Redmond, WA · Member since 2014 · 5 posts · 0 votes
Our property does not fit into 50% or the 2% rules; but I am still in a dilemma of weather to rent it out or sell the home. Any wisdom in the matter is really appreciated.
Here are the details:
Market: Seattle area
Mortgage is at 62% LTV @ 3.25/30 years and in year two.
Rent: 0.6% Purchase price
If we sell it now, we would make about 30K on top of down payment amount after covering the mortgage, commissions, closing.
Our home is in a very good rental market and I expect minimal vacancy rate for several years. Its a newer home (Built in 2009-2010), so I do not expect big maintenance expenses for some years either. We are currently managing the property ourselves. Rent leaves us with about 400/month after covering mortgage, taxes, insurance and HOA. Should we continue renting it and consider the equity+appreciation in cash flow?
Does the 50% or 2% rule matter in high priced markets like Seattle/SFO?
Investor · San Francisco, CA · Member since 2008 · 83 posts · 50 votes
12y
Hi @Jerry Gates your post caught my eye b/c of your reference to SFO…one of my keywords.
in the bay area, unless you come across a complete fluke of a deal, you're not going to get 2%. the best i've gotten is 1.6% and for bay area standards, that's darn good. the 50% rule is just that: a rule of thumb vs gospel, but will keep you out of trouble most of the time … so a safe starting place. i've invested in markets where 50% wasn't enough and others where 50% was overstated. key is to know your market and understanding your true expenses.
in terms determining whether your home is a good investment ... that's hard to say. one would need to know what your down payment was and when it was made, all of your operating expenses, income, how long you want to hold it, projected sales price, etc. to compare two different investments apples to apples, i evaluate based on internal rate of return (IRR), which is the most comprehensive way of evaluating two dissimilar investments. it takes into account all factors, including the time value of money.
i'd suggest considering how you would reinvest your money if you sold by running an IRR analysis to see which path would create a greater return on your money … in the end, the numbers will speak. it doesn't sound like you have to sell, so i'd take time to look at other options and if you find something that would bring a bigger IRR, then sell and move your capital into that higher yield investment.
Redmond, WA · Member since 2014 · 5 posts · 0 votes
12y
We don't need cash right now, but just trying to figure out if this is a good investment to keep. We bought in 2010 for 510K, and it's close to Woodinville in Redmond ridge area.
Investor · San Francisco, CA · Member since 2008 · 83 posts · 50 votes
12y
Hi @Jerry Gates your post caught my eye b/c of your reference to SFO…one of my keywords.
in the bay area, unless you come across a complete fluke of a deal, you're not going to get 2%. the best i've gotten is 1.6% and for bay area standards, that's darn good. the 50% rule is just that: a rule of thumb vs gospel, but will keep you out of trouble most of the time … so a safe starting place. i've invested in markets where 50% wasn't enough and others where 50% was overstated. key is to know your market and understanding your true expenses.
in terms determining whether your home is a good investment ... that's hard to say. one would need to know what your down payment was and when it was made, all of your operating expenses, income, how long you want to hold it, projected sales price, etc. to compare two different investments apples to apples, i evaluate based on internal rate of return (IRR), which is the most comprehensive way of evaluating two dissimilar investments. it takes into account all factors, including the time value of money.
i'd suggest considering how you would reinvest your money if you sold by running an IRR analysis to see which path would create a greater return on your money … in the end, the numbers will speak. it doesn't sound like you have to sell, so i'd take time to look at other options and if you find something that would bring a bigger IRR, then sell and move your capital into that higher yield investment.
You have an income producing asset. You make several hundred dollars of positive net cash flow after expenses each month. The area is appreciating in value. There's market demand for your property as a rental.
Consider tax benefits of depreciation and the impact of this asset on your net worth. I personally would rather own an asset like yours versus getting a one-time cash out of $30,000. How would you reinvest the money?
Rules of thumb don't matter, it's your actual situation, income, expenses and investment goals that matter. Like @Kevin Young I would run some internal rate of return (IRR) scenarios to get an idea of how holding time impacts your return. Most people don't realize that IRR changes over time, depending on several variables. Don't count appreciation in cash flow, it's accounted for in the final sale.
It sounds like you're in a good position either way -- good luck with your decision.
Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
12y
The 2% and 50% rules are rules of thumb at best. In a market where the average rent/cost is 0.6% like Seattle, it will be a very rare thing indeed to find a 2%. And if an apartment is all bills paid or in a really bad area, 50% expenses could be a long shot. On the other hand, if it's new construction, 50% would be horrible. It all depends on the local market.
Redmond, WA · Member since 2014 · 5 posts · 0 votes
12y
Thank you all for the insights. That really helps. I have no plans of investing the money right now and considering the depreciation and other expenses looks like its a much better investment to keep the house.
Thankyou @Kevin Young and @Susan Gillespie for the IRR information. I will hang on to the property for the foreseeable future unless the IRR numbers says otherwise.