Conundrum - Sell it vs Rent it

[candrew]

Before posting a new thread, I tried searching for earlier ones that might specifically address the dilemma DW & I are grappling with - should we sell our house, or rent it out?

Since our RE almost two years ago, DW & I have pursued a slow-travel lifestyle in various overseas locales with occasional brief visits home to see family & friends. We love this new lifestyle and plan to continue doing so for as long as we are able.

The dilemma we face is what our best move would be in terms of our home that we've lived in for almost 25 years and own free and clear. The house is in great shape - a new roof 6 years ago, new HVAC and rooftop PV solar that generates a surplus of electricity. It is in a desirable neighborhood w/ lots of amenities in close proximity (including spring training MLB). During our travels, we've had great luck with a couple who have house sat for us. The downside of this arrangement is that we continue to incur all of the expenses of home ownership.

We've put down deep roots in the area. Should we decide to sell, friends and family have generously offered us a place to stay during our brief visits home.

OTH, renting our home affords us the opportunity to hold on to an asset in a desirable area. Taxes are relatively low. It is a single story, ranch style home which would make it ideal for us to age in place if and when the time comes. We really don't need the rental income for our retirement expenses as pensions and SWR from IRA's meet our needs.

Here is an article in this morning's AZ Republic on owning rentals as an investment that prompted more thought and discussion for DW & I.

https://www.azcentral.com/story/mon...-great-new-investment-stock-market/609159002/

The hesitation we have about becoming landlords involves the responsibilities/headaches of being absent ones and having to rely on a property management firm. It would be interesting to hear from members who have had experience with property management firms. The good and the bad.

Thanks!

 

[COcheesehead]

If you didn’t own this house, would you buy a rental? Probably not. So there might be your answer.

 

[Red Badger]

If you didn’t own this house, would you buy a rental? Probably not. So there might be your answer.

+1.

That's exactly the way I try to sort out these decisions. Also, be certain that you are not attaching any sentimental value to your house (renters and PM company co definitely won't).

Good luck!

 

[RunningBum]

My guess is that you have a big paper profit on the house. I don't recall if the rules are still that you have to live in a house for 2 of the last 5 to claim it as a personal residence, but I think it's something like that. If that's it, you'd only be able to rent it for 3 years before you lost that tax advantage.

 

[JDARNELL]

I have had rentals for 15+ yrs. The headaches were minimal during the asset accumulation phase of life but now I find them more annoying when they occur. For example I have a unit turning over the end of the month. I had over 50 contacts and probably actually interacted with 10. Of those 10 at least 7 I uncovered things that were questionable from an honesty pov. Everyone has a problem and over time I have learned do not let peoples problems become yours. In 10-14 months we will be selling our McMansion and might move into one of our units if it is available. If not we will put keepsakes at a relatives and a few things in storage while we figure out what we are going to do.

I am seriously considering turning rentals over to a property manager as we travel and become nomads for most of the year. The money earned from the rentals really just go to running up the score for now. I could take them or leave them. In fairness I couldn't have said that 5 yrs ago. Personal growth I guess.

 

[Winemaker]

DMIL,DW and I thought it was a good idea to sell MIL's house to the neighbor's son. He lost his job before closing. We decided to rent it to him, because his mom was such a sweetheart. We lived three hours away, and have been in the rental business for 18 years.

To make a long story short, the son and girlfriend almost turned the place into a meth lab, took in boarders, tore the place up, didn't pay rent, scammed the mother by borrowing from her to pay rent, violated parole, burglared jewelry of mother, and really fouled up a good situation for all parties involved.

It takes 1 bad apple to spoil the whole bunch.

 

[foxfirev5]

Sell it. Enjoy your life. Been there done that. It's not at all what some here profess. Take another job if you need it, which you already said you don't.

 

[haha]

Before posting a new thread, I tried searching for earlier ones that might specifically address the dilemma DW & I are grappling with - should we sell our house, or rent it out?

Since our RE almost two years ago, DW & I have pursued a slow-travel lifestyle in various overseas locales with occasional brief visits home to see family & friends. We love this new lifestyle and plan to continue doing so for as long as we are able.

