Should we Sell or Rent our Second Home?

[48Fire]

We have a second home we own as part of our ER. As things change, we are debating whether we rent in the second location and either sell or rent our second place. Does anyone have any models, analysis, thoughts, or opinions on what they have done for a similar situation? Thanks!

[Senator]

You need to calculate what kind of income you will get from it, and compare that to what you would get in any other investment. You also need to factor in a risk premium.

Be sure to figure that 50% of rents go to expenses, and the remaining goes to mortgage and profit.

I have 24 of my own rentals, and it works well for me.

[jerome len]

Unless you're really in the rental business of have a relative or good friend that wants to rent the home, I'd sell it. You really need help for rental contracts, deposits, etc. and, do you want to chase a renter behind in his/her payments? What do you do when the rental calls and say's the toilets broke on a Sunday morning? Senator has 24 rentals.....that can be a very good business....just one, especially if it isn't near your primary home can be a problem.

[Senator]

Quote:

Originally Posted by jerome len Senator has 24 rentals.....that can be a very good business....just one, especially if it isn't near your primary home can be a problem.

Very true. All of mine are within 10 miles of my home. My cash flow is very good, but it takes a bit of work on my part.

I work full time (for now), and am able to save quite a bit of money managing them, and doing my won maintenance.

It's all a matter of getting great tenants.

[imoldernu]

Aside the personal aspects of owning/managing... a longer look to the future.

After the housing bubble, and the low, low prices for foreclosed homes, REIT's and individual investors bought up the inventory for incredibly low prices. During the same period, those who had lost their homes, needed housing, so renting to them, became the means of supporting that ownership.

Housing prices have been increasing for 5 years and nationwide are within 10% of the peak. Investing owners (during the interim) have the cost of management, taxes etc, so at some point, it becomes more profitable to dispose of this ownership because of the higher prices.

Major cities have benefitted the most, but individual states and small locales have spotty resale values, and so it would be well to see what is happening in your own area. This could be a major decision consideration.

CoreLogic: Home prices moderate into late fall | 2014-12-02 | HousingWire

[Senator]

Quote:

Originally Posted by imoldernu Housing prices have been increasing for 5 years and nationwide are within 10% of the peak.

You are correct. The appreciation is slowing, and appreciation is not the reason to own investment property. Nor is depreciation. Cash flow today is why you invest in rental property.

The upcoming demographics say we will have many more renters than home owners. Most of the population growth will be lower than average income, not higher income. The new renters will not be contributing to housing appreciation, unless the minimum wage increases significantly so rents can be raised.

Here is my take on where the housing market is headed.

[jkern]

Here are a few things I would look at:


1) What is the net ROI? For me, anything above 6% is good.
2) Is the rental market strong? A strong market virtually eliminates vacancies.
3) Are the typical tenants mid to high income? Low income tenants could be trouble.
4) What is the condition of the house? A well maintained home means fewer maintenance visits.


If the answers to these questions are positive, rental real estate can be a very good investment.

[48Fire]

Thanks everyone for the inputs. Looks like I will be creating a spreadsheet

[RetireBy90]

I would make a careful assessment of what is the best use of the value you have in the 2nd home. Considering the cash flow you can expect from renting the home out as opposed to an investment in stocks, bonds, or other assets. You could also compare to what you could receive from and annuity. There are many different things to consider but if it is cash flow you want to help fund your retirement real estate can be an attractive investment. We have only one rental property that is in Nevada and we are in Virginia. We have a property manager to take care of day to day collecting rent, finding tenants, and making repairs.


My goals may be different than yours, I want income for my retirement but I also want to leave a home to my son. Figure why you are considering this particular investment and then rate it compared to various others in meeting that goal.

[Dog]

48Fire,
We are in the same situation. I retired this year and DH will retire mid2016. I'm spending most of my time at our future retirement home a 25 mile drive and short ferry ride from our primary residence where he is staying. The primary residence is an older home in a desirable location (close to schools, transportation and waterfront - near a major employer for the state). I believe we could easily rent the home for close to double the mortgage payment, so it is tempting. But, I don't want our retirement impacted by maintenance issues for renters. We are leaning towards selling, but will decide based on the economy in 2016.
I will read the comments to this string with great interest


Sent from my iPhone using Early Retirement Forum

[RetireBy90]

Quote:

Originally Posted by Dog 48Fire, We are in the same situation. I retired this year and DH will retire mid2016. I'm spending most of my time at our future retirement home a 25 mile drive and short ferry ride from our primary residence where he is staying. The primary residence is an older home in a desirable location (close to schools, transportation and waterfront - near a major employer for the state). I believe we could easily rent the home for close to double the mortgage payment, so it is tempting. But, I don't want our retirement impacted by maintenance issues for renters. We are leaning towards selling, but will decide based on the economy in 2016. I will read the comments to this string with great interest Sent from my iPhone using Early Retirement Forum

48 - while there are those that manage a rental property themselves, I would suggest you consider a manager. It costs to hire one, but for us it makes all the difference. That would take away the impact of maintenance issues, finding and qualifying tenants. I look at it as a cost, like the management fee you pay for a fund.

[unno2002]

Does the prospective rent cover all costs of keeping the house?
Does the house have reasonably expected potential to sell for more in the future?
If you sold now could you invest the net proceeds of the sale in something that could provide the same net income as rent with similar future sale price potential?

[outabout]

We bought our current house in 2009 and didn't want to sell the replaced house for a loss, so we rented it out for a few years. It was a middle class house and tenants were generally good, but they would rent for a year then bought a house, so turn over was yearly, still I would take this anytime than a lower-income rental. Even with this middle-class rental, I practiced "defensive landlording", I learned everything about the local landlord-tenant law, I maintained the house in great condition, I responded the tenants requests promptly. I also went to landlord forums on the internet, and tried to learn from other's experience, which was a double edged sword - on one hand I learned valuable information, on the other hand, learning about all tenant issues lowered my confidence in humanity significantly.

