To rent or to sell???

Question

My husband and I upgraded to a larger home 6 mo ago. We still own our previous smaller home approx 1000 sq ft. with on street parking only. Its in a good area of St. Louis city. (the Mayor owns one of the big new houses in the development across the street) also it's just 1 block off a really nice park. It's currently been for sale but no offers. Agents say it shows great/ staged well. We've dropped the price several times. We are nearing what we still owe (approx 100k).

My question is should we rent it? It's on an ARM that will adjust in 2yrs. We originally tried to rent it ( tried for only a month) but only got sec 8 folks with crappy credit scores- I didn't know scores could go so low. My real estate agent that sold us our current home held an open house for us for renters and she said all the crazies came out.

Should we just cut our losses with property and sell for what we can get or try longer for a better tenant? At best for a house that small in that loc maybe we could get $700-800/mo from comps. This would cover the mortgage but nothing else. All the other expenses, PM, repairs ect would be out if pocket. I figure 10 - 15 yrs before we would turn any profit. My hubby wants to hold on to it for retirement earning, I'm not sure it's worth the time and $ when it will take 10yrs to make any $.

Sorry post was so long:(

Ryan Billingsley · Answer

@Kristine Osborn

You could also consider lease to own or seller financing.  This would put the responsibilities of maintenance and repairs on the person you find to buy the property.  Just another option to think about.

As far as renters you should put a add up on craigslist, vflyer, and postlets.com.  You will get a abundant amount of renters contacting you to see the property.

Bob Hines · Answer

How many beds/bath?  Can you give a better idea of the location?  If it's in a great area, and depending on the beds/bath, maybe try upping the rent to attract higher level tenants.  I get $700-$800/month for 2/1s east of Grand.  I'm getting $1050 for a 3/1 (technically 2/1 as it doesn't offer a dining room to technically be a 3/1 per the city) that is on Kingshighway down near Gravois.  I had a good number of showings for it with it listed for $1100/month, did $1050 as it was a med student who wanted to sign a 2 year lease.

Although you would still be cash flow negative if $700-$800 is just the PITI. I know lots of people hold rentals west of Kingshighway and west of Hampton that don't cash flow for long term savings/investment.  I'm not saying it's the best way to go but it's common in that area.  Look at how much time/effort/money you want to put into this.  If it's something you want to do and view the extra time and money as a 'hobby' or 'entertainment' as those other landlords do; it could be ok for you if you look at it from a 30 year mortgage paid off by tenants point of view.  If you want to do more real estate to make money or don't want to deal with it or don't want to do things yourself (meaning if you would hire a PM for this) you would most likely be better off selling it and purchasing something else that will make money.

Feel free to message me if you don't want to post specifics here.

Wes Shive · Answer

@Kristine Osborn , while I think your situation may be a great way for a new investor to get into landlording/real estate investing, it sounds like you'd be stacking the deck against you. In this situation, if you can get out from under the house and be okay with the loss, then IMO that is probably what you should do. One way to look at it would be to ask yourself if you would buy the home at the current price you can sell it for (less transaction costs) for the purpose of a long-term investment? If the answer is no, then there you have it.

Having an investment property (and this is now an investment property even though you used to live in it) where rents barely cover the mortgage is probably a situation that 99% of investors on BP would want nothing to do with. Once you factor in property taxes, maintenance, and insurance, it will probably be hugely negative in terms of cashflow. Furthermore, hanging onto the home in hopes it may appreciate (not saying you're doing/thinking this) is your only potential upside in the near term, which is highly speculative.

The ARM going floating in 2 years could also be a timebomb. If interest rates start to run up, your mortgage will as well. If you decide to keep the house, could you refi to a 30yr fixed with a better rate?

Another thought is have you considered doing a rehab on the home? If you have the funds (or can borrow them) and doing so would increase the value SIGNIFICANTLY beyond the current market price plus cost of a remodel, it may be something to consider. Keep in mind that that process is a learning experience in and of itself. Best of luck!

Raj Gandhi · Answer

Rough situation, but not uncommon. First, try to separate emotional attachment from finances for the old home. Financially, assume everything you've put into that home is sunk (gone). The sale value is exactly the market value (equity is what you'd have after paying off the mortgage). The rental value is what it is. Calculate: Cash on Cash return = (annual rent income - expenses) / equity CoC > 20% => you've got a good business 10% < CoC < 20% => you're in no-man's land CoC < 10% => you've got a good hobby CoC < 0% => you're in trouble The calculation would be ~weird if your equity is negative. If that's the case, let me know and I'll re-think.

Vince Mayer · Answer

@Kristine Osborn

Would you consider seller financing or lease option? Maybe even seller financing with a good down payment.

To rent or to sell???

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