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Sell or Rent Opinions
Old 07-21-2012, 12:49 PM   #1
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Sell or Rent Opinions

I know this isn't a great time to be trying to sell, even with low interest rates there just doesn't (at least in my area) seem to be a lot of buyer demand.

My wife and I were ready to move though, we wanted more land and more separation from our neighbors and the move was going to put both of us closer to work so we bought some land and are building and will be moving in Oct.

I've put our current house up for sale by owner and have gotten decent traffic, just no legitimate offers. Once we close on our new house and we move I plan to just rent our current house instead. I figure I'll outline all the specifics and just get opinions about if that is a good idea or if I should keep it listed for sale. I've gotten calls of people wanting to rent it, I wouldn't have trouble at all renting due to the area.

-Realistic sale price would cover closing and mortgage pay off only
-Realistic monthly rent wouldn't 100% cover monthly ins, tax, mortgage

However, my best estimates of all the tax deductions (property taxes, ins, interest and depreciation) when combined with the rent income for the year I think the cash flow would be positive.

I've tried to do all the calculations about what sale price is the minimum I should take before it is better to rent, what are some considerations I might be forgetting?

Even though I wont have positive monthly cash flow but due to lowered taxes at the end of the year does that still make renting viable?

THanks
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Old 07-21-2012, 01:25 PM   #2
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I'm somewhat in the same boat as you. I've got a lakehouse that currently has no lake due to the drought (boat dock is sitting on dry ground). I managed to lease it out 22 months ago when it did have water for $2000 a month. That is roughly $200 a month less than current mortgage, taxes, and insurance.

I can refinance at current rates and realize a $300 a month savings.

The property is worth ~550K when there is water in the lake, much less when there isn't.

And like you, I've found that even in the Austin area, it's still much easier to rent than to sell.

So my current strategy is to continue to lease it out until the heavens open up and the lake fills back up. And if I can't lease it out again when the current lease is up in October, I figure I'll continue to hold onto it as a lakeless lake home for a couple of years until the lake and demand do come back because the $50K or so it will cost me to keep it is much less than the delta between value with lake and value without lake.

Would it be possible to refinance your current note and drop your monthly holding costs even further?
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Old 07-21-2012, 01:25 PM   #3
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How about maintenance? We went through this three years ago. Had already purchased the new house, had the old one on the market for sale or rent. Rented it to a couple who also had their house on the market. Our rental income was all positive cash flow because we owned the house free and clear. That couple finally sold their house and liked our rental well enough to ask if we would sell it to them. They had taken a beating on their house and didn't have the money to get a mortgage so we agreed to carry the mortgage for ten years. After a year, they wanted to up the monthly payment to pay the house off sooner. Good things can come to those that wait.
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Old 07-21-2012, 05:33 PM   #4
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Originally Posted by LakeTravis View Post
Would it be possible to refinance your current note and drop your monthly holding costs even further?
Yes, the current loan is 6% so it would be a pretty good drop. My current loan is an FHA one with PMI so I'd probably try to get rid of the PMI in doing so. That would probably make a pretty good difference.

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How about maintenance?
Maintenance isn't too bad, its a small yard and since I've owned it there haven't been any issues. It is only 10 years old so it is fairly new.

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Good things can come to those that wait.
True, that is why I'm thinking instead of trying to dump it at a low price just rent it and see what turns up in a few years.
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Old 07-21-2012, 09:37 PM   #5
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While you can may be able to refinance your property be aware that as property that will not be owner occupied you won't get as good a rate as you would for a principal residence.

If it was me in your situation I would probably sell (and we actually did sell a house at a loss about a year ago). It doesn't sound like all that positive financially for you renting it. Remember you have to factor in vacancy times and your cost to maintain and keep the house in repair with the likely greater wear and tear on it with renters and likely greater costs for insurance. Even if you have "good" renters remember you will have the possibility of having to make repairs and if your tenant leaves getting the property back into rental shape. That said, if you feel the property is likely to increase in value enough to make renting worthwhile and you think you would enjoy being a landlord then it is a viable choice.
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Old 07-22-2012, 05:24 AM   #6
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We did the same thing recently with our former house; rented it with slight positive cash flow, waiting for the market to recover some. We had no trouble renting due to strong demand, and the sales price recovered by ~15%.

Under those conditions, I think it was a good path for us. But, that's with the benefit of hind sight. When we were making the decision, we had to weigh several factors: vacancy rate, hassle factor (we were remote and used professional management), where is the sales market headed and when, whether we could carry two mortgages, etc. We also rented it a short enough time that we were able to shield all the gain (we'd owned it for 12 yrs) when we sold. I think all these factors should play into your decision.

A couple other points.
1. A quick check shows that a refi could save you ~$400/mo (assumed $250k Mtge)
2. You can improve your ROI by paying down your mortgage if you have available cash. You'd have to run the numbers to know if this makes sense.

