Sell now or turn into rental property?

Question

I bought this property to live in years ago.  I paid about $430k which was around peak, The property could be sold for around $460k today.

I owe $300k on this, so assuming a 6% realtor fee, I would get around $130k in my bank after selling.  minus property gain taxes.

I am preparing the property for rental with new paint, floor, bath, everything looks better than it's ever been.  I lived in it myself and I have high end appliances, but did not bother to swap out to cheap ones.    So it will sell or rent pretty easy over all.

As a rental, it will be rented at $2100 a month,

after my mortgage and property tax only (not including maintenance and insurance or income taxes) is $1600, so I have about a $500 cash flow, at the current amortization $500 out of my $1600 is into principal of the mortgage.

I have to make some simple assumptions this is not ideal?  At $500 a month It would take 21 years to balance out the $130k that I could have access instantly by selling.    $130k is a little less than what I paid in mortgages over the years to live there, but overall it was relatively cheap compared to renting.

Of course in 20 years I would have much more equity also, but I could start investing $130k other ways and not have to pay $1600 a month out of pocket and do maintenance.  But $130k does not generate $500 cash flow unless put into long term investment.  Please help me see all aspects and decide.    I am happy to provide more information.

The area is booming more but this property will always to be a starter home in terms of size.

Thanks

Christian Bors · Answer

@Jeremy H. Sounds like a sell situation to me.  The property appears to be horrible with cash flow plus since it was your primary residence you don't have to pay capital gains tax as long as you lived in the property 2 out of the last 5 years.  I cannot wrap my head around the idea of holding a negative cash flowing property.  I think it was buffet that said, "Rule 1 number never lose money and rule number 2; don't forget rule number 1."

Take your tax free 130k and invest it in a more suitable cash flowing property.  The other option that makes some sense would be to hold the property for 3 years as a rental hoping the appreciation will supersede the negative cash flow then sell.  In doing so, you would get 3 years of write offs and principal pay down plus tax free gains on the property.  But that seems risky given the market has been basically vertical since 09'.  Another correction may be lingering so if you wait too long you might be forced to hold the property as a rental.  Personally, I would sell!

Jeremy H. · Answer

So I look at it like this now.

I sell and I have extra $1600 cash a month.

I rent out and have extra $200 cash a month + deal with a tenant.

Selling now or later will get $130k in bank.  Betting at property value not to crash.

If I sell now and keep the $130k, the next low market I could shop for a good deal, and however many months of $1600 I also save away until then

Jeremy H. · Answer

In the $1600 figure does not include insurance, which is $600 a year currently.  But I was told by my insurance agent if this changes to rental the insurance type changes and is "cheaper" .    The insurance has been raised 10% a year lately.

Anyway, within the $1600, $1300 is mortgage, $300 is property tax.   As I mentioned $500 is paid into principal, so the rest $1100 is tax deductible, and makes it more like $825 out of my pocket.   Assuming the property value does not drop drastically (big IF) and I get to keep my $500 principal each month so not looking at that.   $825 expense - $500 positive cash flow (from rent - $1600) puts me at -$325 a month.    Sorry I think I am doing numbers on money that I could have saved away not overall cash flow so maybe that's not accurate assessment.  So I will consider your calculation of $200 positive cash flow as well.

That does not look too bad, I can think of other silly ways to waste $325 a month, but that's another discussion.

Though this does not include any breakages or maintenance cost.   at the current move in condition it does have a $900 dish washer and a $2000 wall oven (new price, but not worth swapping for cheaper new ones and selling it away used).

I like your "Should I put $130K down and buy this property?" way to look at it.   I am at a cross roads and because I did not buy this property at first with a great deal it is looking like selling is a good option, because a negative cashflow and also betting on property value to be stable can be a bad thing for me.

Charlie Fitzgerald · Answer

If you are only looking for immediate gain on a cash flow basis...then you sell.  If you are looking at overall gain through the many different ways a buy and hold rental property benefits an investor...then you keep it as a rental.  You need to determine your overall goals and desires as it relates to your REI portfolio over the timeline you determine to be invested in Real Estate.  Your answer is in there.

Ryan Gillette · Answer

If you give exact numbers for taxes, insurance, maintenance we can look at cap rate and ROI - basically look at it like "Should I put $130K down and buy this property?". Overall running these numbers, it's probably a sell decision.

Insurance is a cash expense, as is maintenance. You have to cut checks (cash) to the insurance agent, the landscaper, etc. When you add in these costs, on top of the other costs to include like repairs, cap-x, vacancy loss - you're likely running in the red. Let's say your mortgage is $1300, taxes are $300, insurance is $100, maintenance is $200- you're positive $200/mo or $2400/yr. Then if there's any vacancy loss (tenant misses a month, you go through an eviction), repairs (dishwasher breaks) or cap-x (roof wears down, furnace life ends) come up, you lose for the year or years. Not to mention your opportunity cost on this is the $100-130K tied up in it. The upsides are (possible) property appreciation and a tax write-off, but cash-flow is what you want to look at. There's also a chance the property depreciates in value over the time horizon.