Hold or sell

[KENDRA J.]

I have a SF home that i have been renting out for the past 7 years. It was my family home before we started renting it out. The current tenants are the 3rd to occupy this property and gave notice they will be moving out at the end of Dec. Currently weighing the options to sell this property or continue renting it. Would like some advice if it financially makes sense to keep it as a rental? Currently rents for $1800 a month. Owe $180K on mortgage with an interest rate of 4.3 %. Could sell for approx $300K if we do some updating. We originally paid $280K 13 years ago. Any help would be appreciated ~~~ Thank you

[Jamie DeRossett]

Based on $180,000 at 4%the mortgage payment without taxes and insurance is about $1,400 and the taxes and insurance are normally about 10% ($140). That makes it $1,540 without vacany or repair items (hotwater tank, furnace, applainces, ect.) which we will estimate another 10%($140), which is low considering you have had high turnover, and the condition of the property is unknown.  So now plug the numbers. This is a best case scenario in my opinion. The property rents for $1,800.  

$1,800 - $1,400 - $140 - $140 = $120 x 12= $1,440 annual income if you keep and this is a best case scenario with low vacancy and almost no repairs.

If you sale.  The amount of $ needed to get it to $300,000 makes a big difference.  I am going to pull $20,000 out of thin air and use it for this example.

$300,000 (what you can sell it for after updating) - $20,000 (hypothetical expense number pulled out of thin air) - $180,000 (what you owe) = $100,000x.02 if it were in a low interest account = $2,000.  

What the numbers show:

Best case scenario for renting in my opinion is $1,440 annual income and you have to collect the rent every month, make sure taxes and insurance are paid, pray there is no repairs and the property stays rented.

Cash out the $100,000 and put it in a low interest account and do nothing and the worst case scenario is $2,000 and do not have to get insurance, pay taxes, or worry about vacancy, pay the payment, and all the other headaches that come along with rental property.  

The numbers reveal it is a no brainer.  Sell! The rent is very low for a $300,000 property. All markets are different and In my market most investors look properties that rent monthly x 100 = value. Here is a quick example using your info if you have a $300,000 property it should rent for $3,000 a month. What I look for myself is double that a $300,000 property should rent for $6,000  and your $300,000 is rented for $1,800 which is very low and barely cash flowing if everything goes perfect and it never does.  

If it were me I would sell and maybe look for another property around $150,000 and pay the $100,000.  The payment would be really low on this note and you could pound the principle with the excess rent and in no time have it paid off.  Then at that time invest that extra money in another cash cow and keep pounding the principle.  For an income producing property to pay off you must pay cash or at least 50% down or get a great deal with alot of equity.  Cash flow is name of the game with income property and your current property just does not cash flow enough.  I hope this will help.  Thanks for the post and have a great night.