The dilemma we face is what our best move would be in terms of our home that we've lived in for almost 25 years and own free and clear. The house is in great shape - a new roof 6 years ago, new HVAC and rooftop PV solar that generates a surplus of electricity. It is in a desirable neighborhood w/ lots of amenities in close proximity (including spring training MLB). During our travels, we've had great luck with a couple who have house sat for us. The downside of this arrangement is that we continue to incur all of the expenses of home ownership.

We've put down deep roots in the area. Should we decide to sell, friends and family have generously offered us a place to stay during our brief visits home.

OTH, renting our home affords us the opportunity to hold on to an asset in a desirable area. Taxes are relatively low. It is a single story, ranch style home which would make it ideal for us to age in place if and when the time comes. We really don't need the rental income for our retirement expenses as pensions and SWR from IRA's meet our needs.

Here is an article in this morning's AZ Republic on owning rentals as an investment that prompted more thought and discussion for DW & I.

https://www.azcentral.com/story/mon...-great-new-investment-stock-market/609159002/

The hesitation we have about becoming landlords involves the responsibilities/headaches of being absent ones and having to rely on a property management firm. It would be interesting to hear from members who have had experience with property management firms. The good and the bad.

Thanks!

Your link is to an article that posits a 9% annual return for SFH rent-outs. I strongly doubt this! Maybe in unusual very tight markets, but this would soon be competed away. Not unlikely their figure may ignore depreciation and many other offsets.

IMO, keeping a rental while going walkabout is usually a bad idea. If you have a home in a very high class truly gated community-(with guards, etc) maybe sometimes it works well, but in many cases too many bad to very bad things can happen.

Ha

 

[W2R]

I wouldn't rent it because personally, I view landlording as a job and not something fun. Also I don't really need the complication of dealing with a property management company. YMMV and probably does to most, but to me all of this would just be a headache and I feel like I sure didn't work all my life just to be able to fund this sort of lifestyle.

You know what I'd do? Since you only plan brief visits there, I'd sell the house, and buy a smaller, less expensive lock-n-leave condo as a pied-à-terre. Maybe one in a high rise building with a doorman or security guard to keep an eye on things. You wouldn't need much square footage, since you would probably be spending much of your time while in town visiting friends and relatives at their homes or whatever. I'd furnish the condo very sparsely, and sell or donate the rest of the furniture.

 

[JDARNELL]

I wouldn't rent it because personally, I view landlording as a job and not something fun.

When I was working I viewed it as just another task. Now that I am FIREd any time I have anything to do with my units I think of work. I am getting cold sweats.

 

[Scrapr]

Your link is to an article that posits a 9% annual return for SFH rent-outs. I strongly doubt this! Maybe in unusual very tight markets, but this would soon be competed away. Not unlikely their figure may ignore depreciation and many other offsets.

Yeah i saw that and almost choked..

We sold our main house 2 years ago. I totaled build price plus prop tax. 23 year non compounded return was about 2.6%

I think they included the imputed rent. Which they mean to say you have to live somewhere. I have a really hard time not adding in the expenses of the rental. I think they were goosing the return

 

[Luvdogs]

If it's in a neighborhood where most/all are owner-occupied, I would not. You will not get the ROI typically. For example in our area, a single family home that is worth 500K will not bring 4 times the rent of a 125K condo.

Plus the headaches, and former neighbors not being happy because you rented it out, etc, I would not be a "default" landlord.

You have to have a different frame of mind for a rental property and not to be personally tied to it.

We have friends that many years ago rented out their first townhouse, really cute, did lots of nice things to it.

He was transferred about 500 miles away, rented it to a "nice attorney" who managed to set it on fire doing something with cocaine. She was devastated that this person did it to "her" house.

I think I'm pretty good at what I'm doing but I have used a property manager. They rented it to a crappy tenant (probably not the same level as you are describing) but I had to evict the tenant who also stole my washer and dryer!!

DD who just graduated college is now living there and is a wonderful tenant!

 

[Scuba]

We have an oceanfront condo and have had good experience renting it out but we did use a property manager. I like W2R’s suggestion, but if your area doesn’t have nice condo complexes, I’d keep it, hire a good property manager, and have it available for your future use. You can always sell it later if you want but depending on the market you’re in, it might be hard to get back in if you want it later.