Good luck with your new build and rental/sale.
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Old 07-22-2012, 07:23 AM   #7
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in a perfect world you would probably sell it. Given that renting is what the market is dictating at this point and the financials are about breakeven (better if you Refi) maybe you should go with the rent option. Doesn't have to be forever.
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Old 07-22-2012, 07:31 AM   #8
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Remember if you rent it there will be different tax issues when you sell....

Do a tax run as if you started to rent it out 5 years ago, recapture your depreciation, make the gain taxable etc. etc. and see if it makes sense to rent.

For me, I just sold mine for less money. It was not as big as some here, but on a % basis it was... I just do not want to be a landlord and sold.... that was in 2009 and it has turned out to be the better decision.... house prices in that neighborhood has continued to decline, but my investment I made with the money has gone up.... since yours is a wash with not money, that is not an issue....
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Old 07-22-2012, 08:12 AM   #9
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One big question is whether you are suited to being a landlord. Do you have a good understanding of how to screen your tenants to reduce (but never eliminate) the chance that you get a tenant that stops paying and starts destroying your property?

Do you understand the eviction process in your area? Are you mentally prepared to use it quickly in the event of problems?

Are you able to either do or pay for the repairs that will be required? Note that even good tenants are likely to generate more wear and tear than an owner in their own property.

If you are good at selecting and maintaining good relations with tenants, and are handy or have a reasonably priced handyman that you know, then I think renting is a good option.

Otherwise, I would lean towards selling.
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Old 07-22-2012, 09:21 AM   #10
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Thanks for all the replys!

My initial thoughts were to just sell unless it was a huge loss because that way I wouldn't have to deal with all the landlord issues that some of you have pointed out. I'm lucky however in that my house is close to a large AFB so renting it will be easy, vacancy fairly low and more than likely I'd have "good" renters. Not sure how I'll handle being a landlord but I guess I can try and if necessary put it back up for sale after the first lease ends if it turns out it is not for me. I'll still meet the 3 out of 5 requirement for capital gains too.

Our new land is only 30 minutes from our current house so we will be local and able to manage ourselves. I've run some numbers assuming certain sales prices and certain monthly rent and with all the estimated tax deductions I've got a decent idea of what sales price I need before it is better to rent for 5, 10 or 20 years. I think it is possible to get that price right now but I don't want to keep the house up for sale after we move while I pay a mortgage and it sits vacant.

I do need to look into the eviction process for my area and I guess the biggest question is am I cut out for being a landlord. I guess I can figure that out as I go, I can afford both mortgages (I don't want too but...) so worst case scenario I figure out its not for me and then I put it back up for sale, hopefully without any permanent damage done by the renters
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Old 07-22-2012, 11:09 AM   #11
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It can be a reasonable option but you should check into the refinance rate and requirements for a non-owner occupied property. My understanding is that they are more strict on requirements and may require higher equity. If it is worth less than enough to meet the LTV requirements of a refinance then you would have to keep your current rate which is quite high or bring money to table so that there would be enough equity. You can't just refinance as owner occupied since you can't represent that you will live in the property for however long your paperwork requires for an owner-occupied mortgage.

Also, as others mentioned if it does go up in value to more than you paid for it and you later sell you may owe taxes if it no longer meets the requirements for the gain not to be taxes.
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Old 07-22-2012, 11:28 AM   #12
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Remember if you rent it there will be different tax issues when you sell....
What if you rent it but have lived in the house for 2 of the prior 5 years? Does renting for the interm before selling make a difference? The tax guy I spent an hour with didn't mention it and I didn't think to ask.

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I know this isn't a great time to be trying to sell, even with low interest rates there just doesn't (at least in my area) seem to be a lot of buyer demand.
We were in the same boat. We bought a house before ours sold. A neighbor who we really like and trusted asked if we would rent it to him. We agreed and it has worked out well for the past year.

It was a tough decision as to whether to sell in a down market or rent it. We needed capital to retire next year (I want to have 4 years of living expenses in cash/cds/short term bonds) and it came down to either selling the house or selling stocks.

We now have a buyer and are in the process of closing.

We lived there 20 years. After principal+interest, improvements, property taxes, etc. I'm not sure that we broke even. If not, we at least had an inexpensive place to live.
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Old 07-22-2012, 12:09 PM   #13
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I don't know what the equity requirements are now to refi an owner-occupied property but seems like I remember it being 30% even in the go-go times. When I refi'd a rental property about 10 years ago, seems like they added at least one point to the loan and also added 2 points to the closing costs.
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Old 07-22-2012, 01:11 PM   #14
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One big question is whether you are suited to being a landlord.................. Note that even good tenants are likely to generate more wear and tear than an owner in their own property.
So very true. The hardest part for me was seeing someone else living in MY house. I wrote into the lease that I change the A/C filters every three months, got me scheduled access to the inside. If you aren't cut out to be a landlord, you'll know it the first time you see someone else's junk all over your house!

