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Selling rental to pay off primary
We purchased our primary residence about 1 yr ago and turned our other house into a rental. We are considering selling the rental to pay off our house.
here are the numbers:
Primary: mortgage 470k - 15 yr mortgage at 5.7% interest.
Rental: $500k value on a 15 yr that we will pay off in 5 yrs. The mortgage is about $1200 a month. We get $2800 for rent.
The reason we want to sell is that our renters are talking a out leaving already and with the rental market cooling down, we feel anxious. The mortgage for our primary residence is pretty significant and the rental income help us pay for it.
What options should we consider?
Thank you for your feedback!
Vi,
I would tell you to also consider doing a cash out refinance to take out enough cash to float your mortgage for 3-5 years while you build up cash reserves. Why sell it if it cash flow instead move the equity around in your favor. You could pull out $200K to $300K and Make a few extra payments a year and have that mortgage paid off in 8-9 years.
If you pay the mortgage as a Bi-weekly and add $1000 a month you will have it paid off in 9 years and it saves around $225K in interest. You can speed that time frame up by adding more per month this still allows you to keep the rental and speed up the payoff of the home and save interest at the same time.
The other benefit is both properties continue to grow in equity and offer a better long term equity position.
How much of the rental income are you reliant on because $1600/month is some decent cash flow for a SFR. If you're worried about losing tenants.... I'd seek to have them re-sign the lease and let them know you will be marketing the place as available to rent if they don't... and if they don't then I'd do just that, I'd start marketing the house as available (at the date the current tenants lease ends) to get some early interest from potential renters. We listed on facebook marketplace for a higher than average rent rate and got multiple messages within a week and signed a tenant within two weeks. I wouldn't suggest lowering rent, but if the market does cool off, you have more than enough wiggle room to lower the rate and you'd still be cash flowing. I'd do my best to hold onto the asset, let the house appreciate in value, and have someone else pay your mortgage down.
If you take the rough national average of 4.8% appreciation and consider the $1200/month mortgage payment being paid by someone else.... you're looking at an equity increase of over $38,000 a year..... I'd hold.
Don't sell. I have regretted every single sale we have done.
Learn more about your local rental market and the specific houses you are competing with.
Put together some long term models, 10-15-20 years and consider appreciation, rent increases etc. and make your decision based on an objective analysis of your overall financial condition over that time.
You will probably see pay increases over time, your primary will get easier to pay for and in a few years you will really appreciate the growing margin between income and expenses by keeping the rental.
@Vi Prich if you lived in the rented one 2 out of the last 5 years, you can keep up to $250,000 single or $500,000 married equity tax free. Huge consideration if you qualify for it. I’d speak to an accountant to see as it would make it worth selling.
#2 Managing Your Property Contributor
How much has the value of your rental gone up since you originally bought the home? You also need to factor in capital gains taxes as it was your primary residence first. Run some numbers if you kept it for another 5 years vs selling it now. You didn't mention what the interest rate is on the rental.
@Vi Prich I wouldn’t sell. Every property I own has appreciated more than $100,000 in less than 4 years. Some much much more than that.
Three months prior to the end of their lease press the tenants to either renew or give you their notice and then start marketing the heck out of the rental.
Sign new tenants and move on.
Or
Most of my tenants stay multiple years. Especially those in my houses. It’s difficult to move so unless they’re buying a house find out why they’re moving and maybe try to work with them. If it’s only a matter of a small difference of them looking for a slightly cheaper rent it may be more cost effective to lower the rent a little than to pay to turn the property over to get it ready for new tenants.
well, not sure what are your taxes and insurance, but I'm guessing that eats into your remaining rent pretty well...
If you are fearful of the rental market and don't want to continue being landlords, go ahead and sell. You are looking like conservative people as having a 15yr mortgage. While generally properties appreciate (especially in the past 8yrs now), you never know when there will be a drop. Also, there is the costs/headaches with owning/operating the property while it appreciates.
Sell it now, and since its only been a year you take any associated capital gain tax free. Also, there is little depreciation you have to pay back (which could be offset by any other capital losses you may have).
Is it close that you can fully pay off the primary mortgage? It looks kinda close just eyeballing it... If you can't fully pay it off, you can most likely ask your lender to recast the loan for a small one-time fee (e.g. $400). That will reset the monthly payment according to the remaining principal balance. That will take the pressure off, and you can finish paying off the loan at your leisure.