 

[DrRoy]

If you didn’t own this house, would you buy a rental? Probably not. So there might be your answer.

I have never done it but have read a lot about it. There is plenty of risk. Other peoples' experience with it often seems to come down to the tenant(s). If they are good, it works ok. If they are bad it can be a disaster, and easily a $ loser.

 

[Another Reader]

I own a number of rentals in the Phoenix area. For middle of the road single family homes, rent based on current prices is about 0.5 to 0.6 percent per month. That means the total rent before deducting expenses is 6 to 7.2 percent per year. Using the 50 percent rule, your annual cash return on a free and clear property is 3 to 3.6 percent.

Not only is there no way I would buy anything in this market, I'm considering selling some or all of the properties. Neither the rents nor the values are sustainable in my opinion.

In your shoes, I would consider selling, taking the tax free capital gain, and investing in something else.

 

[Aerides]

Since you are in AZ, you are in an up-market now. I vote sell or keep, don't rent. SFH rentals are hard to turn a profit, and with only one property you can't spread risk efficiently.

Anecdote:
I had a small house to sell in 2005, DH thought I should rent as property values were growing, "keep as an investment". I sold anyway, for a very nice profit, didn't want the hassle of being a landlord.

Of course, the housing market slowed and then dropped precipitously in the following months. 13 years later it's still estimated at $60k less than the price at which I sold. I ended up, purely by luck, selling at the exact highest point for that area.

 

[candrew]

OP here. A sincere thanks to all of you for your posts, great advice and information. I've shared all of the feedback you've provided with DW and it has helped us decide to sell rather than attempt to rent out our home. SFH sales in our area have been steadily improving and demand has been especially strong for homes like ours, priced <$300K - making the decision to sell ours that much easier.

 

[kgtest]

I own a number of rentals in the Phoenix area. For middle of the road single family homes, rent based on current prices is about 0.5 to 0.6 percent per month. That means the total rent before deducting expenses is 6 to 7.2 percent per year. Using the 50 percent rule, your annual cash return on a free and clear property is 3 to 3.6 percent.

Not only is there no way I would buy anything in this market, I'm considering selling some or all of the properties. Neither the rents nor the values are sustainable in my opinion.

In your shoes, I would consider selling, taking the tax free capital gain, and investing in something else.

Until the note is owned free and clear, the longer that is, the more cash flow and the higher the margin.

A home that produced $15,000 in rent each year. but has a mortgage
will not compete with a home that produced $15,000 in rent without a mortgage.


Depreciation can happen...and location matters.

DF bought a $30k property on auction in 1974. Same house, clear of mortgage for over 25 years, has now APPRECIATED to $170k.

I can count on one hand how many tenants occupied during that 35 year gap. Admittedly the expense comes when renters turn-over. You want 10+ year renters folks, play the long game...nobody gets rich over night, or in five years for that fact.

Replaced the roof once, carpet replaced once, and a bunch of small TLC stuff along the way. Original steel siding and windows...although oddly enough one of the tenants replaced some of the porch windows during an interim CFD period...and instead of fulfilling the CFD bailed and her mom moved in. Got new porch windows and the original CFD payment outta the deal.

My DF has literally only had three different families in the span of what 45 years.

One of those long term tenants was an alcoholic for a period of time drinking and confined to a single room of the rental but he got sober and we never had a single call nor knew of the struggle until he moved out.

For 15 of those years the rent was paid in cash.

My point is every unit is different.

Best piece of advice, do not get emotionally involved and stay out of people's problems. Evict as soon as the rent is more than three months late, or late three consecutive months in a row, or the cops called 3 times. The three strikes rule. And never more than 3 animals. I am always fine with them personally but if I had a choice would pick tenant without one. The irony is those tenants might get lonely and move away and the turnover happens sooner. I would rather replace carpet once in 10 years instead of three times in ten years.

Its a business, collect the rent or find a new renter.

On the flip side, owned a 6plex and went through tenants, appliances and repairs way too often. Was a good tax loss harvester lol.

