would be a no-brainer. But if the market recovers in the next three years and values start to climb, then I wouldn't mind waiting. So, I ponder.

 

[Sam]

Modhatter, I feel your pain.

On a related note: My youngest sister is a VP of a sizable Apartment/Condo Rental company based in West Palm Beach. 4 months ago, she told me she just bought a house there. I was so angry (out of concern) and told her so. I laid it on her pretty hard because she should know better and that she and I had talked about the local market just a year ago. Obviously, she god mad at me for not trusting her judgement. I said sorry, and told her I would like nothing more than to be wrong about West Palm Beach Real Estate. Oh well...