So in addition to what's been already said here about financial, you also need to consider the hassle factor, which can be huge. I didn't have too much tenant problem, but I always felt something on my mind, I was not free. If you hire a management company, you would then have a different set of issues unless you are very lucky to get a reputable company, remember you still have to pay the management company even if you can't collect rent.

Denver has a very good housing market, it has recovered from all of the recession plus quite a bit more. We sold our rental house earlier this year, I feel so much relieved.

[someguy]

I'm a bit of a broken record on this on landlord threads, but Senator gave you the key a lot of new landlords learn the hard way. Assume 50% of rent goes to expenses (including RE taxes and insurance). The remaining 50% has to cover the mortgage (P+I) and whatever is left is your true cash flow. Unless your second home is:

1) in a place where home rental to purchase price ratios are skewed
2) owned a pretty long time in a high appreciation area or
3) purchased below standard area value

I think you'll find it's hard to make the math above work.

[SumDay]

I'm also a broken record on landlord threads. I would not own property I could not personally keep an eye on. And I also wouldn't pay a property management company. Good ones are hard to find.

[Sunset]

My advice would be to sell it.
You can put the $$ into an etf (VTI) and without work make about 10% per yr avg.

I have couple of rentals, I just spend a week fixing supports for a carport type roof. Then getting bids and checking references of roofers, then picking one, working a on time to do it, then supervising the job.
Having tenants pay late (up to a week late).
Honestly the midnight calls are very few.
Your landlord insurance will be more than double the homeowner insurance.

Right now you probably have lived in the house you want to sell for 2 out of the past 5 years, meaning when you sell, any profit is tax free.
If you rent it out for 4 years, then when you sell the profit is taxed.
Another problem for retiree's is you have to depreciate the house over 27.5 yrs. then when you sell the depreciated amount is recaptured at 25% - even if you were only in the 15% tax bracket when you took the deprecation, so you are raising your tax bracket.

Finally compared to an ETF, which you can sell in small chunks over years (so some of the capital gain will be zero or just 15%). Instead you keep a rental house for many years and when you sell it, then entire sale is in 1 year, so your income jumps a lot pushing you into a high bracket that year.

[mathjak107]

Quote:

Originally Posted by Senator You are correct. The appreciation is slowing, and appreciation is not the reason to own investment property. Nor is depreciation. Cash flow today is why you invest in rental property. The upcoming demographics say we will have many more renters than home owners. Most of the population growth will be lower than average income, not higher income. The new renters will not be contributing to housing appreciation, unless the minimum wage increases significantly so rents can be raised. Here is my take on where the housing market is headed.

actually appreciation is the only reason i invest in real estate.

i never was one to go for just a typical landlord /tenant situaton of collecting rent.

my game plan has always been to go for much higher pay offs.

most of my real estate holdings were special situation stuff.

the most profitable being buying co-op apartments in manhattan and then offering to buy out the leases and sell off the apartments.

it was the most profitable venture i could have done.

rent was basically break even and out of 9 apartments over looking central park we have just two left at break even rents.

those tenants have no interest in leaving . but the money made on the 7 that were sold made holding these 2 even for the rest of our lives at break even cash flow all very worth it.


we also sold some commercial lease rights that were worth a ton of money in one of the cities biggest lease right sales which we held on some commercial spaces in the same co-op in nyc.

those were also all based on appreciation .

every investor has a different goal and style but to say investing for appreciation and not cash flow is silly is not true at all.

it will all be situation and location dependent. the nice thing about real estate is how you make money can be so varied.

while your game was collecting rents ,my game has been capital appreciation on things.

[ChiliPepr]

Quote:

Originally Posted by 48Fire We have a second home we own as part of our ER. As things change, we are debating whether we rent in the second location and either sell or rent our second place. Does anyone have any models, analysis, thoughts, or opinions on what they have done for a similar situation? Thanks!

My first question to people who ask me this is.... If you did not own the property and had the cash value in your hand, would you buy that property as an investment?

After that question is answered you can then think about if you want to be a landlord.

[Huston55]

Quote:

Originally Posted by Sunset Right now you probably have lived in the house you want to sell for 2 out of the past 5 years, meaning when you sell, any profit is tax free. If you rent it out for 4 years, then when you sell the profit is taxed. Another problem for retiree's is you have to depreciate the house over 27.5 yrs. then when you sell the depreciated amount is recaptured at 25% - even if you were only in the 15% tax bracket when you took the deprecation, so you are raising your tax bracket.

I think this is key in your analysis - how cap gains and depreciation are treated in each scenario. Using this factor as part of the analysis, I would perform the risk-based investment comparison described above and choose the best one. If the ROI is close for sell/rent, I'd sell just because of the hassle factor.

If it fits your circumstances, you could also look at a 1031 exchange but, it would need to give you enough extra return to be worth the trouble.

[Senator]

Quote:

Originally Posted by mathjak107 every investor has a different goal and style but to say investing for appreciation and not cash flow is silly is not true at all.

That would be speculating, not investing. Similar to 'investing' in fine art. And every investor has their pain thresholds and acceptable returns. You were actually a real estate developer.

For most of the US, Real Estate historically has only returned slightly better than inflation. Factoring in taxes, selling costs, risks, etc. It rarely beats most much safer investments. If you actually live in a home, you get many intangibles that might make the investment worth it.

Buying land outside of a metro area, or next door to an expanding business, can be good. Buying apartments and changing the clientele from a class D apartment to a class C or B can be another way to get quick appreciation.

For someone that is deciding to sell or rent a second home, appreciation is likely not going to be the deciding factor.