How to know if you're in a good position for a rental

Question

So my situation is interesting at this point.  My wife and I are moving from Nashville to Atlanta, and we bought our first house last year.  We were planning on living in it for 5 years and renting it out, but that plan has obviously changed.  That being said, we kind of overextended ourselves trying to fix it up, and we just got to a point where we had to stop, because our cash reserves we severely depleted.  Now that we are moving, we want to keep it and rent it, since we've updated so much, but I'm concerned that we may not be in a financial position to do so, being that though my wife is getting, a raise, I'm having to take a cut.  Here are the numbers:

Bought for: $177,00

Renovations total : $32,000

Additional repairs needed to rent/sell: Approx. $4000

PITI: $1105

Potential Rent: $1650

True Cash flow after expenses (Vac. CapEx, Expenses, Management): approx: $50

Potential Realistic Sales price: $235,000

Net after transaction costs: $42,000 (before debts are paid back)

Cash Reserves after move: Approx. $2000

We will be staying with my parents for a while, so I won't have housing overhead expenses, but we would still have the debt payments, making it even more difficult to save.  But I have to be honest and say that there's both a part of me that feels like rebuilding my cash to invest in Atlanta is a better move because I can get a true investment where I run the analysis beforehand for a good deal.  What makes it a difficult decision is that Nashville has been booming lately, and I'm sure over time, my house will be much more valuable.

Would you keep an out of state rental with low reserves? Or would you sell, keep some reserves, and reinvest the rest in your back yard.  I'd love to hear your thoughts.

Mike Tetzel · Answer

Hey Jarrett,

I live in Riverwood, right off Old Hickory in Hermitage. The area is really growing since Downtown is getting so expensive, its pushing more affordable out of the city. In your situation, I would strongly consider selling because of multiple factors. 1) You can build your cash reserves up, which is necessary for you to continue to succeed in real estate. 2) The hassle of rentals at a distance when you move. I still have a handful in North East Ohio that I purchased around 2008-2011, but they really become a hassle if you don't want to take the time to maintain them. Also, staying with your parents will give you time to look for a really good investment moving forward. Last point I'll make, I have been in real estate since 2005 and I saw a LOT of people go from having plenty of equity to having negative equity during the downtown. I'm not saying thats going to happen again but I would say your not in a financial situation to withstand that type of downturn, so consider minimizing your risk and sell. Hope that helps!

Michaela G. · Answer

sell and then buy in atlanta. Not that great a deal for rental.

Crystal Smith · Answer

Based on your numbers the Net Cash from a Sale will be ~ $12K (This includes realtor fees & paying yourself back the $32K invested)  The yearly net cash from a rental will be ~$600/year, assuming the property is 100% occupied & there are no surprise expenses.  Based on this you'd have to hold the property 20 years to cumulatively net $12K from rent.  This doesn't take into account the time value of $.  Yes there are other benefits that you'll be able to write off on your taxes but....

Let's say your assumption that the value of the home will increase.  When running the numbers on how much & how fast it will increase how much more cash would it put in the bank & how fast.  You'd do better selling the property & reinvesting the profit in an asset that will produce more than $600 per year of income.

Mark Ainley · Answer

@Jarrett Mitchell If you can sell Nashville at this point for a profit after all of the original house investments are repaid then I would recommend selling. You had an initial plan when you bought last year and it was disrupted by this new move so sell, regroup, and create a new investment plan.

Andrew Holmes · Answer

@Jarrett Mitchell

Personally I would sell because I am not a fan of out of state rentals. A lot of folk will disagree but if my own back yard is very fertile I am not going to watch something in another state. In your case this was a personal home so that is understandable.

Your net is $ 42,000 is your net before debts are paid back so that would depend on your debt amount. Buts lets assume you have a gain back in Nashville for another 10 or 15 K in the next few years.

I think what you have to look at it highest and best use for this money or your rate of return. If you think that you can buy an properties in ATL with the purpose of investing and good a better rate of return then of course it makes sense to sell.

You should look at the numbers in ATL and how likely it is that you can create those returns. You may have already done that. I think you should weight the two before making a move to sell.

Know my market in the Chicago suburbs I would sell and buy here but I know this market so that is the reason for that biases.

Federico Gutierrez · Answer

Sell and move on. You will have less headaches to worry about, life as your transition into a city will be a lot less chaotic worrying about an out of state rental. Long as you don't have to bring money to the table on the sale, you had good memories in the home not it's time to make some new ones

Maxwell Lee · Answer

Yes, most likely it will be best to sell. The considerations for keeping it are that you bought it as a primary residence and a year ago, so likely at far better terms than you will get for a rental property anytime soon. If your DTI is low enough it might serve you to hold on for a little bit until you really need to unleash that borrowing power.

Of course, such a strategy then would require selling in a year or two and selling can be difficult if you are doing it long distance with tenants in place. We just went through this with our condo in DC.

Steven Taylor · Answer

I think there are additional variables, that are pretty situational dependent on your specific goals and situation. Do not forget about the depreciation on the home, that's likely another $7,000~ a year that you get to write off on your income. (Realistically another $1500-1700 dollars you don't have to give to uncle sam, not including some additional tax write offs)

With that being said, it's still probably a better idea to sell, if you can get out without losing too much or hopefully with a profit. You'll more than likely be able to make a much better investment this next time around, plus not have to deal with the headache (unless you determine the headache is worth it)

How to know if you're in a good position for a rental

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