Unsure whether I should sell property or rent it. Suggestions?

Question

A little history: I've owned a century two story home in Orrville, OH for 14 years. I got married a few years ago and my husband wanted a ranch home. He was able to find a ranch that wasn't on the market in 2021 (w/the help of our realtor & word of mouth!) The sellers were in their 80's and wanted to move to Texas. He bought the home with 20% down, an interest rate under 3%. The new home is closer to his work, about 20 minutes away from Orrville. We did some work on the new home, mainly gutted the bedrooms, added a bathroom/walk in closet and recently moved into it. The rest of the home had been recently remodeled in the past 10 years, kitchen/dining area, bathroom.

My husband thinks we should rent the Orrville property, but I was thinking of selling. The Orrville property is 100 years old but the equity/value of the home is considerably more than three years ago when I had checked with a realtor about selling but decided not to at the time. This month I had a new roof installed and new vinyl siding is going to be installed soon. My homeowner's insurance paid for the roof and surprised me by agreeing to do all new siding. I was missing a piece and another section a few pieces on the side kept coming loose. The property is solid, and I've maintained it over the years. In 2008 when I bought it I had a new furnance, water heater and electrical updated. In 2012 I updated the upstairs bathroom. In 2018 new flooring in living room, 2019 A/C unit installed etc.

Would it be better to sell the property or hold on to it?

I bought the home for $97,000 & I could probably get around $150,000 if not more for it. The mortgage is around $700 a month and my husband said we could rent it out for around $1100 per month. (3 bdrm or possible a 4th bdrm/2 bath, 1900 sq ft). My husband has an interest in investing, and he thought we could start with this home .....

Bill B. · Answer

100 year old home to make $5,000 per year if there is zero vacancy, zero management expense, and zero repair? No thank you. You have a property that didn’t increase in value 50% in 14 years. You actually managed to lose money after inflation and repairs. That is not ideal. Sell and move on. Maybe you’ll find a better rental near your new home. Or you’ll find a better dream home and you can rent out this new place in the future.

Joe Villeneuve · Answer

I second what Bill just wrote, and would like to reinforce his statement with some rough numbers. You probably have around $40k left in your principle/mortgage. If you could sell the property for $150k as you say, after closing costs, you could have around $100k in walkaway cash to move forward with. If you used that money as a 20% DP, that would mean a new property value of around $500k. As Bill said, that's a $350k loss.Furthermore, based on the rent/mortgage pmt and potential taxes/insurance payments, you would have a CF of no more than $200/month (that's negative CF waiting to happen), or $2400/year. Based on an equity position of $100k if you keep the property, it would take you over 40 years of CF to come close to that equity position. Now, based on the $350k loss in PV if you sold the property, that same $2400/yr CF (if kept) would mean it would take a couple of centuries to come close.REI is a numbers game. When in doubt, always let the numbers with $$$ in front tell you the direction to take. The numbers don't lie, so don't argue with them...you'll lose every time if you do.

Theresa Harris · Answer

Why not sell the current home and buy a newer home as a rental? You could look to buying a duplex. Often homes bought as a family home do not make good rentals as far as the numbers go. You buy your family home because you want to live there, like the amenities and the only thing you think of is the mortgage and taxes, not if the rent will cover those and other expenses.

Jonathan R McLaughlin · Answer

@Angie Schwartz holding on to it as a rental for more than 3 years costs you the most meaningful tax break in investing…the homeowner exemption for capital gains. By my rough calcs anything over 3 years will cost you about 50k. How much money are you going to make as a rental in 3 years? Even counting equity, tax breaks as well as cash you won’t even come near that number.Your husband is interested in investing? The ability to use that “free” money on a proper investment property is invaluable.

Lewis Vine · Answer

@Nathan G. Sorry, new guy here. When you say 10% return, does that always mean cash on cash unless specified otherwise?

Eric Larson · Answer

I would be glad to share my experience with you whenever you are ready. Thanks!

Angela M. · Answer

Hi Eric! Thank-you for your encouragement. We will have to connect in the near future. I would be interested in any recommendations and would love to hear more about your investment opportunities and what has worked for you!

Eric Larson · Answer

Angie, Orrville is a unique town. I'm a local agent with 14 years of experience as a Realtor in the Orrville area and I own 14 units in Orrville. I would be honored to see your place and share my experience with you. I think you have a great opportunity to go in any number of directions with your real estate investing journey and this could be a great start. I would also be happy to recommend local tax and legal professionals that will really make your experience as a real estate investor significantly better. Good luck!

Angela M. · Answer

Thank you for the information. I just had a realtor walk the property and she is going to pull the comp numbers and let me know what it could list for. I said %150k but was told don't sell myself sort on what the house could sell for. Zillow shows $221k (range from $192-$250k), which seems high to me! Rent zestimate at $1200, which our area/city you could get that for a house like ours. (Sidenote: The city has plenty of jobs and the corporate headquarters JM Smuckers draws in a lot of people as well. It also has its own utility company, beautiful park etc.). The realtor said the bones of the house are solid and everything that buyers would be concerned with have been maintained/updated and she stated the house could sell as it is, nothing needs updated.If we kept the house, we would cash flow $500 a month. My husband currently works in food manufacturing, and he thought a rental could help lower our tax bracket. I'm still reading up on everything here! The idea of selling and having that cash for a better investment opportunity (something newer too) is appealing to me. I appreciate everyone's suggestions!

Jonathan R McLaughlin · Answer

@Angie Schwartz oops, misread gain numbers. If your gain basis is 90 and you sell for 150000 you have about a 20k tax liability, not the 50 I mentioned.Still meaningful, and still much more than you stand to make on a long term hold.