If my time horizon was less than 30 years I would stay away but you really need to have the long-term investment mentality or a hot rising RE market to capture some equity.

 

[RetireBy90]

I have had rentals over the years and thank God never had any of these horror stories. We lost money on first property but have made a little on 2 others and now have one that has about doubled in price with no incidents from tenants. We live on east coast and the property is in Reno, so of course we have a property manager. I would have it managed even if it was a local property, but good property manager isn't cheap.


My question to you is what will you do with the $$ if you sell ? Will it return more than your honest projection of renting the property. It is a simple question if you reduce it to that level. 2 options for the $$ available, which gives you greater return after taking risk levels into account?


Many have had bad experiences with rentals, many have had good. No telling if you will get a tenant from hell or heaven. A good property manager should provide some screening to help, but if you get a bad one cut it short and find another tenant. This has been one of my lessons learned.

 

[calmloki]

The tax difference between selling a primary residence and a rental that you have to prorate tax on primary/rental use capital gains is fierce. You've been in your home over 25 years, which means you will have a bunch of capital gains that could be all tax free given your projected sales price. The tax savings alone will overpower any potential rental gain. We've had rentals for decades and it has worked for us, but primarily through scale - a single rental just won't bring in enough to offset the irritation and stress. Or so I think.

 

[Amethyst]

We had an out of state property with a property manager. Long story short, nothing terrible happened. However, between tenant turnover, management fees, leasing fees, high insurance and property tax assessed on rentals, and maintenance and repair costs, we lost so much money that we ended up paying no cap gains tax or depreciation recapture, even after selling the place for 1.5x what we paid for it. So there's one actual experience for you. I like W2R' s idea of a tiny home base while you are traveling.

EDIT: To clarify, we did, of course, pay depreciation recapture - you have to. However, our total passive losses over the years, set against that year's income, basically zeroed out the recapture amount. Sheesh, did we lose money on that property.

 

[gamboolman]

Sell it and It's Not Even Close

We have been international expats for pushing 20 years...and we have kept our home in Spring, Texas.....But....our grown adult son has been in school forever getting multiple degree's.....and he has been living in our home while he pursue's being a professional student....

He has saved several major FN disasters in the house by being there.

If he had not been there....we would have sold the house 15+ year ago.... No FN doubt...

Do you want to roll the dice and get the renters from Hell who bring in there family and friends to live in your house....with there pet snakes....

Sell the GD house pawdnaaaaaahhhh.... AIAEC....

Please post back what you do....... I would be interested in hearing your stories if you decide to rent while being international.....

 

[GravitySucks]

When I was working I viewed it as just another task. Now that I am FIREd any time I have anything to do with my units I think of work. I am getting cold sweats.

Thank you for this.

 

[Offgrid Organic Farmer]

... The hesitation we have about becoming landlords involves the responsibilities/headaches of being absent ones and having to rely on a property management firm. It would be interesting to hear from members who have had experience with property management firms. The good and the bad.

Thanks!

I have owned 2 Tri-plexes, a Four-plex and a five-plex. I currently have a commercial property that includes 2 store fronts, 1 office space and eleven residential apartments.

Back when I was still working I knew a lot of guys who rented out Single-Family-Residences. Seriously none of them turned a profit. None of them.

A property will cost you X to keep it functional and operational. Lets say utilities, insurance, management, taxes, and enough repairs to keep the cost-basis level from year to year.

Another property with the exact same market value but that includes five tenants will bring in 5X. Enough to cover all of those previous expenses, plus some profit.

I served on Active Duty for 20-years. I have known literally thousands of men whose families had set down roots in a community, then were forced to transfer to a new area. So they were faced with this scenario. About half of them would attempt what the OP is talking about doing. Keep the house they love and have a Real Estate Manager rent it out for them, while they live in some other country. Money down the drain, I say.

I was the Budget Counselor assigned to help when these guys finally realized the hazard they had gotten into.

 

[CaliKid]

I'd probably sell it and that's from someone who likes rental property. Market is up and if you want to buy back in in 5 years you can probably buy in cheaper without all the headaches for 5 years. Plus, you can make your "home" address Texas or some other state with no income tax in the meantime.