Is Renting primary residence a good decision at $400 cash flow and sell before 3yrs?

Question

Hello guys,

I am trying to figure out if Renting out my primary home of 10yrs is a good decision or not  at a $400 positive cash flow.

The home has a mtg of $600 and rent for the tenant in mind will be $1000. No management company involved at this point.

Homes like mine are renting for around $1100 to $1200 so after a year when this prospect tenant moves out I will market the property for $1200 so the cash flow then, including a management company, will be $500. (I'm giving the tenant a good deal)

So, at a $400 cash flow for the next year and possibly $500 when i get a new tenant in the near future. Is Renting this property a good decision?

The other option is selling it now and making just 10k after paying realtors and closing costs for buyer etc..

If I sell in three years to avoid paying capital gains, I am calculating the mortgage principal will go down $2500 per year and the property values will go up by at least $5k. So selling in 3yrs will net me around $12,500 More just in appreciation and lowered mtg payoff for a total of $22,500. Plus money made from cash flow in renting out at least another $14,400  in three years calculated even at $400. (I know I will have costs and pay taxes, etc.. but looking at these calculations, doesn't sound too bad or not so hot either?)

What do you think of all this numbers if you were in my position?

I appreciate your insight on this and thank you for reading!

Account Closed · Answer

The capital gain is insignificant in your case so what's the point of selling it at all? Why don't you just keep it as a rental, and let it keep on printing money for you?

Just my 2 cents.

Mehran K. · Answer

@Peter  Turner Look up the 50% rule using the search tool on the top right hand corner of the forums. Having a realistic understanding/expectation of  the true cost of expenses "over time" will  better help you make a more informed decision.

Michael B. · Answer

Sorry, but cash flow is not a simple rent - mortgage equation. I'm guessing that you'll lose money on this in the long run.

To figure your cash flow you have to take into consideration all of the expenses of maintaining a house. This includes capital expenses (like a new roof) and appliances, repairs, and vacancies.

On this site there are lots of articles on the "50% rule". The idea of the 50% rule is that you'll end up spending half of the scheduled rents on the items listed above. In this case you're spending $600 on the mortgage and another $500 monthly on upkeep (maybe a little less if you're self managing). But in any case there will likely be little or no cash flow here.

Another thing to think about: When you get to the three year mark and want to sell there will be significant "freshening" that will need to be done to the house -- new paint, new carpet, etc. A house that's been rented for 3 years looks like a rental house, not a home. And that will probably cost more than any appreciation you're likely to see in just 3 years.

So I'd say sell now and pocket the $10,000 and get out now. It's likely to be the best time to sell it.

Peter Turner · Answer

Of course! I am just at the early stages of planning and trying this out for a couple of years. I might hate being a landlord, not sure yet.

From your suggestion then I am assuming you'd be happy with a rental giving you $400 cash flow?

Account Closed · Answer

Peter,

Not getting into all the details, $400/month or $4,800/year is a 48% return on your $10k equity if you were to sell it. What other investment vehicle can give you that kind of return?

If nothing goes wrong, you will get your $10k in two year from renting it out. In addition, you also have more equity from your property because the tenant has paid down your principal. Once you have plenty of equity, you can obtain a HELOC or do a cash out refinance to extract the equity tax free/deferred.

If you hate being a landlord, hire a property manager. Yes, I'd be happy with keeping the rental with that kind of return on equity.

George P. · Answer

Peter - a few things...

First - let's assume you rent it out for three years, then put the house on the market, it'll then be anywhere from 2 to 12 months before it sells. Your "two out of five" goes out the window (2 years primary residence+3 years rental+time to sell). Perhaps you gonna have to rent it for two years and then have it listed. This way you're going to have a full year to sell/close.

Second - your property taxes might go up because it won't be your primary residence any longer - check with your municipality/state on this issue.

Third - it'll cost you $$$ to clean/ spruce up the place before listing it (even if your tenants doesn't trash the place which could also happen).

....

Peter Turner · Answer

I have been reading about the 50% rule of thumb and I am right there breaking even.

I was checking the landlord insurance and through Nationwide is $580 a year, which is $220 less than my home owners insurance.

Also, my county taxes are reduced this last year by $240 too. So I have an extra $40 a month in savings combined for taxes and insurance.

When I posted this example I stated $400, but more accurate cash flow number is $480 plus the little extra saving on insurance and taxes I will be breaking almost even on the 50% rule. The house was built in 1990 and even though I have never upgraded the HVAC unit or water heater, they have been serviced and still going strong, no issues with this blizzard either.

I will take my chances. Thanks for the input ! I appreciate it.

George P. · Answer

Wouldn't you have to recapture depreciation upon selling ?

Jon K. · Answer

Vacancies, potential evictions, insurance, repair costs, damages and wear and tear on appliances/carpet/everything else could eat into that $400 well.

But $400 a month isn't too bad assuming the repair costs are low and it's a newer house or renovated.

Is Renting primary residence a good decision at $400 cash flow and sell before 3yrs?

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