Should I rent-out or sell my house?

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Hi! I'm a super-long-time lurker but I finally need some financial advice of my own.

I'm living in my first house that I bought under a year ago and now need to move to another state to accept a new job. I will be getting paid a LOT more than I do now, enough so that cash flow problems that may arise renting out the house will never be a problem.

About the house:
- I pay ~ $2085 per month all-in (including PMI, tax, insurance).
- If I pay down the principle about $25k and remove PMI it will be $1875.
- I just refinanced to 3.5%.
- The rental market around here is about $1900 - $2000 for a house like this, but mine is way nicer than the typical rental (pretty lawn, new stainless appliances, etc).
- The sales market is hot and heating up, similar houses are going for ~10% more than when I got this one.
- I have a friend who will also be renting out his house in the same neighborhood (and also be out of state).

The main question is whether investing another $25k and possibly being cashflow negative is better than the 6% hit I'd take by selling it. Keep in mind that the actual negative cashflow would be negligible in light of the new job.

Other questions:
How will keeping it affect my ability to buy a new house in the new state?
I'm considering a home warranty & landlord insurance because I'm out of state and for protection against somebody destroying it. Are these a good idea?

I appreciate any and all responses, thank you!

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startupdad (Mar. 13, 2013 @ 8:40p) |

What state is it and who are you using that you get 8% with if you don't mind sharing? I've found a couple that are bot... (more)

Al3xK (Mar. 13, 2013 @ 9:35p) |

Wow. Is it really this thin of a margin that LL have on their property - renting. If the house is not rented for even a ... (more)

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What are the chances of this rental being cash-flow positive in the near future. As it is, you are not accounting for;
vacancies
possible management fees (unless you want to be long distance LL)
maintenance of property

on the flip side, the principal portion of your mortgage payment is also not accounted for.

Just because you can "afford" the neg. cash flow, doesnt mean it is o.k. The alternative (of selling) might be better. Do you really want to be a LL?

One way this would affect your ability to buy another house is your required mortgage payment to income ratio. You may not qualify if the ratio is too high considering two mortgages. Rental income has to be established to help you there.

Sell the house, take that money and buy 2 cash flow positive rentals in Texas for 100K each that generate $1000-$1100 a month. Seriously this is a no brainier, you are not underwater so there is no reason to keep a house that is cashflow negative.

You have some options.
1) For sale by owner, save on commission.
2) If your income to debt ratio is low enough (which sounds like it will with huge pay raise), then no problem in getting another property in the new state.
3) I wouldn't pay down right now, just hold on to the $25K should you need it when you get to the new state. You can always do it later if you decide to do so.
4) If you decided to rent it out, don't bother with home warranty. You are better off paying for property management. Either way you go, don't expect your house to have the same wear and tear as if you live there. Its not to say tenants will destroy your house, but its tough to find someone who will take care of things like you did.

By the time you pay for property management, insurance, etc. you're going to be cash flow negative even with PMI removed. I know you indicated that your new income can support this, but I would ask myself, what's really your goal in keeping the place and playing long distance landlord, at a loss?

Are you interested in moving back someday? If so, and assuming it would be sometime off in the not too near future, why not invest the $25k and the money you'll be saving each month for down payment on another house at that time, without the risk of deadbeat tenants and costly repairs in the meantime?

OTOH, if this is just a bet on appreciation, then recognize that all you're really doing is gambling. Are you willing to bet $25k and at least a few hundred dollars every month (and considerably more than that while the place is vacant) on the possibility that the home might appreciate considerably more than other, less risky, investments?

You said you think the home has appreciated 10% already, so why would you have a 6% loss? Seems like you should be at a break even or slightly ahead, after realtor and closing costs, if you sold now.

A couple other observations: you should consider that this was your home (for however short a time) so emotions can easily become a factor for you, but they won't be for other people. Prospective tenants may not see the justification for paying a premium for the nice lawn and SS appliances the way that you do. Also, while I don't know the numbers involved in your increased income, I find that people often overestimate the amount of increased purchasing power that the higher salary will bring. Lastly, yes, keeping this house and mortgage will affect your ability to buy another one in your new location.

