Would you rent or just sell?

Question

We are currently living in a townhome, my wife is due to have our second child in a month or two. Hence we need a larger place.

I'm torn on weither I can rent out our current townhome or if I should just sell it.  I really dont feel like showing our home... It's clean, but keeping the place in show condition is a pain in the @55...

I'm completely new to this so please bear with me :)

Our PITA on the townhome is about 815 / month
Our ITA (is there such a thing?) is currently 698.84 and dropping

I have seen other properties for rent in my community at 750

I may have a good renter (friend of the family, who happens to be a home painter) lined up for somewhere between 700-800, so lets assume 750 for the discussion.  She wants to buy the place but her financing is not in line.  She does have 2000 cash saved, I may ask for the 2k and sell her an option to buy.

Would you rent out the property, under the conditions?

I realize the deal is upside down about 75 bucks a month, but it seems as though that 75 a month just goes straight to prinicple.  Also I would be speculating that the property value would at least stay above what I originally purchased at 3 years ago.  Lexington Kentucky.

I realize it is contigent on the property not sitting vacant, as well...

Slap some sense in to me someone!  I'm a computer programmer, not a landlord, but this seems like a semi decent opportunity.  What am I missing?

Christopher Harn · Answer

The only rush we have is the fact that we have a newborn coming, and no nursury, but the reality is that the baby is gonna be in mothers arms non stop for the next 6 months, I spent the first year with our firstborn sleeping on the couch! I may end up there again :)

I sincerely appreciate everyone's response, this definately seems like a great resource for Landlords.

Jon Holdman · Answer

Both are variants of the "make money" school of thought, though.  As my dad used to say about his business, "I'm not doing this for my health."

Unfortunately, this business often requires we make guesses about the future.  Then, we have to apply those guesses to the current situation to determine if a deal is a good deal or a bad deal.  Forgetting about the fact who already own this home, a decision reduces to a math problem.

Based on the current monthly loss and the current value, its a no braining, IMHO. Sell now.  You're losing money every day you hold it because of the monthly loss.

What you're betting on is appreciation.  As Sacramento_Steve lays out, this is never a money maker at the current price.  If you hold long enough, the loss is reduced.  But, its still a loss.  If you get a little appreciation, then maybe you make up that loss or tip positive.

Like Heathen, I like buy and hold.  That's what I'm doing.  But, I want to be sure my buy and hold deals make money, after all the expenses, from the start.  If I get some appreciation, great.  I want to be making money along the way, though.   Having an investment that loses money each month while hoping for appreciation is speculation.  That worked a few years ago.  I don't think it works now.

Christian Malesic · Answer

As with most of these types of decisions, it is left to you as the responses here are all over the field.

We have given some points to ponder that you may not of heretofore thought through.

After reading ours, what are your current thoughts?

Tom NA · Answer

If you didn't already own this house, would you make this purchase as an investment?  I think the answer is a resounding "no" and that should give you your answer.  The fact that you already own this property is mostly immaterial.  Sell now or prepare to throw hundred dollar bills out your window every month.

Steve Funder · Answer

So, PITI is $815.  Renting this thing is going to cost money, vacancy, advertising, maintenance, repairs, paperwork, perhaps property management.  A general rule of thumb is over time expenses go 40-50% of rental income.  This may go down if the Home Owners Association (HOA) fixes roofs and air conditioners, but now you’re paying HOA dues.
I am not a huge fan of selling right now.  I think blood is running in the streets homes for prospective buyers are selling for historically low prices.
So, I have two questions for you:
1.	Will you preserve your principal (the money that you’re putting in?)
2.	Will you get an acceptable return?

Income
Rent $750

Expenses
PITI $815
Misc $300

Negative cash flow $365.

Since taxes vary locally, it’s hard for me to know how much is going toward the principal balance each month, but I’ll assume your initial loan was for 125K and say:

Cost to sell this place now (commissions, closing costs $10,000)

10 years of carrying costs: $43,800
Principal pay down over 10 years: $20,268

20 years of carrying costs: $87,600
Principal pay down over 20 years: $57,496

30 years of carrying costs: $131,400
Principal pay down over 30 years: $125,000

It seems like the negative cash flow outweighs the benefit of keeping this place, unless you just want to have an extra piece of real estate for your child, parent or whatever.
As an investment, it does not seem to make sense.  Remember that at the end of 30 years, this property could cost 5 times what it does now, and when the principal balance reaches zero, the place starts to cash flow.

I may have the numbers wrong, so plug them into this kind of analysis and see what you think.  Be sure you don’t underestimate expenses.

Christian Malesic · Answer

It depends on your cash flow situation at home.

I like property and am a Buy & Hold Investor (so I am bias).  I would hold and rent.

I am not familiar with the market in your area, but I wil take a stab at it and say it is not a sellers market.

A few months or years and the market may change allowing you to sell quicker for more money.

Plus, you know this property intimately making it easier to maintain.  You know, for example, if the handle sticks on the toilet causing the water to run.  You know that breaker 11 trips when you plug in the Christmas tree lights and run the vacuum, etc.

This is a chance for you to see if landlording is something up your alley.

I would be hesitant about renting to friends or family if you want to stay on good terms with them.

I all comes down to cash flow.  Can you afford the holding costs?  If not, sell and take the hit if there is one.

Frank Adams · Answer

I'd sell that puppy so fast it would make your head spin!

Your pitI (a pita is a pain in the a55) is 815.

Rent "might" be 750. That's a DEAD LOSS. If I offered you a stock that was guaranteed to lose 75/month you'd laugh at me. So why would you buy an investment property that does the same thing?

Why is your ITI (interest, taxes, insurnace) dropping?

In reality this is about a $350 month loser.

all cash

Christopher Harn · Answer

I appreciate your response.

the "ITI" (not sure there really is such a thing) is "dropping" because for each monthly mortgage payment more is applied to prinicipal.  The cost of servicing the loan (interest amount in an amoritized loan) lowers over time.

And perhaps I was unclear, this is property that I already own, currently it is my primary residence, finaced 30 yrs at 6%, have maybe 15% equity in.  I need to either sell this, or rent it out.  I will be purchasing a larger home for my new primary residence.

It is unreasonable for me expect cash flow out of this property (The numbers just dont work out).  Maybe in a year or 3 I can refinace this and possibly get some cash out of renting it.  Currently I can either sell it and get my equity out.  Or rent it out and hope to gain equity over time via the principle payments and hopefully appreciation.

Please continue to let me know your thoughts!