Sell vs rent... What would GRM do??

I've taken a job in another state, and have been traveling back and forth for 6 months.  We've purchased a house in the new location, and still own the old house.  Now it's time to get rid of the old house, and move my family to the new one.  The problem is that local real estate values have tanked, and rents are respectable.

I've got about $185K in the house with all the improvements, and it should have been worth $225K.  Unfortunately in today's market, it's only worth about $165K.  Brand new roof, windows, HVAC, paint carpet, and a really nice 2000 SF shop and a pool.  Makes me sick.

I live in SC, but my heart is still in GA.  The odds of me ever moving back are less than 10%.

Anyway, in today's economy, I would have about $45K in equity (before closing expenses, etc).  That would be a net loss of about $20K.  Sucks.

The rental market, however, is pretty strong.   I could rent it for about $700 per month positive cash flow, excluding the shop.  I probably couldn't rent the shop.  The rents have been rising rapidly in the last few years.  Likely the positive cash flow would go up in the next couple years.

The other piece of the equation is that for the first time in my life, my entire salary is W2 income.  I've got almost no deductions (and could use them).

So, if I rented it for $8400 cash flow per year, I'd make my entire equity back in about 5 years, and still have the equity (plus any potential increase in value if the real estate market rebounds, which is unlikely).  I will be considering retirement in 6-8 years.

FWIW, I already have out of state rental properties that I own and have a management company handling.  It's OK.

So, take the $45K equity now and put it in an investment fund, or keep the house and collect rent on it for a few years (plus the deductible expenses).  WWGRM do?

Buy a Miata. 

I would do the “less is more” and sell the house BUT you said you already have out of state rental properties so you know what to do with the rentals.  

No other rentals?  Sell.  In this case add rent it out.  

spitfirebill said:

Buy a Miata. 

I have one!

What are the chances you would retire back to the old house?  Especially given the nice shop. 

What are the chances the new house will increase in value? 

Which property is better for taxes? Something to consider when you retire and taxes represent more of your fixed income.

Given the numbers you've presented, and the reasonable chance of being able to increase the rent, I think I'd choose the rental route over the potentially shaky stock market.  At least for now.

In reply to Ian F :

Good questions!

- I miss my shop, and won't have one in the new house. I would say 10% or less odds of me moving back while working, but 40% possible after retirement. 

- Odds of the new house increasing in value- exceptionally high. I bought it $40K under value in the neighborhood, and the area is growing very rapidly. Excellent desirable neighborhood. 

- Old house is much better for taxes (I think), although I have not researched retirement type taxes. I paid almost nothing in GA, SC works hard at keeping their hand in my pocket. 

Assuming 7% return on investment, the $45k is $77,318 in 8 years when you retire. 

Assuming 7% return on investment--assuming you put that money into the same investments--the $700 is almost $90k.

Now, lets assume that you only get half of the $700 due to vacancy, repairs, etc. Now it is $45k. We have a delta of $32k. Do you think the property appreciates $32k in 8 years? 

At $600 net return per month, you're basically at a wash; any appreciation is gravy. $500 a month you need $13.2k in appreciation; $400 you need $26k.

These are back of napkin calculations, not counting taxes or anything, so YMMV. 

Tough call. I've had to make similar decisions twice and decided to sell despite making less money than renting, just due to the risk of tenants damaging the house and how emotionally invested I was in the house. I thought it would harm me to see the house damaged after spending so much of my time and energy (and yes, money) fixing it up. But if you're able to treat it strictly as an investment it might work out well.

I do not particularly want residential rentals but I'm always looking at them through the lens of a hands-on landlord. Using a management company assuages a lot of my fears about it. Coupled with living out of state means you're unlikely to get the proverbial 3am "the toilet is clogged" phone calls yourself.

What is the total rent? I know you said $700 over costs, but the total rent helps figure out whether that's good or just skating by. $700/mo sounds good but if you have a $15,000 roof repair in a year or two will it destroy any hope of profit ever?

Just a thought - consider this property along with your other rental properties you say you own.  If there is one that is in a hot market, consider selling it and keeping this one, since you seem to like it and may move back upon retirement.  If you're still paying mortgages on any of them, consider what happens if one or more goes without renters at the same time for a few months - can you deal with that?  

In reply to mtn :

Good info.  Thanks!

mtn said:

Do you think the property appreciates $32k in 8 years? 

 

No.  It certainly will not.

