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Sell or Rent Second Home?
Old 06-26-2007, 11:55 AM   #1
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Sell or Rent Second Home?

DH and I have spent the past two years building our future retirement home. It is just a ferry hop and 25 miles from our current residence (but feels a world away). In 2005 we refinanced our current residence to build the new house. Current mortgage is $228k and the house is currently valued at 315K w/interest rate at 5.5%. I am hoping to retire in the next 2 years. DH will work for another 6-9 years depending on whether he wants to earn his full pension. It will mean a longer commute for him (adds the ferry into the mix). OK - heres the question.....I'm trying to figure out whether we should keep the main residence and rent it for enough to make the mortgage payments or sell it and be done with it. The house is located in a desirable area. Thoughts, experiences, ideas?
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Old 06-26-2007, 12:26 PM   #2
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Here is another way of looking at the situataion: If you had the money to buy the main residence would you buy it and rent it out (assuming you can make the mortgage payments)?
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Old 06-26-2007, 01:25 PM   #3
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Just imagine being called in the middle of the night or weekend to fix an electrical or plumbing problem. If you are OK with that, then investigate what alternative investments have been making compared to what you hope to make by holding the house (net of any extra expense payments and capital gains).

The leverage might be better but that increases the risks. What if the place required $5k to fix up and was empty for 6 months between tenants? Would you be OK with that risk?
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Renting second home
Old 06-26-2007, 01:43 PM   #4
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Renting second home

If your rent your second home and then decide to sell have you forfeited your exclusion to tax free capital gains?? That would be my biggest worry. When my house was on the market and seemed it would not sell I thought about renting and a friend brought to mind what I might be giving up.
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Old 06-26-2007, 05:34 PM   #5
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If all you can rent it for is to cover the mortgage payments, I'd dump it. By the time you factor in property taxes and other expenses, the renters wearing stuff out and damaging stuff, problem renters, midnight calls about leaks in the pipes/roof, months without renters, etc...you'll be losing money. You could do far better dumping the place and the hassles and the money sink and finding a better investment.

Now if you could get positive rent from the place including all costs and other mentioned issues...different story...
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Old 06-26-2007, 05:56 PM   #6
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If all you can rent it for is to cover the mortgage payments, I'd dump it...
Ditto!

If you cannot cover all expenses (including interest)... why bother. Plus, you will have some effort invested in it (your time and aggravation). You will need to consider some % of vacancy time (since you are unlikely to keep it rented constantly).
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Old 06-26-2007, 06:07 PM   #7
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OK - heres the question.....I'm trying to figure out whether we should keep the main residence and rent it for enough to make the mortgage payments or sell it and be done with it. The house is located in a desirable area. Thoughts, experiences, ideas?
Sell! Think about how it fits into your ER portfolio's asset allocation and whether you want to include landlording in your lifestyle.

You don't want to deal with phone calls about plugged toilets when you're lounging on Kata Beach with the Kaderlis... but if you're fascinated by the concepts of real estate & home improvement then it might be a nice paying hobby.
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Old 06-26-2007, 06:46 PM   #8
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You have to answer a few questions:

1. Who is going to manage the rental? You mentioned your DH will have a longer commute. Is he going to have time?

2. At some point you will be interrupted and have to fix something (plumbing, HVAC) when you'd rather be doing something else.

Answer those questions and your halfway there

Also as long as you've lived in the property 2 of the last 5 years you don't owe taxes on the gains upto 500k. Be sure to calculate the amount of taxes that will be due if you lose this benefit. That could answer your question of whether to rent or sell.
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Old 06-26-2007, 09:24 PM   #9
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You have to answer a few questions:



Answer those questions and your halfway there
Maybe 10% of the way there. The big question is what is the appreciation rate for your area and your type of property and the probability of it increasing, decreasing of staying the same? My lowest average compounded yearly rate of appreciation is 9% over 29 years investing in 3 different states in four different decades.

Sounds like you have $87K equity. At 9% you would increase your equity $28,000 per year and growing (About 32.5% return). Figure your tenant is paying down your mortgage and paying yearly increases in rent increases your return. Put your $87K in the market and earn $14,000 if you think you can do 16% yearly.

If you have the type or location of a home that could sit 6 months without a tenant it doesn't seem very "desirable". SELL! Landlord tip #1. Preventative Maintenance. Plumbing problems, establish a relationship with a good handyman. I collect $1025 per month per toilet and have a market value of $281,250 for each commode. If you are dealing with less value per toilet than that then maybe not a good idea although I have had ZERO plumbing calls and probably spent $500 total on plumbing on the 8 toilets in over 40 years of renting.

Seems like that house helped you get your future retirement home. May be the answer to possible future nursing home needs or a way to give tax free money to your children. Or you could just cash out now and buy a bigass luxury car.
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Old 06-27-2007, 07:26 AM   #10
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I remember reading (ESRBob's book?) that too much real estate is an ER no-no. Now that I've lived it since Jan. 2005 I can see why.

1. Real estate management and day-to-day involvement is a J O B. Thats what ER's want to avoid.
2. We like the ability to travel (sometimes for months) and otherwise come and go as we please. No can do with a rental.
3. Can be a negative impact on asset allocation.
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Old 06-28-2007, 09:52 AM   #11
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DW and I recently decided to sell our beachfront property in Alaska. We already sold some property in the Yukon and paid off our mortgage on our house with the proceeds.

The Alaska property made sense when we planned to live in the Yukon and spent 2 or 3 months per year in Alaska. Having spent serious $ on designing and installing a septic system, well, and treated wood stairway to the beach, I began to groan at the thought of a further building project there and HAVING to drive 2000 miles every year to Alaska, like it or not. But letting the expensive septic system sit unused seemed like it forced us to develop.

After talking to a realtor and finding out it was worth nearly twice what we thought, we decided to put it on the market next year while cap gains are still low. This figured into our decision to buy an RV and bank the remainder. Of course, DW didn't wait until the property sold before grabbing the RV (sigh).
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Old 06-28-2007, 12:06 PM   #12
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I would not want to be 25 miles and a ferry ride away from my very first, one and only, rental. Sell while prices are still high and taxes are still low.

FWIW I have rental property in 3 states; buutt my very first one ... I lived in the first floor of a 3 family. Learned alot.

oh, and forget about "professional" management ... you can't afford it; they'll turn your slightly positive cashflow into a negative one.
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