decision time: sell rental, re-rent, or move back in?

[simple girl]

Hello all!

Some background for those who don't know our story...in 2005 we bought a townhouse (DH's company paid all closing costs) and lived in it for 6 months. We then were sent on assignment, during which time we rented out the townhouse (using a property management company).

We are now back in the area with plans to stay indefinitely. Our renters have given notice and will be out by the end of September. We are currently renting ourselves and our lease is up Jan 2011.

So we have some decisions to make:

1. Re-rent the property (not sure how long it may take - not willing to manage ourselves...but mngmt co took a long time to fill last time and a bit leery about this)
2. Move back in, converting it to residential (love the property, but not the location due to traffic - like where we are currently renting much better - but willing to move back in if it makes sense financially)
3. Sell the property (about a $15K loss in property value due to current real estate market). In this case we would either continue with renting our current place or buy a smaller, cheaper townhome here.

I contacted our accountant for advice - to do a full analysis he estimates charging us $350 to $500. I've been trying to decide if I can crunch the numbers myself, and my research to date has been making my head spin.

Should I bite the bullet and pay my accountant to crunch numbers, or is this something we should be able to figure out if we just continue to study it?

 

[Alan]

I think both you and DH are pretty smart cookies and should be capable of crunching the numbers yourself.

If it were DW and I, the quieter location that you already have tried out, and like, would be high on our priorities, so it wouldn't be a financial decision for us. We would sell the existing place, and continue to rent until we bought a new place where we wanted to live.

 

[brewer12345]

As Alan suggested, there are financial and non-financial aspects to this decision. The non-financial we cannot crack with numbers. As for the financial, let's take the re-renting off the table for now. So what would it cost you to rent vs. live in the townhouse? Once you have that answer you can decide if $X is worth living somewhere rather than other.

What is the rent and other costs (utilities, etc.) Where you are currently renting? What is the monthly nut for the townhouse (mortgage, maintenance, utilities, etc.)? Is the mortgage interest deductible? And what time horizon are we looking at (3 years?)?

 

[simple girl]

I think both you and DH are pretty smart cookies and should be capable of crunching the numbers yourself.

Thanks for the vote of confidence...I usually tackle just about anything, but this one has been so complicated it's making me question myself!

As Alan suggested, there are financial and non-financial aspects to this decision. The non-financial we cannot crack with numbers. As for the financial, let's take the re-renting off the table for now. So what would it cost you to rent vs. live in the townhouse? Once you have that answer you can decide if $X is worth living somewhere rather than other.

What is the rent and other costs (utilities, etc.) Where you are currently renting? What is the monthly nut for the townhouse (mortgage, maintenance, utilities, etc.)? Is the mortgage interest deductible? And what time horizon are we looking at (3 years?)?

Current costs of renting 2 bdr apt:
Rent: $650/mo
Utilities: $250/mo
Total: $900

Cost to live in townhome (estimate on utilities):
Mortgage/interest/taxes/insur: $960/mo
HOA fee: $37
Utilities: $300
Total: $1297

So ~ $400 more/mo to live in our townhome until we get it pd off. However there are other financial issues regarding the loss we'd take to sell it, etc. I'll detail that in my next reply.

Mortgage interest - it is deductible as an expense if we keep it a rental. If we live in it, though, it is not enough to deduct from our taxes (standard deduction better than itemizing).

Time horizon? Always a bit of an unknown how long we will stay anywhere - however we hope to semiretire in 4 yrs, and we will need a home base from which we will periodically travel - homebase likely will be here since most of DH's work contacts are here. Townhouse would be paid off by then. OR, we could continue just renting. The emotional piece of not having a monthly housing payment entices us - but not convinced that it really matters financially after all the debates on here.

 

[Hamlet]

Ok, so it looks like you will make the loss from a sale up in about 3 years, give or take.

It sounds like you like your current apartment more than the townhome. I'd really lean towards selling.

One thing to consider-- what rate is your townhome mortgage at, and do you have a way to refinance? It sounds like you are underwater, but if you have some liquid assets, you might consider putting enough money down to refi to the current low rates if you have a high rate on the mortgage right now. It might cut the cost of the townhouse for you if you decide to stay there.

Thanks for the vote of confidence...I usually tackle just about anything, but this one has been so complicated it's making me question myself!



Current costs of renting 2 bdr apt:
Rent: $650/mo
Utilities: $250/mo
Total: $900

Cost to live in townhome (estimate on utilities):
Mortgage/interest/taxes/insur: $960/mo
HOA fee: $37
Utilities: $300
Total: $1297

So ~ $400 more/mo to live in our townhome until we get it pd off. However there are other financial issues regarding the loss we'd take to sell it, etc. I'll detail that in my next reply.

Mortgage interest - it is deductible as an expense if we keep it a rental. If we live in it, though, it is not enough to deduct from our taxes (standard deduction better than itemizing).

Time horizon? Always a bit of an unknown how long we will stay anywhere - however we hope to semiretire in 4 yrs, and we will need a home base from which we will periodically travel - homebase likely will be here since most of DH's work contacts are here. Townhouse would be paid off by then. OR, we could continue just renting. The emotional piece of not having a monthly housing payment entices us - but not convinced that it really matters financially after all the debates on here.