In reply to dculberson :

No chance of a roof leak.  Brand new roof this year.  I've never had a clogged toilet call in 10 years of rental properties- Managers handle it.  It really is hands off.

Total rent is between $1500 and $1800 per month.  Desirable rental area.  Mine would be much nicer than most.  I figured on the low end- at $1500, I'm net positive by $700.

Brokeback said:

Just a thought - consider this property along with your other rental properties you say you own.  If there is one that is in a hot market, consider selling it and keeping this one, since you seem to like it and may move back upon retirement.  If you're still paying mortgages on any of them, consider what happens if one or more goes without renters at the same time for a few months - can you deal with that?  

I have a reasonable mortgage on both the new and old houses.  I have no mortgage on the other rental properties I own, but they are not valuable properties.  

I have been managing the 2 mortgages for 6 months.  I don't like it, but we are OK.  We rent rooms in both of them through Air BnB, so technically, they are rental houses already, and generating revenue.  If we had to go for an extended period with no rent in one location, we could deal with it.

In reply to SVreX :

You understand the ups & downs of rental property, and have a company that can deal with the tenants. Renting it out seems like a no-brainer to me, especially vs. losing money on it.

In reply to Pete Gossett :

"Loosing money" is not exactly accurate. I would be selling at a $20K loss, but if I had rented for the same period of time I would have paid out about $63K in rent beyond what my mortgage cost me, and had a much worse house, no shop, and no tax deductions. I just won't be making a profit on my personal house. 

And to clarify, my other rental properties are in FL. I would have to have a 2nd management company. 

Rental prices have gotten stupid. Might as well go up to what most people are doing anyway. $1.00 per square foot or more. If location is really that good, charge more. I know exactly what my neighbor paid in his home mortgage before he turned it into a rental property. It’s a huge chunk of pocket change of $1200+ with enough money left over for property manager to take care of it. 

In reply to Sine_Qua_Non :

You're right. And I think they will continue to. Because investing in purchasing a permanent  home is no longer a value. We'd rather spend our money on electronic gadgets, and complain about the 1% (who are the guys investing in the real estate we are renting)

Sometimes old ways still work. 

The rental market has gone full retard by me  I have to imagine that it is that way by your house as well. I'd rent until it became less of a shoe in the ass to lose it. 

If you can afford to carry both mortgages for some time, then I would lean towards renting and keeping the rent high under the theory those who can rent high may be more inclined to be decent renters.

When you decide to retire, sell 2nd house for profit and move back. Enjoy your shop. Or hell... keep the renters for awhile longer, buy an RV and travel for a year or three using the shop as your home base (that is pretty much my dream scenario...). Of course, this is assuming the Mrs has similar travel dreams.

SVreX said:

Brokeback said:

Just a thought - consider this property along with your other rental properties you say you own.  If there is one that is in a hot market, consider selling it and keeping this one, since you seem to like it and may move back upon retirement.  If you're still paying mortgages on any of them, consider what happens if one or more goes without renters at the same time for a few months - can you deal with that?  

I have a reasonable mortgage on both the new and old houses.  I have no mortgage on the other rental properties I own, but they are not valuable properties.  

I have been managing the 2 mortgages for 6 months.  I don't like it, but we are OK.  We rent rooms in both of them through Air BnB, so technically, they are rental houses already, and generating revenue.  If we had to go for an extended period with no rent in one location, we could deal with it.

Yea to echo everyone else - it sure sounds like you're going into it with eyes wide open, and have experience doing similar long-distance rentals in the past.  I like the idea of rental income long-term, as long as that isn't your only source of income you're relying on in retirement.

wow, I am jealous. Last time I rented, it was $775 a month for a one bedroom cottage with no yard, on street parking, and a leaky roof. Rents around here in NJ are through the roof

Sounds like a pretty strong case for renting to me! It seems that the only advantage to selling is that it's less work. If you don't want the extra workload of managing another rental property, maybe having a property management company take care of it for you (at the cost of decreased profitability) could be a good option?

 rent it out!

$700 seems stupid low to me, around here I am asking $1000+ for houses that are worth less than half your home's value, some 1/3 the value.  

In reply to pinchvalve :

I didn't say I'd rent it for $700. I said that would be the positive cash flow. Rent would be more like $1500- $1800. 

mtn's math makes a pretty strong case for renting it out if you can stomach dealing with another rental company until the market recovers in that area. Especially since it's common for rent to increase each year (as you know.)