Life, in terms of the new lucrative job, has just put all your eggs in the same basket. You want to be able to focus on the new job and make sure you do well at it.

The last thing you want is to be making/taking phone calls during work hours about the idiot tenants who just flooded the kitchen and are two months late with the rent. Or after hours, when you shouldn't be getting stressed.

if the rental were a significant source of income, this would be a tough choice.

But it's not. Sell, and focus on the future and not the past.

Thanks for the replies everyone! I appreciate all the responses.

My reason for keeping the house would be
1) Speculate / "invest" in the possibility of appreciation. I bought it at the absolute bottom of the recent downturn and have a great interest rate. It feels like a loss to bail on that and get another property at a relatively higher price, possibly higher interest rate, and take a 6% transaction cost hit.
2) Eventually it'll be cash flow positive, and when paid off i'll just own it.

To answer some of you:
I do want to be a LL (can't think of many other ways of building wealth than having someone pay a mortgage for you).

I will very likely not move back into this house.

It's my understanding that a property management company wouldn't cover the cost of repairs, is that right? While a home warranty would?

Another thing I could do is pay down ~30k of principal, get rid of PMI, and ask the bank to re-amortize the loan, saving another ~90 a month. Do they do that on 30 year fixed loans?

@StevenColorado Very good point.

I personally say keep it as a rental. I was in the exact same situation. First house in Indiana and I had to move to AZ. It helped as a big tax deduction and I got to write off flights back to IN. It mainly got me accustomed to having other businesses going on. You're also getting equity in the home, so while yes it's cash-flow negative, it's not all for naught.


ironfist99 said:   Sell the house, take that money and buy 2 cash flow positive rentals in Texas for 100K each that generate $1000-$1100 a month. Seriously this is a no brainier, you are not underwater so there is no reason to keep a house that is cashflow negative.

Actually it's a good tax deduction if he's a high income earner.

Sell it.

I think you should ask yourself a simple question: If you were currently living in whatever state you will be moving to, would you consider the possibility of buying an out of state rental property?

Al3xK said:   Actually it's a good tax deduction if he's a high income earner.

... and the mortgage interest deduction isn't phased out.

startupdad said:   Hi! I'm a super-long-time lurker but I finally need some financial advice of my own.

I'm living in my first house that I bought under a year ago and now need to move to another state to accept a new job. I will be getting paid a LOT more than I do now, enough so that cash flow problems that may arise renting out the house will never be a problem.

About the house:
- I pay ~ $2085 per month all-in (including PMI, tax, insurance).
- If I pay down the principle about $25k and remove PMI it will be $1875.
- I just refinanced to 3.5%.
- The rental market around here is about $1900 - $2000 for a house like this, but mine is way nicer than the typical rental (pretty lawn, new stainless appliances, etc).
- The sales market is hot and heating up, similar houses are going for ~10% more than when I got this one.
- I have a friend who will also be renting out his house in the same neighborhood (and also be out of state).

The main question is whether investing another $25k and possibly being cashflow negative is better than the 6% hit I'd take by selling it. Keep in mind that the actual negative cashflow would be negligible in light of the new job.

Other questions:
How will keeping it affect my ability to buy a new house in the new state?
I'm considering a home warranty & landlord insurance because I'm out of state and for protection against somebody destroying it. Are these a good idea?

I appreciate any and all responses, thank you!


If I am not mistaken, you will need less than 70% LTV and a lease in hand in order to keep it as a rental and not have it count towards your DTI ratio when buying a new place. Sell it if you can make a little bit or even come close to breaking even on it. If the numbers you gave are accurate and it has appreciated 10%+/- then you stand to walk away with 3-5% after selling fees right?

startupdad said:   ...
It's my understanding that a property management company wouldn't cover the cost of repairs, is that right? While a home warranty would?



Generally the home warranties I've seen are not a good buy. The companies that sell those have a reputation for not paying claims. Theres often deductibles or service call charges that add up to make it not worth the cost versus simply paying for stuff yourself. I get the impression they don't use the best contractors either and you don't get a choice in contractor.

