Should we rent or sell our house?

Question

My wife and I built our first home in Maryland, where we are currently stationed due to work. We are both active duty military and bound to move within the next 3-5 years. The question I have is whether we should sell the house or rent it out? I want to be prepared for when that day comes. The property is increasing due to the neighborhood still being developed. I am very new to investing in real estate, and it is something I have became very interested to learn more about. Thank you for the help!

-Kevin

Joshua McMillion · Answer

@Kevin Velasquez

If you are going to get started in REI, you need to map out your WHY. Look at reading the book Vivid Vision and develop a long-term strategy for success. I am more than happy to share the book for free with audible if you have an account. If you want to take REI seriously, you need to run the numbers on the home you live in and see if the property has good returns and hold it. I have done that with two of my homes, but it plays into the larger strategy of 10 to 12 units before I exit out of the military to generate passive income and allow me to enter multi-family.

Start building a team now if you do decide to rent the property out. You have time and can conduct interviews with a PM. I suggest looking to use the same agent or brokerage that sold you the home. When you exit the property in the future, you can often negotiate the agent commission due to the relationship established. Make sure you find the RIGHT PM with a good team. That is the most important aspect.

Sincerely,

Josh

Brian Tome · Answer

@Joshua McMillion - Thank you for your service also, Sir!  Good luck with your goal!

Doug Spence · Answer

Reach out to a property manager to give you an accurate idea of what it will rent for. Keep checking that number every year or so and when you're 6 months out from moving, give it a more in depth analysis to see if you should rent or not. Will the rent cover all expenses? Make sure you include vacancy, repairs/maintenance, property management fees, and not just your monthly mortgage payment. If you can cover all those and still make a bit of money, its probably better to keep it. The short term gratification answer will be to sell it and take the money, but try to think about it in more of a long term mindset. What will be the opportunity cost of selling? How much future rent and appreciation will you miss out on if you sell?

David Avery · Answer

If your house goes up 10 percent in value for 4 years and your rent covers your payment and puts $200 in your bank account after paying TUMMI   taxes, Utilities, management, mantience, ( mis speeled). and inprovements,.    Mis spelled again!!

honey get me some coffee!!

I would hold it and have an extra $75,000-$125,000,

Could replace all the floor coverings, re paint and new kitchen with that extra money. And still extra cash.

Brian Tome · Answer

@Kevin Velasquez - First, thank you for your service.

When deciding whether to sell or keep your home as a rental, you should consider your goals.  How active or passive do you want to be?  What is your financial motivation, cash flow, tax benefits, appreciation?

A few reasons not to keep would be:

1. To the extent your home has appreciated while you own it, you must sell within 3 years after moving out or the gain will be subject to income tax.  Even if you 1031 exchange the property that tax liability will follow you to the next property and ultimately have to be recaptured unless you 1031 until you die and leave the properties to your heirs on a stepped up basis.  You can avoid the taxes completely on any income from appreciation as long as you lived in it 2 out of the last 5 years which means you will have to sell within 3 years after moving out - or plan to move back into it later for at least 2 years.

2. Managing a single family property from a distance is the most expensive and the most time consuming wat to invest in real estate.  A property manager will be less incentivized to take good care of your property and give you good service because you only have one property.  Any contractor will be less incentivized to give you a good price or good work or quick work because he is less likely to get future work or referrals from you because you don't live there.  Also, you cannot easily inspect his work because you do not live close by.  The caveat to this one is that you said you are from Maryland, so if you have friends/family in the area it might be a little bit easier, but this is still the hardest way to invest.

3.  Properties we live in are often not good rentals.  Will it rent for 1% of the property's value?  The last house we sold was worth $370K.  We could have rented it and covered the PITI, but it would not have cash flowed much and by the time we incorporated vacancy, maintenance, and capital expenditures we would have been upside down by a lot of money.  I took that same $370K and invested into 7 rental properties using the BRRRR method and we now cash flow approximately $3K a month in addition to covering all the expenses and paying someone to keep the books.  Consider the asset and its potential return.

Some reasons to keep may include:

1.  You probably have very favorable financing on this home.  Maybe you got a VA loan with a very low interest rate and 30 year financing.  You can get 30 years on rental properties, but you will need 20% down and pay a higher interest rate.

2.  Realizing the equity puts cash in your pocket to buy another property, but you may be able to accomplish almost the same thing by using a HELOC.

3.  If you are planning to eventually move back to the area, it's a home you are familiar with and made memories in so it might be special to your family (this could also be a downside if the tenants you put in place mistreat the property).

4.  If the property is in a rapidly appreciating market your appreciation may offset any losses/costs in the intervening years.  There are tons of people who invest in properties they lose $200/month on because they anticipate selling the property 5 years later for $100K more than they paid for it.  I would caution you that this is speculative and can come back to bite you if there is a downturn in the market, but if you can hang in there you may be able to ride the ups and downs of the market and choose the time to sell when the market is up.

Lots of stuff to consider, but there are several people who have served and obtained properties in their duty station while doing so.  Some of them have been on the podcasts.  You should listen to their stories if you haven't already.

Either way, kudos to you for thinking ahead and planning for your future.  I know you will end up being successful no matter what you choose.

Account Closed · Answer

It would be hard to know what the market will be up to in 3-5 years so you will not be able to make this decision now but if I were in your position I would own it like you might rent it-- that means no huge upgrades on things that are specific to your tastes-- and get to know what your real costs would be if you were to rent it, including using a property manager.

If you do decide to sell then one bonus is that after you live in a property for 2 years you are not taxed on profits over $250K single person/ $500K married couple.*  So hold on to your receipts just in case you go that route.

*just in my experience, I'm not offering tax or legal advice

Alyson Anderson · Answer

@Kevin Velasquez

Hi,

Thank you for your service! Everyone has a ton of great information however the market is hot. It would be super beneficial to look at comps and look at the value of your property vs rental rates. Are you getting the best return possible? If you have a substantial amount of equity in the property it may be a good time to sell, especially with inventory being at an all time low. Houses are selling quick and for top dollar!

Justin Lanciault · Answer

I would suggest keeping it, unless you need to sell in order to buy the next one or if it is impossible to rent out.

Tim Jacob · Answer

I think to do this I would look at an assumed 2% appreciation though it will probably be more along with estimates for cash flow, potential tax write off, and principal paydown to generate your internal rate of return (IRR).

A few things to consider.  Property management costs if you leave the area.  Biggest thing is flying in on the weekend to lease the place is a bad idea.  If you are a couple hundred miles or less could be possible.  Realistically decent pm will be atleast 10% to manage the property, affordable maintenance, and lease it.  Capex and maintenance depends on the state of the property but if its a decent asset class being A or B I'd go less than 200.  Maybe you can get someone just to lease it but be careful with that too as they will not care as much about the tenant quality.  Unreimbursed utilities can happen as well based on the area.

Once you get reliable numbers think about your time and stress level and you should get a good answer.  The 1% rule is nice and possible in Baltimore not usually DC area but unless you are really losing money it could be a good rental.   Look into realistic cash flow based on asset class along with irrr most importantly.

Ruth Lyons · Answer

Thanks for you and your wife's service, Kevin.

The comments provided offer a lot of food for thought. I'll add that it depends on whether your home will make a good cash-flowing rental which is dictated by the location, features and local rental market. You don't indicate where in Maryland you live, but in the Baltimore, Montgomery and Howard counties which is what I'm most familiar with as a realtor and investor, there's a shortage of affordable housing.

Ruth Lyons, Sachs Realty, Columbia

Should we rent or sell our house?

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