If you want to be landlords, and if you think the property will appreciate, and if you have the reserves to try, you could try renting it out for the rent that you need. If you get it, then you keep renting it. If you don't, then sell it. Lots of "ifs" here. In WA, I know/thought your property values have gone done and in general everything is softening pretty good. No idea if thats the bottom or if it will keep going. So, the conservative/safer play is to sell. Otherwise, you could push a bad position.
Remember, lots of people lose money in real estate investment. I've lost money, but luckily I've just made more than I've lost over lots of time. Its not always all roses...
Good luck.
All responses are really helpful. The rental has appreciated over $250k over the 10 yrs we've owned it. The interest is only 2.8% compared to 5.67 for our current house.
@Vi Prich
Those are great numbers. Don’t sell your rental! The rental market isn’t cooling. Market rent will keep going up. You’ll regret this big time in 5-10 years.
#1 Personal Finance Contributor
- Rental Property Investor
- East Wenatchee, WA
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#1 Personal Finance Contributor
- Rental Property Investor
- East Wenatchee, WA
Quote from @Vi Prich:
All responses are really helpful. The rental has appreciated over $250k over the 10 yrs we've owned it. The interest is only 2.8% compared to 5.67 for our current house.
This is what I needed to know. There will be $250k in cap gain plus depreciation to recapture tax-wise.
How will an extra $300k ish affect you on your taxes next April?
@Steve Vaughan the "rental property" was their primary just a year ago... Their tax liability should be not much more than just over a 1yr of depreciation...
I think your gross rental margin is enough to justify keeping it as a rental. Just keep placing new tenants and every year with fixed mortgage amounts and increasing rents will feel more comfortable. If this experience has left you soured on owning rentals or you need to take advantage of the step up in cost basis, you can wrap your existing mortgage and sell and then you wouldn't have to feel like you wasted what is essentially now a 5 year principal only loan.
#1 Personal Finance Contributor
- Rental Property Investor
- East Wenatchee, WA
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#1 Personal Finance Contributor
- Rental Property Investor
- East Wenatchee, WA
Quote from @David M.:OK gotcha. I'll just crawl back into my hole then.
@Steve Vaughan the "rental property" was their primary just a year ago... Their tax liability should be not much more than just over a 1yr of depreciation...
It really depends on what you plan to do with that money.
For a new rental I analyze based on the return that we are getting with our money. - Annualized ROI
For Rentals that we
hold in our portfolio, that were perhaps once BRRRRs, I analyze based on ROE -
Return on Equity
There is also the peace of mind factor. Nothing wrong with having a completely paid off house.
Do not sale your Rental! When you get you mortgage paid off in less than 5 years! You will have cash flow of 2,800.00, even if you have to lower your rent a little to get it rented out its still worth holding on to. You will be able to rent your place out again.
At the end of that 5 years your will have an asset with great cash flow and solid equity!
Quote from @Tony Savage:
Do not sale your Rental! When you get you mortgage paid off in less than 5 years! You will have cash flow of 2,800.00, even if you have to lower your rent a little to get it rented out its still worth holding on to. You will be able to rent your place out again.
At the end of that 5 years your will have an asset with great cash flow and solid equity!
@Tony Savage how do you figure $2800/mo of cash flow?
What does your wife think?
Quote from @David M.:
Quote from @Tony Savage:
Do not sale your Rental! When you get you mortgage paid off in less than 5 years! You will have cash flow of 2,800.00, even if you have to lower your rent a little to get it rented out its still worth holding on to. You will be able to rent your place out again.
At the end of that 5 years your will have an asset with great cash flow and solid equity!
@Tony Savage how do you figure $2800/mo of cash flow?
There getting 2,800 for rent currently. 1,200 of that is going to their mortgage payment. When they pay off their mortgage. They will have a gross cash flow of 2,800.00, no?
Quote from @Tony Savage:
There getting 2,800 for rent currently. 1,200 of that is going to their mortgage payment. When they pay off their mortgage. They will have a gross cash flow of 2,800.00, no?
@Tony Savage I would have thought there were other fixed expenses besides mortgage payment. Its not really clear so I can't assume. thanks.
@Vi Prich
Sell your primary home. The real issue is If you cant pay your mortgage without the help of a rental, you bought way to much house.
Selling a rental because you can’t afford your primary is a mistake. Selling the rental because you hate being a landlord is a different story l. I would Keep the rental as it’s going to continue to go up in value, the mortgage itself at its current rate is an asset, in 10 -15 years it’s going to be worth double what it is now.