Sell it or rent it?

Question

I have out grown my current home, a townhouse in Blaine, MN I have been thinking of renting instead of selling, it seams to be an easy option to get my feet wet in landlording and renting.  I owe 129K and could walk away with 30k if i sold it.  I believe it would rent for 1550/month and HOA fees are 220/ month.  Mortgage payments should be around 950/month in November when I'm eligible to get MIP removed.  Giving these numbers and factoring in 200/month for extra costs leaves a cash flow of 180/month which is only a 7% return which isn't very good.  Any thoughts?

Michael Clemson · Answer

You're wrong to calculate this as a 7% return, I think. I live in Blaine. Is this in Club West? I see 2BR's listed for $159.9k. No matter the location, all homes sell for less than list. Let's say you sell for 92.5% of list. This is $147.9k, subtracting 6% for realtor fees and closing leaves $139k. You would only be able to walk away with $9k, and walking away also "costs" you $8k in lost equity that you had to pay the Realtors. It sounds like your original loan was for around $160k-$165k if you can remove MIP in November.

Since you would only take $9k with you, we can count $9k as your cash investment if you keep the home instead of selling it. You said the $950/month includes principal, interest, taxes, insurance, and then another $220/mo for HOA for a total of $1170/mo. The HOA takes care of lawn, snow, exterior, I assume, so that's $0. Your tenant should take care of all utilities, so that's $0.

If you rent it for $1550/mo with a month of vacancy per year, you will receive $17,050 in rents per year. Subtracting $14,040 for principal/interest/taxes/insurance/HOA, that leaves only $3,010. Are you responsible for any mechanical that would need replacing -- anything with a service life besides appliances? If not, repairs should be low each year, but budget maybe $1,000 anyway. This leaves only $2,010 of cash flow per year. Not a lot, but that's a $2,000 return on a $9,000 investment, or 22% cash-on-cash returns. You'd also be keeping some equity, maybe $2k/year -- something to consider.

Another benefit of keeping this property is that you know the home and area. If you don't like being a landlord or it doesn't work out, you were going to sell it anyway. If you rent it for 2-3 years and decide it isn't for you, you've earned enough equity (which the tenant paid for you) to cover realtor fees, and you can exit with more cash.

Jesse T. · Answer

Even though it isn't a slam dunk rental, I think this property would be a great way to start. Especially if the 30K is just listing price vs. mortgage.

Even if the property doesn't appreciate significantly, you still have principal pay-down in addition to monthly cash flow.  You are likely to get increases in rent also.

I would see this property as more of a way to try out real estate investing vs. a pure investment.  If you do have significant appreciation, it will probably make sense to sell within 3 years anyway - to take advantage of the 250K exclusion - although there will be some taxes(recapture and partial capital gains).

Michael Clemson · Answer

In that case, I'd sell it. It doesn't cover your risk. Even a month of vacancy and you're losing money.

Matthew Carlson · Answer

Given these numbers it would cashflow around 1900 a year on a 26K investment which nets around a 7% return

Matthew Carlson · Answer

Sorry should have been more specific the mortgage included taxes, insurance, and interest.  I would plan on self managing and factored in 200/month for extra cost for maintenance and vacancies.  The HOA covers all exterior maintenance water and sewer.  I should have also noted it was built in 2010.

Dan B. · Answer

@Matthew Carlson

I'm in a similar position - we have some more equity in our home (in Lino Lakes), but it won't rent for much more, so we are planning on selling. If this same home was in Roseville we could rent it for more and would almost certainly keep it.

Some things to think about:

1. What are your goals? Cashflow, tax savings, building equity/capital?

2. What are your plans for personal residence? Are you going to buy a slightly larger townhome or SFR? Have you considered buying a small multi-family to move into and rent out the other units?

3. Assuming you have lived in this place for at least two years you won't have to pay capital gains on a sale, even if you rent it out (for up to 3 years) before selling it.

4. It doesn't sound like you really know what you could rent your place for. Blaine is a pretty decent area as you know, but neighborhoods vary quite a bit. You really need to nail this down. Is your place a 2 or 3 bed - obviously this will make a big difference, but if it's a 2 bed I probably wouldn't keep it.

5. Remember to calculate for realtor commissions (7%) and likely paying some of buyers closing costs (~2%), if you owe $130k, sell for $160k, you'll probably get more like $15k.

Shuai Zeng · Answer

Then I would suggest sell it, and buy that duplex. Instead of paying full mortgage, half of it should cover you. You don't have to worry about HOA either even thou it's only 200. You can also keep a "Close eye" on tenants.

Matthew Carlson · Answer

Our HOA is very well funded but it is a possibility that something major would come up.  I will have to do more digging into what i can get into in my area.  So far the best I have found is 210k duplex that brings in 2600/month in rent.

Shuai Zeng · Answer

So, lets look at your numbers before you go ahead. Also are you going to move into another home?

1. Sale

-Capital gain?or 1091 which you'll be purchasing another? which if doesn't work out as 1091 then still capital gain I think.

2. Rent

+1550 Rent (If you can get it rent that price)

-950 (Mortgage)

-220 (HOA) I guess it's not included in the mortgage the way your telling us.

-150 Property Mangment fee (10%??)

-120 Landlord Insurance.

Now, I'm guessing your around 20-30 year left on the house? If HOA ask you to replace anything or ask for money to repair something for the "Community" that would ditch you deep into the negative. 2400 a year, is not worth it with your mortgage price of -950. Now, if your like me with around 3900 cash flow, and mortgage is only 450. I say keep it. Mainly is your mortgage value too high. Just my 0.02.

So my suggestion is sell it, and use that money to get into a SF, or mulit. HOA are evil........

Sell it or rent it?

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