Should I rent or sell my house?

Question

Hello all,

New member here. I just found the website researching some stuff related to the issue below.  I recently moved (not far, just found a house I like better).  That leaves the question of what to do with my former residence.  I was looking for tax deduction information, and found bigger pockets.  I've been doing some additional reading here, and refining my list of inputs based on what I've learned so far.  I guess I'll give some specifics since it will probably be additionally helpful.  I would be grateful if you experienced landlords could let me know if you see places where my numbers are obviously jacked up.

-The rent number is a couple hundred under the Zillow estimate... hopefully slightly conservative.

-Using the "50% rule" (that was a new one on me) I just split those anticipated operating expenses evenly between repairs and maintenance.

-The mortgage is currently less than the number shown, but I'm anticipating a tripling of the property tax if I don't sell, so I assume it would go up to something close to the number listed.

-IF my numbers are right (and hopefully I can refine them here) if my yearly cashflow on average is right at zero, is it worth the headache just for the equity appreciation?  I'm not in an area where the property prices move much, so it would mostly just be my mortgage balance shrinking over  time.  If I sell, I'll probably clear around $60k in equity out, that I could put into easier market investments, or whatever else.

Thanks for any input.

Income   Item

Monthly Income

Rent

1500

Mortgage interest write off

100

Depreciation write off

113

Property insurance write off

23

Repair expenses write off

93.75

Maintenance expenses write off

93.75

HOA write off

10

Utilities payments write off

Property management write off

37.5

Legal/Professional fee write   off

0

Vacant time write-off

Total Projected Income

$1,971.00

Other benefits:

Continual increase in equity via property appreciation and   reduction in loan balance.

Expense Item

Monthly Expense

Mortgage (includes property   tax and insurance)

1027

Repairs (ex plumbing, AC)

375

Maintenance (ex yard stuff,   light bulbs)

375

HOA

40

Property Management

150

Legal/Professional Fees

0

Total Expenses

$1,967.00

Other:

After three years, loss of tax-free profit on a sale.

Estimated Monthly Cash Flow

$4.00

Thomas S. · Answer

Having 60K in equity dead and buried in the property you are losing opportunity value on that cash of $500/month. This is a seriously poor investment that will lose money over the long term and probably not even break even when you sell even if it is fully paid off. Most hobby investors sell in 20-30 years banking the money without ever calculating the cost that went into holding the property above and beyond the rental income. Most lose money. It is barley more than a form of forced savings at a cost to the owner. Usually nightmare tenant and financial issues force a early sale.

Hobby investors that depend entirely on profits from the tenant paying down a mortgage take a serious gamble due to not actually realising the value of equity, ongoing major expenses and market conditions at time of sale. It is a amateur move that does not really pay in real dollars. Upside is that they are happy believing it does.

These are the burned out hobby landlords that put money in our pockets as investors.

Garcia Santos · Answer

If you want to sell your house fast, Try selling it to investor sites like forthomebuyers since they buy houses.

Nick Yanutola · Answer

I'm thinking the better play is to sell it, and use the capital to acquire a purpose-bought multi family property that will hopefully have better month to month cash flow.  Here are my updated monthly estimates on standard cash flow (not including any "bonuses" like appreciation and principle reduction)... any additional thoughts would be appreciated.  I spoke with a property manager about realistic rent expectations and called the county to verify exactly what the tax increase could be, so I have a good expectation that these (admittedly conservative) numbers are pretty accurate.

Standard   Cash Flow During the Year

Monthly Estimate

Yearly Estimate

Notes

Rental Income

$1,600.00

$17,600.00

The yearly rental total projects one month of vacancy.

Mortgage (includes property   tax and insurance)

$949.98

$11,399.76

Repairs+Maintenance

$300.00

$3,600.00

HOA

$40.00

$480.00

Property Management

$192.00

$2,112.00

Formula also accounts for one month of vacancy

Misc (legal fees, etc)

$0.00

Estimated Net Pre-Tax Cash   Flow per Average Year

$118.02

$8.24

Formula also accounts for one month of vacancy

Dick Stevens · Answer

You're making things too complicated with factoring tax deductions.  Keep it simple.  Take the gross rent and subtract the mortgage (principal and interest), taxes, insurance, any utilities you will pay, and an estimate for repairs & maintenance.  Whatever you are left with is your monthly cash flow.  Don't forget that you may have vacant months, which means all expenses are out of pocket.  I'd never invest for the potential of appreciation alone, it's a silly gamble.  You previously said you're at about a monthly break even. If that's still true, it's a bad investment property.  Also, once you start renting a property that was previously owner occupied, you are going to have to factor in capital gains tax and depreciation recapture when you sell it.  If you sell right now, you can walk away with any profits in your pocket.