And you can pretty much count on the cost of painting and replacing carpet in between renters. I rationalized that somebody else paid me close to $50K to live in my house for two years during a time I would not have sold it or been able to enjoy it anyway, so they've helped pay for new carpet, etc.
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Old 07-22-2012, 01:37 PM   #15
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So very true. The hardest part for me was seeing someone else living in MY house. I wrote into the lease that I change the A/C filters every three months, got me scheduled access to the inside. If you aren't cut out to be a landlord, you'll know it the first time you see someone else's junk all over your house!

And you can pretty much count on the cost of painting and replacing carpet in between renters. I rationalized that somebody else paid me close to $50K to live in my house for two years during a time I would not have sold it or been able to enjoy it anyway, so they've helped pay for new carpet, etc.
This is the type of stuff I'm looking for! Thanks!

I definitely like the idea of scheduled visits to check on the property and hopefully I'll be able to handle seeing someone else not take as good of care of my stuff as I would. Probably not a bad idea to factor in cost of paint and carpet between renters. I'd love to have long term renters 2+ years and that could be possible with air force folks.

I think that is one thing I try to keep telling myself, aside from a few hundred bucks a month in cash flow after a few years the equity they've produced counts for something too.

As far as some of you pointing out the refi requirements for non-owner occupied, those are good points. I need to do some digging. Might turn out that a refi isn't worth it and it is just better to pay extra on the mortgage to reduce interest payments that way...

All good info, any other advice or experiences with landlording is welcome, keep it coming!
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Old 07-22-2012, 02:18 PM   #16
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IMO, shorter leases are better than longer leases. Hope for a long-term tenant on a month-to-month lease. A nightmare scenario is finding out in the second month of a 12-24 month lease that you have rented to the tenant from hell. Terminating a m-t-m arrangement (30-60 day notice depending on where you live) is much easier than trying to break a long-term lease.

Hopefully, you will be one of the lucky landlords and not learn how seemingly normal humans can defile and destroy the home in which they live. Make regular inspections (i.e. changing the furnace/ac filters) to protect your investment. Just because the rent checks are arriving on time every month does not mean they are taking care of your house.

Make sure you have a good umbrella policy.

Good luck. At least there are many more people in the rental pool today. In the last few years that I owned a rental property, anyone who fogged a mirror could buy a home. Made for slim pickens in the rental pool.
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Old 07-22-2012, 05:27 PM   #17
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IMO, shorter leases are better than longer leases.
Does it deter many renters looking for longer leases when you say you want to do month to month?

I wouldn't have a problem doing month to month, especially if it was too a military family but I would be afraid that might limit the people that would be interested, maybe not.

I guess optimally you want a renter that stays for 2+ years but goes month to month...that would be great
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Old 07-22-2012, 06:03 PM   #18
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Does it deter many renters looking for longer leases when you say you want to do month to month?

I wouldn't have a problem doing month to month, especially if it was too a military family but I would be afraid that might limit the people that would be interested, maybe not.

I guess optimally you want a renter that stays for 2+ years but goes month to month...that would be great
I used to start with a 6-month lease that rolled into m-t-m in month 7+. Tenants want a lease to hold prices. Keep your increases moderate and infrequent and it shouldn't be a problem. Remember that a $25 per month increase only brings in an additional $300 per year. If the increase causes a tenant to give notice, you just lost at least a month's rent and fix-up costs which I guarantee add up to way more than $300.

I found that it made more sense to do the increases when a tenant had given notice (i.e. the new tenant will pay higher rent) and I was forced into a period of vacancy and doing fix-up.

Also, don't forget that your homeowner's policy may become invalid once the house has been unoccupied for more than 30 or 60 days. A friend of mine just bought a condo that had a $17,000 insurance company lien on it because the previous owners had "forgotten" to tell the insurance company the unit had been unoccupied for several months when they filed a claim for water damage. At some point the insurance company figured it out and slapped on a lien for the amount of the repairs. Be careful you are properly insured while you are in transition. It would be a bummer to have the house burn down after being empty 61 days and your insurance company denies your claim.

Also, if you decide to rent, don't forget to change your homeowner's policy over to what I used to call a fire policy. Don't know if that's the official name. You will now only insure the structure. The renters need renters insurance to insure their stuff.
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Old 07-22-2012, 06:12 PM   #19
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Also, if you decide to rent, don't forget to change your homeowner's policy over to what I used to call a fire policy. Don't know if that's the official name. You will now only insure the structure. The renters need renters insurance to insure their stuff.
I just did this - changed my policy from a "Second Home - Rental" policy to "Dwelling Only - Rental" coverage and it cut the premium in half by removing contents and living expenses coverage.
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Old 07-22-2012, 08:05 PM   #20
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Good to know about the insurance policy, didn't realize it mattered if for 30 days or so no one was in the house...

Also, if the premium drops by only covering the structure that sounds pretty good!
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