Sell or Rent? Need help analyzing costs among different homes
Investor · Parker, CO · Member since 2014 · 25 posts · 2 votes
Hello,
We are moving into a new home and will be selling or renting out our old one. We had a private lender loan us the money to get out of our VA loan in order to pay 0 down on the new home. We have to refinance to pay the lender back and there is more than enough equity in the home to do this. However, we are looking at all of our options, one of them being sell the home and purchase a different rental (or 2) in another market. We are trying to analyze the monthly costs (property management, CapEx, Vacancies, etc) and are having a difficult time. It seems the calculations are based on the gross rent. How would you calculate these costs if some of the houses are almost identical but in different markets? For instance, our current home is in Denver and the rents are much higher than the homes we are looking at in Tennessee. However, the homes are almost identical.
The main reason I ask is because our current home shows a negative cash flow but I believe, possibly falsely, it is due to the large demand in rent. Any thoughts or input on this would be appreciated.
Thanks,
Lance
i bet denver is in the top 10 most expensive cities in the us and here in tennessee is near the low end....numbers only lie if you missed something...i would even up with the lender asap for a repeat if necessary then rent for a short term if you need to.....might be the time you need for a great deal to come along
@Lance Smith I will speak to one of your questions. Econ 101 says that when demand increase the price also increases if the supply remains fairly constant. The high demand for rental property drives the price up (rent rates up). The reason that we have such poor cash flow is that rental demand is only outstripped by owner occupancy demand (resulting in low supply of homes). Owner Occ demand drives up the price of homes relative to what they can be rented for. Typically you sacrifice cash flow for appreciation potential. So while a property in another state may so superior cash flow the appreciation is anticipated to be flat. Not always the case but it is generally the rule.
To compare across market you can evaluate historic appreciation potential. You need 10 years or more data to get through the recent ups and downs. You can then use this to level the playing field to see where you can expect the greatest rate of return.
@Bill S. Thank you for the response. I will get started on comparing historic appreciation rates and see how the Denver and Tennessee markets compare. I see you have been in the industry since 2001. When comparing the appreciation rates would you use the last ten years? I only ask because the last ten years have been atypical of the normal market, or so I’m led to believe.Would it be beneficial to expand that time frame to 15-20 years to get a better picture of appreciation?
I understand the concepts you present with supply and demand. What worries me about holding out for appreciation is the appreciation is not guaranteed. For instance, I bought my current home in the Denver area 2 years ago, with $0 down, and have about $100k in equity as of now. Also, the home we are building has about $40K in equity with $0 down and we haven’t even closed yet. Appreciation has been great for me in this market but how long will the market continue to appreciate in the Denver area? Eventually, and I fear we are getting close to this point, the market will flatten out and possibly decline because the supply/demand will shift. At a certain price point the demand will decrease and so will home prices, assuming supply stays static. I think a major question that needs to be answered is, “Should I cash out now or ride the market a little longer?” I’ve seen a lot of posts on here that are against investing for appreciation and instead state investments should focus on cash flow. What is your take on that perspective?
Also, I think a major issue with calculating for cash flow based on percentages of gross rent is just that. If the same house in two different markets has a rent differentiation of $1000 the Maintenance/CapEx will be similar but the percentage taken from gross rent to determine cash flow is highly differentiated. I am trying to determine a conservative but realistic solution for this.
Thank you again for your response. I appreciate experienced investors helping out those new to the industry.
@James Lamb I do like the thought of having a lump sum of money to seize an opportunity when it comes along. I just have to make sure it is the right decision and that there is an opportunity to seize.
i only have a duplex and a single family....read up a lot on property managers here and basically learned they are not all created equal.....not sure if i would want the major chunk of my investment several time zones away taken care of by someone with 500-1000 other rentals and only met online.....maybe when i hit 20 rentals lol.....i would still want to see if the grass was cut.....best of luck.....money isnt everything so do what makes you happy and thanks for your service
@Lance Smith I would do at least 15 years. The S&P Case Shiller index has data for many years for major markets. It will give you a good idea about what is historic in Denver. If you look at the 20 Cities they track you will see that all are not equal. All were indexed and started at 100 in 2000.
Also, speaking strictly in generalities, it's a suckers bet to time the market. NO ONE knows when things are going to turn. To just assume that since prices are high they will go back down is not 100 percent true. There was a period of time in So Cal that saw 25-30 years of positive growth. This was despite the other ups and downs in the economy in the rest of the country. The reason was people continued to move there and the population inflow kept the area growing despite what went on elsewhere. That could happen here. I'm not saying it will but you would be really sorry to have sold if it does.
In reality, even if the market goes down, you will only be hurt if you have to sell at or near the bottom. If you have the 20 year approach, then no need to worry if next near we lose 25% or gain 25%.
BTW cash flow is not guaranteed. It's probably more reliable than appreciation but it's not assured. Things happen and cash flow disappears.
For me, it's much better to be locally and able to do my own management and property selection. If I can get the cream of my market, I believe I am better off than feeding toward the bottom in a market I don't know and is hours away. By cream I mean select the best tenants, find the best properties at below market prices. By bottom feeding I mean you are taking tenants that have been passed over by other local landlords and paying retail or more in areas that you may or may not know very well.
This is the question to ask yourself. In 20 years would I rather own a property here in Denver or in Tennessee . Only you can answer that. The bottom line for me is that it's not all about the numbers. You have to know the numbers and run the numbers but if you only use the numbers, it is my experience that you will end up with trash properties in the 'hood.