Hello everyone! I"ve recently moved into a new home but I kept my first home. I did take some of the equity out of the house before I moved. Now I’m trying to determine whether to sell or rent. If I rent, the current market value for rent is less than my mortgage so I’ll be in a negative cash flow. But the market in this area is predicted to increase due to major construction of a new draw bridge and a new harbor. If I rent I’ll probably have to add $350/mo to cover my expenses. WHAT SHOULD I DO???
Anthony,
You didn’t really include enough information to make an educated decision. However, if this is a nice house, I generally would not rent it. Tenants are VERY HARD on property. If you can sell at a profit, I would do so.
Also, I don’t think that you understand the realities of operating rental property. If you have to come out of pocket $350 per month to cover the mortgage, your actual loss is MUCH GREATER than $350. There are a BUNCH of other expenses when you have rentals.
In short, unless there was some compelling reason to do otherwise, I’d sell.
Mike
Depends on your market. If you sell it within 3 years, you’ll get 250k or 500k if married tax free capital gains. That’s the live in it for two out of the last five years rule.
If you think it might increase that much over that time period, it may be worth it to wait. If those projects get delayed and takes longer, it may be better to sell. Like Mike said, there’s not enough information to decide. Best time to sell is typically in the spring. Currently the thought seem to be split that the decline in housing prices are going to continue for another year and the other side that says the decline is over and we’re headed up again. In my market, it seems that the decline has stopped and the lower priced homes have been sold with not a lot of new inventory hitting the market. It’s the spring market that will indicate which way we’re going. If lots of sellers put their houses on the market in the next month or two, the decline may continue, if there aren’t, then it may head back up again. Interest rates are also still low too so that was one factor that was supposed to kill the market, higher interest rates.
Could you buy a similar house for $350/ month ?
Here’s the deal… We are just coming out of an unprecidented real estate boom. Look at a 50 year price chart for U.S. housing. It looks like a verticle wall for the last 4 years. The problem is rents have not even come close to the increases in housing costs. Prices will stabilize and rents will rise over time.
The advice you were given is correct. the home will cost you more than $350/ month… BUT… Saving $350/month is not that hard, it’s a car payment. Over time the rent will increase and 15 years from now you will be sitting on a very nice pile of cash. Meanwhile, the guy who bought the car actually paid (with interest) $4000 more than sticker, and the car is now worth half of what he paid.
My grandfather used to say “your doing time on the cross” Ie. you suffer. But who do you know (self made I mean) who didn’t to get where they are.
I’d pay $350/ month out of my pocket for your house, no problem, my son will go to college because of it in 15 years. Think about it!
Petemfa,
One test I use when considering an investment is to ask myself “how many of these investments can I afford?” No matter what the amount, if the property is losing money, I wouldn’t want many of them. In business, you simply can’t afford to have “investments” that are losing money! And remember, in this case the actual loss is not $350 - it’s probably a LOT more.
Mike
I agree with propertymanager. With all the properties out there that make you money, there is no reason to have even 1 that loses you money. Relying of rents rising over time is speculation. People look at real estate statistics to determine where rents are going, but you have to look at labor statistics to determine that. If wages are rising and jobs are secure you can raise rents. If they are not, then rental increases will not be able to maintain their footing and they will fall back to lower levels.
To add to what others said, if you lose $350/month renting it out, figure how much you lose with it vacant.
With higher end SFH’s, which is normally hard to cash flow, figure someone renting it for two years on the average and moving on. Figure fixing, painting the place for the next tenant. Figure at least 30 days to re-rent, probably more time, if you want market rent.
Figure maybe the real estate taxes are going to go up. If it was your own home, I’d sell it, as it’ll be capital gains tax free. I don’t think there’ll be a big runnup as it’s been in the last few years, and increased values based on new construction may take years to materialize, and speculative.
Propertymanager,
I’ve read many of your posts and you consistantly give great advice. I do agree with your assessment. What I was trying to say is How much would it cost you to replace that home. If it’s negitive cash flowing and it’s worth $80,000 yea, dump it. However, If it’s a $400,000 home and it costs you $500 a month to hang on to it. I would hang in there. Right now in my area 98% of properties I look at don’t come ANYWHERE NEAR positive cash flow, and the ones that do barely make it.
When I got started investing I purchased a little house 100 yards from the Atlantic ocean. It cost me some money every month but I looked at it like I was putting money into something that would continue to increase in value. That little shack which I paid $140,000 for is now worth almost $1 million. It cost me $300/month EVERY month for a few years. If I had followed your advice instead of a windfall I’d have $20,000. You can’t make blanket statements about this stuff, every situation is different. You are correct though, you can’t afford to hold a lot of these “losers” HA HA!!
Petemfa,
Speculation is a valid business model. During the recent record breaking runup, many people made small fortunes due to the runup in prices (mostly by accident). However, the runup is over (things don’t go straight up forever) and prices may be stagnant or only modestly increase for many, many years. In fact, historically after a RE boom and decline cycle, it takes inflation adjusted prices 8-10 years to reach their previous (inflation adjusted) high.
