What would you do in this position?

Question

Hey folks,

I am getting ready to close on my wife and I's dream home. We currently live in a townhome we bought back in 2018. My question is should I consider selling or renting it out? (Part of me doesn't want the hassle of being a landlord)

Bought for $128,000 back in 2018 and used conventional financing at 5% from what I could remember with down payment and closing costs it was about $12k or so.

Monthly payment which includes principle, interest, taxes and HOA is $1,122. Currently I owe about $113k. Realtor.com tells me I can likely pull $180k.

I am in central Florida and believe I can pull about $1,200  for rent at the very minimum. The property is in very good condition as we swapped out all carpet and put in vinyl flooring and painted.

What do you professionals think?

Thanks!

Nathan Gesner · Answer

$1,200 for rent. You should set aside approximately 10% for maintenance, 10% for vacancies, 10% for capital expenditures, and 10% for property management. This money is set aside to build a reserve and keep things running without dipping into your personal funds.

Using this basic formula, you would be $400 in the negative every month. Even if you set aside just 5% for each category, you would be $200 negative cash flow every month.

It's not a good investment. It may survive and may turn our really well if you hold on for 5-10 years. Or it could blow up in your face.

I would sell it, learn what good cash flow looks like, and then find a property that produces it from the start.

Theresa Harris · Answer

If your basic expenses are $1125 and rent is $1200+, you haven't factored in repairs, vacancies and maintenance.  I'd have a realtor (not a website) go through and give you an idea of market value.

Nathan Gesner · Answer

And HOA fees never go down so rent increases may be eaten up by HOA fee increases.

Colleen F. · Answer

@Edwin Duran  if you sell now you do not pay capital gains if you have owned the home for a period of at least two years and used it at as you main home during that time providing  you haven't used that exclusion on another home in the last 2 years. Markets are appreciating so I would expect you would have some gain.  Your numbers like Nathan said if accurate don't look good.  Unless you have a personal reason to delay the sale I would sell.

Also HOA sometimes limit rentals so if you decide to rent check your bylaws.

Matt Leeding · Answer

I am very new to being a landlord, but I just did everything you are talking about.  I decided to rent out my townhome rather than sell it because it got me into real estate very easily.  I ran the numbers using the rental property calculator and found what numbers I would need to make everything work.  After doing some research in the cost of rentals in my area, I knew I could do it. Once I knew my bottom line and what I could get for rent, it was an easy choice for me.  Call around to property management companies and ask what they are renting houses for in your area.  Get an idea of the cost per square foot and that can help you decide what the rent you could get. The rental property calculator also has a rental insight that can give some info.

On the part of not wanting to be a landlord...remember that is what property management is for!  I decided to manage it myself since I want to get a grasp on all aspects of being a landlord.  But in some of my research I found that there are some (maybe all do this?) that offer different levels of management.  Examples are: Full management where they do everything.  Placement Only where they do everything to get a renter in the house and you then manage it.  Also just management where you place the tenant, but they manage the property.  I am sure there are different options form different companies that may help you in your choice.  But it could be worth calling around to ask in your area.

Good luck in your choice and in your journey!

Johann Jells · Answer

What do you want? Equity or cashflow? If you leave it as-is and can pay a manager from the rent, then you have a property buying itself for you. Another idea that is probably not going to be popular is to refi at 25% down 15 year using part of the equity, then you'll have cashflow plus leftover money for further investments. That 25% down will earn 9.6% over 15 years even if there's no cashflow or appreciation. Pretty good return for no work. Now, a lot of people here like to churn their investments more to keep the equity earning as much as it can. But that's a lot more work.

Marian Smith · Answer

@Edwin Duran  homestead sale gains are tax free, not so with investment property, with gains taxed and depreciation recaptured.

Brian Hamel · Answer

@Edwin Duran

Sell it. With those numbers the renters are going to rough it up and it will drive you nuts

Drew Sygit · Answer

If you want to be a landlord, hold onto this property as you should know it inside & out. WIll make it easier to DIY manage and learn the ropes. If you continue to accumulate rentals, your DIY knowledge will make it easier for you to screen Property Mangement Companies and not get screwed.

Refinance ASAP to get rid of PMI/MIP and get a lower rate.

Select a 15, 20, 25 or 30 year loan term based on the payment that gives you the "cashflow vs equity buildup" you want.

Ronald Starusnak · Answer

Just hold it if you don't need the extra cash. Flips are for running the sprint, rentals are for running the marathon. Long term wealth comes from holding your properties. You're going to be paying capital gains taxes, 7% realtor commission, closing costs, etc. Hire a PM if you don't want to be a landlord and enjoy the passive income.

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