Nick Yanutola · Answer

Since this thread, I actually figured out that my assumptions about how the taxes were calculated were all wrong, and I've created an updated set of data that is actually even less in my favor.  That being said, if I actually utilize expenses that are closer to what mine have been over the years, I'm more or less breaking even on a cashflow basis (maybe a small profit) before appreciation and principle reduction.  Based on the total equity in it (effectively about 60k) I calculate about an 8% return for the year with fairly conservative numbers.

So... I'm still undecided.  I know it is not a deal that an investor would likely buy into as is, but, I already have it and probably wouldn't lose my shirt on it.  I'm trying to decide if renting it for a year or two would be worth it for developing some connections in the industry... I could then sell and use the proceeds to get into something purpose-bought from the start, and already have the resources/connections to get that new property into shape quickly and efficiently.

I can post my new numbers if anyone is interested.

Agustin C. · Answer

I would consider cash flow as actual expenses minus income. Tax savings is just icing. I wouldn't take it into consideration when analyzing a deal.

All that being said maybe you do a reverse cash out and keep it if you can afford the negative cash flow. Use the cash out to purchase more property. Or sell it and try and find a property that cash flows from the get go.

Account Closed · Answer

Never rent for equality appreciation.  My ADD won't let me read the whole question, but if you can predict the market that well, then you need to be doing other things than renting out homes.  You need to ask yourself what your long term goal here is.  Is this the only one you want?  Is this something you may want to do a lot of in the future?  If you answered yes to the first and no to the second, I would probably sell it unless you are making over 50K a year and are having someone else manage it.  Depreciation isn't worth the potential headaches otherwise.  You can easily end up underwater in a year or two if the market tanks.

Nick Yanutola · Answer

Thanks Tony...

Just to be clear, the $100 to $200 most people want to see in free cash flow... is that including tax deductions or not?  If I apply the zillow rent value (want to call a local property manager to at least inquire about this), use the 50% rule for maintenance, and assume the property taxes double, I get:

1675 rent - 883 mortgage - 837.50 maintenance = about -$45.

And that is before any property management fee if I wanted to go that way.

I believe I would get a large chunk back at tax time that could possibly bring the average for the year to +200/month or more, but I want to know if people are counting that in their calculation, or do they want to see my -45$ number be +200 instead, before a tax refund?

Troy Gandee · Answer

I always recommend keeping any property that is equitable unless you're liquidating to trade up for a better deal. Getting started investing is one of the hardest parts of this business and acquiring the first one or two assets is the biggest hurdle for most folks. If the property cash flows, I would absolutely keep it. Real estate can be a killer tax shelter if it's held in your name, which it probably is since you have a mortgage and it was your primary. I don't ever count on appreciation, but I keep in mind that it's there if the market is decent. The biggest advantage to real estate is that that property will be 100% free and clear at some point. Those funds can then subsidize your income or you can use that equity to go and acquire more assets. Just remember that selling a house will not make you wealthy. Owning assets is what will make you wealthy.

Nick Yanutola · Answer

Thanks all for he input.  To address some of the questions above:

1) House is actually worth: I would estimate, 210k.  If I were trying to sell it I would put it on the market starting at 215-220.

2) Remaining loan balance is $123,xxx

3) Mortgage payment is currently $808.  The current tax portion of this is $73.xx.  I guess I'm not understanding how they calculate the tax portion.  The internet says 4% for a primary residence, but this is more like 0.4% of the taxed value, which is around 180k.  Internet says 6% for a non-primary residence.

4) Work it needs:  Yard is in pretty good shape.  I've put a good bit of work into the yard over the years.  The interior I think would need some stuff to get top of the market rent.  Mostly cosmetic like carpets, paint, light fixtures would be the biggest things.  It could probably stand for a set of new counter tops as well.  The roof is brand new.  HVAC replacement will be coming soon.  All the major appliances are in it and function perfectly except for washer and dryer, which weren't in my new house, so I took those with me.

Rent:  Zillow says $1675.  I'm guessing I'm not going to get quite that much without freshening up the interior a bit.

Should I rent or sell my house?

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