In an environment of rapid price appreciation, I would agree with you that you might be able to wait for the market to catch up with you. In the current market, I would not speculate on appreciation. Of course, that’s just my opinion.
Mike
Point taken.
Keep up the good work. I read your posts when ever I see them. You obviously know your subject.
Pete
Thanks everyone for your advise. Let me give you some background on the property. My wife and I built the home in 1997 and lived there ever since until recently. It’s 1800 sqft on the first two floors. We paid 174k for it in '97. Last year it appraised for 525k so we took out 150k. We live in Md so we really saw a great RE boom but now everything is slowing down or even dropping. The house is in great shape, finished basement, billiard table, hardwood kitchen, upgraded appliances, etc. As mentioned before, with new homes coming up close by for approx. 490k it kills my profits. So if I sale, I’ll only clear roughly 30-40k after sales commissions.
Anthony
We still need more information. What is the total loan amount you have on the property? How much do you expect to sell it for?
Also if you bought it for $174k and sell it for $400k, your gain on the property is $226k. If you’ve lived in the property for two out of the last 5 years, 500k of gain is tax free for married couples. Otherwise you’d be subject to long term capital gains tax which would probably be 15%. 15% of 226k is $33.9k
So if you rented out the property, you’d either have to sell it before 3 years is up, or move back in for a while after 3 years, or pay about 40k in taxes if sold after 3 years. Or do a 1031 exchange but you’ll still have to pay taxes on those gains eventually.
Oh, if you did anything to the property in terms of improvements or other expenses, then that adds to your basis which is the $174k original price.
Your best bet is probably just to sell it if you want to lock in your gains. Or hold on for 10-15 years when it’ll appreciate more and the long term gains tax will seem like nothing.
As for only netting 30-40k, you’re really netting 180-190k, you just took out that money early in terms of a loan.
The total loan is 404k. I’d like to sell for 500k. I know I took the money out but I was really hoping that the market would increase enough to allow me to squeeze a little more out of it later, possibly a year.
If you owe over $400k on it just sell it. You’ll get killed everytime someone moves out and it sits for a couple of months with no rent and you paying on $404k. I assumed you owned this house for a long time and there was a small balance on the mortgage.
If you do decide to keep it you may look into corporate rentals. I own a very nice single family home in a executive neighborhood, it’s fully furnished, central air, all the ammenities. I have it leased to a large corporation which puts execs in it when they travel to the companies corporate headquarters which are about 5 miles from the home.
They use it to entertain, have meetings, they have a caterer bring in food, ect. Great payers, never late. And because the company is paying everyones on their best behavior when staying at “the house”. I have a cleaning service go by once a week, very easy. You really have to dig to find these companies. I stumbled across this when a visiting Vice President came by the house to inquire about some stained glass windows being installed, we got talking and he mentioned the idea.
There’s a saying on Wall Street that says bulls make money, bears make money, but pigs get slaughtered.
Now no one can tell where the market is headed, but it seems like you’ve gotten your gains and by selling now you’re going to lock them in. It’s hard to say if you’ll make enough in a year to justify holding it that long. You also say that there’s new developments selling for $490k and if your house is similar to those, do you really think you can get 500k? New projects are getting canceled all the time but as all real estate is local, and you have a lot of new inventory on the market, that may keep prices depressed for more than a year.
Thanks everyone, I thnk what I’m gonna do is rent it with the option to buy. If I do a purchase option should I require a down payment and for how much? If the sale doesn’t go thru at the end do they get the money back? I’ve been reading on this subject but I’m still a little unclear on some issues. I Appreciate you all!
Anthony
Why would you buy a property that is not making you money when you buy it? Are you just betting on future appreciation? Thats gambling why not just go play the slots it costs less.
I think you’re going to have a problem between theory and practice. Why do people lease option? Bad credit or other problems prevent them from obtaining a mortgage.
Typically in a lease option, it’s a regular lease with an option to buy. They pay a slightly higher amount and that amount is used as the downpayment. They typically have problems coming up with a down payment to buy a house now. And credit problems probably prevent them from doing 100% financing. You also set the purchase price when they sign so are they going to sign on to some inflated future price you’re hoping to get? They’d probably sign for what it’s worth now. Probably the best part about a lease option is that if they break the lease, they lose their excess deposits and if they have credit problems, that’s probably what’s going to happen anyway.
As an FYI, I was reading how three of the most inflated markets are Florida, the west coast and Washington DC. Those are suffering the greatest price drops and the projections are that it will take a few years to turn around. You should consult with someone who’s local that knows more about your local market. I believe you may just be in denial.
Renting out to the right tenant is hard enough, but finding the right tenant who would be interested in buying the property is probably even more difficult.
Good luck.