 

[brewer12345]

just for grins, how about door #3? What would you net if you rented it, less management fees?

 

[simple girl]

So here are the nuts and bolts I've been looking at regarding the sell or not to sell decision. This is pretty detailed, so kudos to any of you willing to listen and help!

According to my research, to calculate gain or loss on a rental property, you have to figure out your adjusted basis. Here are our numbers projected through 2010:

Original Cost: $170,903
Improvements: 0
Depreciation: ($25,203)
Adjusted basis: $145,700

Gain/Loss is your expected sales price minus your adjusted basis and selling costs.

In our case:
Expected Sales Price: $155,000 (our realtor did a comp for us)
Adjusted Basis: ($145,700)
Selling Costs: ($12,400) guessing 8%?? based on various websites
Taxable Gain/Loss: ($3100)

In addition, I have read that we would ALSO have to pay taxes on the depreciation - 25% on $25203 = $6300.

So in the end, if I've done this correctly, we would have a net loss of $3200 ($3100 - $6300). That's very acceptable to us.

For those kind enough to still be interested, does this analysis look correct? Is my thinking flawed anywhere?

Now, if we moved back in and lived there 2 yrs, there are complicated tax laws about how much of the gain (if/when the housing market turns around) we'd be responsible for when we do sell (I believe the laws changed in 2008 or 2009 about how much). I haven't attempted to fetter that out...also, we'd still be responsible for the depreciation recapture of $6300 - that doesn't go away.

IF I've done this correctly, I'm leaning towards selling, just to write it off and be done with it. Just writing this all out and having to explain it to others is quite cathartic.

Of course will need to go over it all in detail with DH! We are tempted to buy locally as we would buy smaller and have the mortage paid off in just a year or so...that's the emotional piece...be tied down...or not? Ah, the age-old question and debate on this board.

 

[simple girl]

One thing to consider-- what rate is your townhome mortgage at, and do you have a way to refinance? It sounds like you are underwater, but if you have some liquid assets, you might consider putting enough money down to refi to the current low rates if you have a high rate on the mortgage right now. It might cut the cost of the townhouse for you if you decide to stay there.

Current rate is good - 5.25% on a 15 yr. So good on that - but an important consideration! (Oh, and not underwater on the mortgage at all. We had a large downpayment from our previous home and have been throwing extra at it for a long while now.)

 

[simple girl]

just for grins, how about door #3? What would you net if you rented it, less management fees?

Sadly, not netting much at all! Around $3500 a year after all expenses taken out. Not the greatest investment but you live and learn!

 

[brewer12345]

I think the gain and loss is besides the point. Focus on the cash you would get from the sale, not the gain/loss (that has already happened and you cannot change it). So how much cash would you net, after paying off the mortgage, selling costs and taxes?

 

[simple girl]

I think the gain and loss is besides the point. Focus on the cash you would get from the sale, not the gain/loss (that has already happened and you cannot change it). So how much cash would you net, after paying off the mortgage, selling costs and taxes?

The cash we get from the sale is dependent on the gain/loss - no? I mean selling a rental property is different from a residential since you can write off the loss plus you have additional taxes to pay on the depreciation recapture. So that is why I went to the effort to figure all those numbers - they aren't important?

Cash we would net would be about $97K, if we sold today.

P.S. going out of town for the holidays, but will reply to any other replies next week!

 

[TromboneAl]

If you get some bad renters, it would be better to move in or sell it. If the renters are good, it would be better to re-rent it.

My point is that the most important aspects are the relative probabilities of each of those two outcomes, and how they would affect you.

For me, I'd feel that I could do a pretty good job of screening the tenants, but the grief from dealing with bad renters would be so bad that I would still decide to not re-rent.

BTW, our pot-growing, junky dog owning, house destroying neighbors got an eviction notice last month, but they still haven't moved out. So you know where my perspective is coming from.

 

[brewer12345]

The cash we get from the sale is dependent on the gain/loss - no? I mean selling a rental property is different from a residential since you can write off the loss plus you have additional taxes to pay on the depreciation recapture. So that is why I went to the effort to figure all those numbers - they aren't important?

Cash we would net would be about $97K, if we sold today.

P.S. going out of town for the holidays, but will reply to any other replies next week!

What I mean is you need to base the analysis on ash flows, notwhat you paid for it.

So you can either rent it and fork over a thousand bucks a month, live in it for $400 a month more than rent would cost you, or sell it and pocket $97k while living where you really want to for less money on a month to month basis. Selling looks lke a no-brainer to me.

 

[Brat]

Whether you put it on the market, rent it or move in the place will need at the very least a paint job and through clean up. Move a few of your things in the place to give it a little staging and see what interest you can generate. If it gets no buying traffic then evaluate you options.

I too think that selling is the best option but the current RE market may say otherwise.

 

[tryan]

Yeah, forget re-renting this beast ... you're bleeding slowly.

Better to move in or sell it. That decision is not a financial one ... If you don't mind it: live in it until the market moves up. If you can't bear to live in it : sell at a small lost and move on.

 

[NW Landlady]

In my humble opinion, I think you should SELL IT!