To sell now or use it for rental property?

Question

I'm currently living in a SFH in TN. I purchased this home with zero down at $199,900 with 30yrs fixed 3.25 interest rate. I spent $770 out of pocket to close. My current mortg is $1150 with tax,ins and hoa.

I can either sell now with net profit of $30k or use it as a rental. Rental will be $1500/month. Property management will be at 10% without budgeted maintenance. The home is in great shape since it's 2009.

Is it better to sell now or use it as my 1st rental property thats not making much on rental due to higher mortgage???

HELP please!!

Veronica Ivy · Answer

I'd sell it and bank the cash, then buy a property that actually makes sense as a rental. Look into a 1031 exchange so you don't pay taxes on the 30k profit, though.

The kinds of properties we buy to live in tend to be terrible properties to buy as a rental. Most landlords in North America are in your situation: they rent out a property they previously owned as an owner-occupant, and they're not exactly making money off the situation. The reason? The property isn't best used as a rental: it's best used as an owner-occupant SFH.

Veronica Ivy · Answer

Appreciation is unpredictable and not a great long term investment strategy, in my opinion; it also means that your asset isn't liquid and not producing cash flow. You won't even be able to cover repair costs and vacancy rates with 1500/mo rent and that mortgage cost.

Refinancing has closing costs. It's not free. There's no guarantee home prices will appreciate (they went through the roof this year...there may be a correction or slowdown after the pandemic). Most long term buy-and-hold rental investors treat appreciation as a bonus and never factor it into whether a property is a good buy.

As I said, this is a bad rental. I'm sure it's a lovely home and very nice to live in as a primary residence. But it's a crummy investment property. I don't buy investments based on whether I would want to live in them: short answer is, I wouldn't really want to live in the homes that I own and rent. The homes I want to live in don't make profitable rentals.

Sang Yi · Answer

I initially thought to hold it for duration even if small negative cash flow, thinking the home would appreciate more equity over time. I guess this is why I'm here to ask from experienced investors. Thanks again for knocking some sense into my dumb idea.

Veronica Ivy · Answer

$1500/mo isn't enough on a $200k property with no equity.

That's clearly going to be cash flow negative. And I'm not sure why you'd want to do that. Do you have an investment strategy? How does holding a cash flow negative property help with your strategy?

Jaron Walling · Answer

100% what @Veronica Ivy said. The numbers don't work as rental unless you can stomach negative cash-flow and plan to hold for a long time.

Sang Yi · Answer

Current rental market here is very good. $1500 is on the lower ballpark, due to shortages of homes/rental. I plan on purchasing again to live with no down with no pmi. I just don't like overpaying market price.

Sang Yi · Answer

Great advice y'all. Thank you so much!! To answer little more about my situation. I don't need the cash now and have enough cash reserve. I'm looking to purchase again to live in for a while but the market seems overpriced for SFH to live and not for investor property. Current rate is 3.25 now and was thinking if refi will IRRRL to 2.25-2.75 will help if I decide to just go the rental route.

Veronica Ivy · Answer

Just to clarify: I primarily invest in SFHs. I think they're very stable. The issue I'm raising is that the kind of property we buy to live in ourselves tends not to be a good rental property once we move out. It's not that it's a SFH, it's that it's the wrong kind of SFH.

Larry Chen · Answer

I second Veronica.  I would say it depends on if you need the money right away for another deal but it didn't really cost you anything to close the deal in the first place so you kind of picked up a free asset that will pay you about $100-150 a month.  Try to judge your market though; I agree with Veronica's point that the SFH may not be as stable due to demand but that's entirely dependent on your market. Good luck!

To sell now or use it for rental property?

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