Rent the house or sell?

Question

Hey everyone. Would love some advice and input on my situation.

I purchased a house for about $227,000 in Wenatchee, WA, and over the past two years I have slowly updated the home with the intention to one day rent it out. Two bedroom, 1 bath, right next to a hospital and between the high school and middle school. Between updates and new appliances, I put just shy of $20k into the place. My mortgage balance is 176k, and my monthly payment is $1148.

I accepted a job in a different state and have to make a decision on the house - rent or sell. I am working with a property manager I like and we originally had rent at $1750 - then the virus hit which had slowed down the interest a bit. $1750, after withholding expenses and fees would be a comfortable cashflow after analysis. But we've lowered the ask for rent to $1550. It has some traction people, but no lease yet. At the $1550 price, I would likely break even after my rental analysis. It has sat vacant now for 30 days. I'd like to not pay the May mortgage on the house.

Although the house is in a great location, I do have concerns about the long term with the property. I believe it will need a new roof within the next 7 years. There is no sprinkler system, and it is a very high maintenance lawn/yard (I'd have to trust the tenants to make sure it doesn't die). It's older radiant heat system. Previous owner put in some funky washer/dryer venting system that may not be up to code (according to a contractor).

My other option is sell the house. I spoke with a realtor and she believed it could sell anywhere between $252,000 and $270,000. I believe at the lower end I would likely lose some money, after my rehab costs, and at the higher end I'd come out about even. Then I would have the cash to invest in a cheaper market where I am moving to.

Anyone been in a similar situation? Would love to hear another persons thoughts, recommendations, advice.

Thank you!

Steve Vaughan · Answer

So this was your primary, William?

Going out of state, having a high maintenance yard without sprinklers and a funky laundry area would lean me towards selling.

Not having any tax headaches because it is or was recently my primary would seal the sell deal. Feel free to DM me for bad local advice if you wish.

Nik Moushon · Answer

Will, sorry to see you move man. Good luck in your new location!

As for the house, I would have to agree @Steve Vaughan and go with selling the house, there is potential for too much trouble and too much CapEx hit you really soon to be able to keep the cash flow constant. No sprinklers, high maintenance lawn that unless you higher lawn care company to maintain it will turn to **** real quick, quirky vents and a roof thats on its last leg scream of constant maintenance calls. So by the time you are sick of dealing with this from afar you will be forced to replace the roof before you sell it.

The reality is right now the the housing market is slow right now. If you can hang on for another month I think you will be fine selling. The governor should be making an announcement either today or this weekend about how long he will be extending the lockdown. This should give you a better time frame on how long you would have to hold this. Also taking into consideration that there will be the reopening of the economy in phases. So things will get back to some what normal housing market in a month or two. Because of the brief description of your house I would think under a normal market your $270k range sounds about right for that house and location. So for two months rent is it worth putting it on the market for $250k and loose out on ~$20k? Plus you dont wanting it sitting on the market too long....but you dont want to wait till EVERYONE is out of this lockdown either. Prices havent dropped here on houses, so the demand is still there, its just that everyone is scared to go out and do their normal house hunting. So they are sitting at home drooling at all the pictures on Zillow. So as soon as the restrictions lighten up the housing market should pick back up really quick. So getting your house on the market a week or two before everyone can get back out will be good for selling. See what the gov has to say about the lockdown and then make a decision.

Of course if you HAVE TO HAVE to cash now in order to move then thats something different and you have to do what you have to do. You might not get ahead with this sale but at least you wont loose ground. Breaking even is the best worst case scenario to be in.

William McSeveney · Answer

Thanks @Nik Moushon and @Steve Vaughan for the encouraging words. I was leaning towards selling but I ended up getting a tenant in at $1,600. I am actually relieved I have a good tenant now. I really like the future of the Wenatchee market, so we will give this a shot for a bit!

JD Martin · Answer

I don't see how you get out of paying the May mortgage since today is the first, and most mortgages are due on the first. Unless you are counting the grace period, but even that only buys you 2 weeks, or you have some kind of funky end-of-the-month due date.

That aside, considering what appears to be two poor options, unless you believe the rental market has the potential to come back with a roar and get you to $2k or more per month, I would cut my losses and sell. Anything below that is a loss. Even getting $2k/month isn't great but at least livable; $1750 doesn't sound like comfortable cash flow to me if your mortgage is $1150 (I assume thats PITA). Even if you use low numbers - 5% vacancy, 5% combo maintenance/CIP, and do your own long-distance management, that only clears you $5k per year. Anything beyond that virtually wipes you out.

This isn't unusual, anyway. Most personal homes make lousy investments because no one buys them or rehabs them with future rental purposes in mind.

PS: This is the first time I've seen 3 people from Wenatchee in the same thread. I'm baffled that there's even an East Wenatchee! :D

Rhett Kelton · Answer

I don't think I can partner up right now, since I am in the middle of 2 1/2 projects, but whatever I can.

Vito A Carlin · Answer

Hi @William McSeveney my family and I just moved to Murfreesboro about a week ago from Southern California. I was a RE investor in Cali as well. I also struggled with selling or renting my CA property, right now my area is SoCal is increasing rapidly and rents are between $2,800 - $3,000, however I decided to sell. With CA consumer protection laws in effect if a tenant lost his/her job due to COVID I could potentially hold onto a tenant for months or even a year without paying any rent. To me that was too risky plus the crazy high property taxes and the talk of getting rid of Prop 13 (incremental property tax increases as opposed to prop taxes based on market value of the property) that could double the property tax for California's. The challenge I'm running into is I'm new to the TN market and feel like a total newbie b/c I have to learn a new market all over again and start from scratch. Back home I knew everybody, the good attorneys, CPAs, escrow/title, subcontractors, rehab pricing...and now I have to basically rebuild a 16 year investment team/career from ground zero. It's pretty scary to be honest. I wish I could find an experienced investor in this market to partner with, share the risk, and learn from instead of going at it alone. But for now I'm doing my research and trying my best to ID the players and steer clear of the scammers. Any advice or referrals would be appreciated.

Ryan McKenna · Answer

List it for sale and for rent at the same time using your optimal numbers and see which one pans out.

Shane Cummings · Answer

This is a tough call. You mention that at the $1,550 rental rate you would likely break even. What assumptions did you make in your rental analysis? With the items you listed, you may need to budget for: 5% vacancy, 8-10% repairs and maintenance, 8-10% capital expenditures, and 10% property management.

Breaking even on a property may be better than selling it for a small loss but if it were me I would want some cushion in my analysis. For example, I would want it to break even using the assumptions I listed above (20% repairs & maintenance and CapEx combined).

Another thought to consider is the expected appreciation of the property. While the property may not appreciate at its normal rate over the next few years, what about after that? How long do you envision owning the property if you do choose to rent it out?

If the numbers are too close to call, you may be right in trying to sell it to invest in the cheaper market.

Rent the house or sell?

Rent the house or sell?

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