A good property manager should help you find dependable contractors that will do a good job at a reasonable price.

You may be better off investing 30k on another rental in your new location if you think you'll be long term. Nothing wrong with your plan, other than it may not the best investment property around. More detailed property information is needed along with expertise in area to come to conclusion. We are assuming that you can also qualify for another property in new location, which may be biggest factor. Only further research on your part can answer your question.

BTW...pretty lawn...give it couple years of rental, lol. How much would re-sodding cost you. Based on info...Id say Sell!

Home warranty doesn't do **** for you. They are waiting to take your payments and deny claim on some bogus reason. They will honor fixing leaky toilets etc for $50 copay and that is about it. Worst of them is AHS (American Home Scam).

Don't even get me started on property managers. When everything is going great, they will happily take 8% of your pay, when things go wrong they screw you good. These f'n ladies do nothing but sit on their *** and do everything over phone. Why can't you do that?

Being a landlord is not that simple. I am doing it for 15 years with multiple properties. I suggest, you sell it.

Sincerely.

kchunk said:   I think you should ask yourself a simple question: If you were currently living in whatever state you will be moving to, would you consider the possibility of buying an out of state rental property?

Well I've already got it, but that answer would be "no".

I think the more accurate question is "If you had to pay 6% of the property value NOT to buy it, would you?"

startupdad said:   kchunk said:   I think you should ask yourself a simple question: If you were currently living in whatever state you will be moving to, would you consider the possibility of buying an out of state rental property?

Well I've already got it, but that answer would be "no".

I think the more accurate question is "If you had to pay 6% of the property value NOT to buy it, would you?"


I assume you're talking about the 6% realtor commissions to sell the place?

Thats a given cost of selling property. That was the case when you bought it. Did you plan to keep the property forever? If you sell the property you'll eventually have to pay a realtor some commission. So basing your decision to sell or hold on that really doesn't matter. You either pay a realtor today or you pay a realtor tomorrow. Or you can do FSBO and not pay a realtor...

jerosen said:   

I assume you're talking about the 6% realtor commissions to sell the place?

Thats a given cost of selling property. That was the case when you bought it. Did you plan to keep the property forever? If you sell the property you'll eventually have to pay a realtor some commission. So basing your decision to sell or hold on that really doesn't matter. You either pay a realtor today or you pay a realtor tomorrow. Or you can do FSBO and not pay a realtor...


I did plan to keep the property forever and eventually rent it out, it's just happening much earlier than I expected.

startupdad said:   mine is way nicer than the typical rental (pretty lawn, new stainless appliances, etc).

Won't be if you rent it out.

Sell it.
There is no advantage to being a Long Distance Landlord.
You would be much better off buying a place to rent out where ever you settle down.
Are you so willing to spend thousands per year to subsidize someone's rent in the hope that the property will appreciate faster than the $$$$ you are spending, plus the damage/wear the tenants are doing on the property ?

I would rent it out for a couple of years, the reasons have been listed above. I am aware of the negatives, I just see a bigger potential in keeping the property. I've never sold a property that had good financing, and I have ~20 rentals now, with 3 of them being 3- and 4-plexes.

OP's instinct is right on seeing the 3.5% loan as something valuable. [But who knows, maybe in a few years, we see 2.5% on 30yr amortizing loans!]

Good chance also that he could possibly rent for more than $2000, due to the upgrades.
Higher rent should bring you a higher quality tenant, although, this is a bit of a lottery.

BEEFjerKAY said:   Al3xK said:   Actually it's a good tax deduction if he's a high income earner.

... and the mortgage interest deduction isn't phased out.


Not a chance they'll torpedo that one.


OP - why not rent it for a year and see how it goes? You can always sell in a year, assuming you're willing to bear the risk of another market downturn.

If you need the money sell it. If you dont need the money rent it. Renting it and having someone else pay your mortgage is ALWAYS better. Just make sure you find a good tenant, and write a good lease. I never used a property manager and dont carry any home warranty. Managing houses has been the LEAST amount of work for the BEST return unless you are in upper management and get big bonuses for reaming the company in the rear end...

