Struggling to decide: Sell vs Rent out my home?

Question

Hi all,
I am not an real estate investor, but do own a home in Fort Collins, Colorado area (2009 built; 3520 total ft2; 2350 finished ; full basement - unfinished). I have an out of state job offer and trying to decide whether to sell or rent out my house.

Preliminary sale estimate from my real estate agent suggests that it could sell for 315k, but with commissions (6%) and fees, I'd be left with $292k (3 k less than what I paid for the home : $295k). Also, house is in a great new neighborhood with excellent schools. So I am tempted to keep it for now and rent it out. It would also be a nice option to have a home back here in colorado, if the new job offer doesn't work out.

Having done my research, I believe I need to hire a property management company, since I will be out of state and there is no one to help here in Fort Collins.

With this back ground, could someone please help with the following questions :

1) Is renting out your home when living out of state a huge deal ? In terms of maintenance etc ?
2) What are the tax implications if I have rental income in Colorado but live in state that doesn't have state taxes ?
3) Any recommendations for a reputed property management company in Fort Collins-Loveland area ? I am reading mixed reviews for all of them online. Any recommendations on how to choose a property management company ?

4) I am not hard pressed for cash even if I don't sell my home. Is there any strong reason for me to sell my home rather than rent it out ?

Thanks Much, Raghu

Jon Holdman · Answer

1) Since you will be out of state and using a PM, you will have to pay someone to deal with the property and tenants, no matter how small the issue. We talk a lot about the "50% rule". That simply says that 50% of the gross rents will be consumed by expenses (i.e., taxes, insurance, routine maintenance, property management fees, utilities (at least when vacant), CPA fees, legal fees, make-ready costs, etc), capital (big expenses that have to be capitalized over multiple years - roofs, furnaces, sewer lines, etc), and vacancy. From the remaining 50%, you have to cover your P&I payment (only P&I, that taxes and insurance are in the 50%). In any particular year for any particular property, your actual numbers can vary widely. In your case, the absolute best you can do is to pay your PITI payment and the PM fee (typically 10% of collected rent.) You can do much, much worse. At the least, you should count on some amount of vacancy, the PM's fees to fill a vacancy, and some maintenance.

2) You will continue to have to file a CO tax return and pay CO income tax. Your income will be pro-rated between the two states, based on the income you earn in each. Unless you're getting some pretty serious rent (e.g., $5000 a month), don't worry. You won't have any rental income.

3) Sorry, no.

4) Yes. To be rid of something that's going to cost you money out of pocket. What do you expect for rents? Divide that by two. Subtract out the P&I part of your payment. That's your expected monthly cash flow. Negative? That means its going to suck money out of your pocket. OTOH, if you want to hang onto it in case you move back, this may be OK. Its also a form of forced savings.

You should expect to also give seller concessions of around 3% when you sell. I'd expect your net to be more like $280-285K

Robert Steele · Answer

A couple of general points:

1. You can still get all the profit tax free from the sale of the house even if you decide to sell it after being a rental. Providing you lived in it for 2 out of the 5 past years (double-check that).

2. If you have been putting off maintenance (new roof) or improvements (patio, dishwasher) while living there then by converting it to a rental you can now get tax deductions if you decide to go ahead and do them.

Lynn McGeein · Answer

All great replies so far, just wanted to add that if you are considering buying a home in your new area after renting for a year or so, having your old primary residence not sold but converted to a rental will seriously hurt your DTI ratio. These days, the "buy and bail" rule holds, meaning they count your whole house payment against you but you cannot report any of those rents towards your income to qualify for another home.

Also, you said you are not an investor, so you're probably not ready for problems like tenants not paying the mortgage, evictions, repairs costing more than you think, and, especially, turnover costs on such a big home, especially if the tenants don't pay but their kids have destroyed the carpets and written all over the walls. Losing a few thousand dollars to move on with no worries left behind and not having that payment held against you for your next home is much better than the risk of bad tenants. If you do go the renting route, make sure you are very sure about the property management company, as that can be its own nightmare from out of state.

Account Closed · Answer

Great advice Jon Holdman I think you hit the nail on the head.

Sometimes it's better to cut your losses rather than throw good money after bad money. In the rental game, you never know how much cash you may end up throwing at it.

Johny Sam · Answer

Since, a property is an investment, you want to get the optimal value when you decide to part ways with it. Selling the property gives you the profit up front but Renting, as an alternative, can provide steady income over a longer period of time. I think you should analyze the state of the real estate market before making a decision. Tax deductions are an added bonus of renting out your property. Although you pay taxes on the income, the property will allow write-off options.

Michael B. · Answer

Don't forget risk in your calculation. The risk of something expensive happening at the house is very real. What happens if a tenant falls over a railing that has come loose? What happens if a tenant decides to remodel and takes out a wall before losing interest in the project? What happens if a tenant forgets to tell you that the foundation is settling rapidly?

There's so much that can go wrong in long distance landlording. And you're not going to know about it or easily address it from afar. Even if you have to bring cash to the closing, sell it and remove the risk of really bad things happening to your longterm finances.

John Stevenson · Answer

There maybe an incentive to rent, at least temporarily.

What are realtors saying about the economy? If housing prices are expected to appreciate at a rate higher than inflation over the next 3 - 5 years, it may make sense to rent it out for a few years to capitalize on the appreciation. Even with the expenses going out, as long as you break even every year, when it comes time to sell you still make money.

In the meantime, if the job situation goes sour, at least you know that you have a place to go back to. If after a few years, everything is going good, then sell with no regrets.

As to a good property manager. If you go the rental route, I recommend asking any property manager for 5 - 10 past or present clients. Then give them each a call and ask them for their candid opinion.

Raghu Kota · Answer

Rich Weese : Yep, well said! Thanks !

Raghu Kota · Answer

Dave Meyer : Not much. It is a basic lumpsum package of around 16k (includes tax assistance) . After I factor in cost to move my family of 4, find a temp stay and then rent at new location, not much remains..

Raghu Kota · Answer

Jon Holdman : Thanks for the detailed reply and objective advice. I am now more inclined to sell!

Struggling to decide: Sell vs Rent out my home?

Struggling to decide: Sell vs Rent out my home?

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