"Al3xK said: Actually it's a good tax deduction if he's a high income earner."

How so? Doesn't the passive income loss limit phase out at 150k?
http://turbotax.intuit.com/tax-tools/tax-tips/Rental-Property/Re...

mindbowels said:   "Al3xK said: Actually it's a good tax deduction if he's a high income earner."

How so? Doesn't the passive income loss limit phase out at 150k?
http://turbotax.intuit.com/tax-tools/tax-tips/Rental-Property/Re...


I supposed "high income earner" is a relative term. Up to $150k then it's decent?

olvrtw said:   If you need the money sell it. If you dont need the money rent it. Renting it and having someone else pay your mortgage is ALWAYS better. Just make sure you find a good tenant, and write a good lease. I never used a property manager and dont carry any home warranty. Managing houses has been the LEAST amount of work for the BEST return unless you are in upper management and get big bonuses for reaming the company in the rear end...

There are situations where renting out a specific house isn't the best choice. If you have negative cash flow, equity in the property and don't expect good appreciation in the local market then renting out the house would be a poor choice.

He clearly stated he expects good appreciation, as he had purchased at the bottom of the market. Even a slight negative cashflow is GREAT, you just have to consider that you are just paying a fraction of the principal yourself. Considering monthly rent of around $2k a month, that market looks like a higher end market and finding a good tenant should not be hard at all. I'd be more worried about owning a $100k house that rents for $800/month that I'm making a $400 positive cash flow on.

Also he wrote that his house is in better condition than other places renting for $2k a month, so he can definitely rent at a premium...

Consider this also, in a worst case scenario, the % cost of major repairs to the value of a $100k house will be MUCH MUCH higher than the % cost of major repairs to the value of a $500k house. In the end, just make sure that the profit (principal included) will be greater than costs you would incur in a bad situation...

Al3xK said:   mindbowels said:   "Al3xK said: Actually it's a good tax deduction if he's a high income earner."

How so? Doesn't the passive income loss limit phase out at 150k?
http://turbotax.intuit.com/tax-tools/tax-tips/Rental-Property/Re...


I supposed "high income earner" is a relative term. Up to $150k then it's decent?


Wow, does this mean that with income > 150k I could not deduct the depreciation of ( <house_value> / 27.5 ) ?

olvrtw, You appeared to make a generalization that renting a house and having someone pay the mortgage is "ALWAYS better". I do not think that renting a property is ALWAYS better than selling it. It may/may not be better in the OP's case.

startupdad said:   Al3xK said:   mindbowels said:   "Al3xK said: Actually it's a good tax deduction if he's a high income earner."

How so? Doesn't the passive income loss limit phase out at 150k?
http://turbotax.intuit.com/tax-tools/tax-tips/Rental-Property/Re...


I supposed "high income earner" is a relative term. Up to $150k then it's decent?


Wow, does this mean that with income > 150k I could not deduct the depreciation of ( <house_value> / 27.5 ) ?


No.

It means you can't use losses from your rental to reduce your non passive income.



Lets say your rent is $24k a year and your other expenses are $20k. That would give you a gain of $4k. But if the building is worht $350k and you depreciate it then you'd get about $12,700 in depreciation. That means you'd show a tax loss of $8700. Normally you could use that to offset your day job income. Say you make $50k at work on a W2. Add your $8700 rental loss and your taxable income drops to $41,300. But the rental is passive income so its caped at $25k and phased out above $150k MAGI. So if you make $200k from your day job you can't claim that $8700 to offset your income at all.

edit : in either case you still depreciate the property and deduct that from your rental income.

jerosen said:   startupdad said:   Al3xK said:   mindbowels said:   "Al3xK said: Actually it's a good tax deduction if he's a high income earner."

How so? Doesn't the passive income loss limit phase out at 150k?
http://turbotax.intuit.com/tax-tools/tax-tips/Rental-Property/Re...


I supposed "high income earner" is a relative term. Up to $150k then it's decent?


Wow, does this mean that with income > 150k I could not deduct the depreciation of ( <house_value> / 27.5 ) ?


No.

It means you can't use losses from your rental to reduce your non passive income.



Lets say your rent is $24k a year and your other expenses are $20k. That would give you a gain of $4k. But if the building is worht $350k and you depreciate it then you'd get about $12,700 in depreciation. That means you'd show a tax loss of $8700. Normally you could use that to offset your day job income. Say you make $50k at work on a W2. Add your $8700 rental loss and your taxable income drops to $41,300. But the rental is passive income so its caped at $25k and phased out above $150k MAGI. So if you make $200k from your day job you can't claim that $8700 to offset your income at all.

edit : in either case you still depreciate the property and deduct that from your rental income.


Right. What is surprising is how many people don't realize this.

jerosen said:   

No.

It means you can't use losses from your rental to reduce your non passive income.



Lets say your rent is $24k a year and your other expenses are $20k. That would give you a gain of $4k. But if the building is worht $350k and you depreciate it then you'd get about $12,700 in depreciation. That means you'd show a tax loss of $8700. Normally you could use that to offset your day job income. Say you make $50k at work on a W2. Add your $8700 rental loss and your taxable income drops to $41,300. But the rental is passive income so its caped at $25k and phased out above $150k MAGI. So if you make $200k from your day job you can't claim that $8700 to offset your income at all.

edit : in either case you still depreciate the property and deduct that from your rental income.


Understood. Thanks for the explanation.

The best thing which I suggest is to go for rent to own home. This will avail you with an option of getting the house in installments or may say that , if the conditions are not good for new bought house may sell it or stop the pay. Just check out details on Google or some local advisory, then get to your decision.

I think you should think twice about renting to own. Here's what I mean: Only do it if it's absolutely the only option. It's ultimately better than renting (even though it will cost a pretty penny). If there's any way you can get a hold of traditional financing, it's a lot less expensive money so to speak. Rent to own can work, but understand the premium you pay to compensate for lack of credit/finance now. This also points out a little more to the effect of what I'm talking about, http://www.homestarsearch.com/when-to-rent-to-own

Update:

Here's what I did:

I payed down the principal to get rid of PMI and I also re-amortized to get the payment even lower. Current Payment which includes property taxes and insurance is $1750. I hired a property management company for 8% and they immediately got swamped with applications. Got a renter for $2150.

Income: $2150
Costs: $1750 + $50 (lawn care) + $172 (management fee)

Result: $178 cash flow positive per month, which I figure will easily cover any maintenance.

But the rental is passive income so its caped at $25k

Where is this $25k cap stated? I was under the impression that passive loss was limited to passive income only, and any additional loss would carry over to the next tax year to be used against passive income.

tjguitar85 said:    But the rental is passive income so its caped at $25k

Where is this $25k cap stated? I was under the impression that passive loss was limited to passive income only, and any additional loss would carry over to the next tax year to be used against passive income.


There is a $25,000 allowance for passive losses as long as you 'actively participate'.

http://www.irs.gov/publications/p925/ar02.html#en_US_2012_publin...

startupdad said:   Update:

Here's what I did:

I payed down the principal to get rid of PMI and I also re-amortized to get the payment even lower. Current Payment which includes property taxes and insurance is $1750. I hired a property management company for 8% and they immediately got swamped with applications. Got a renter for $2150.

Income: $2150
Costs: $1750 + $50 (lawn care) + $172 (management fee)

Result: $178 cash flow positive per month, which I figure will easily cover any maintenance.


Green for update! Does the management company take care of everything for you? 8% sounds high.

Skipping 3 Messages...
startupdad said:   Update:

Here's what I did:

I payed down the principal to get rid of PMI and I also re-amortized to get the payment even lower. Current Payment which includes property taxes and insurance is $1750. I hired a property management company for 8% and they immediately got swamped with applications. Got a renter for $2150.

Income: $2150
Costs: $1750 + $50 (lawn care) + $172 (management fee)

Result: $178 cash flow positive per month, which I figure will easily cover any maintenance.


Wow. Is it really this thin of a margin that LL have on their property - renting. If the house is not rented for even a month in a year, the cash flow is negative. Of course the property will appreciate, but the capital gains will be taxable since its not a primary residence.



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