Rent or Sell?

S

scubasteve

Active member
We just signed a contract for a new home and have been wondering what to do with our current home. We have about  300k in equity right now. Our original plan was to just rent it out and keep the home forever.

However, I'm not so sure if it's the smartest thing financially. We will probably break even or maybe we get lucky and make 1% return per year on our original investment after the mortgage , taxes, mello roos, HOA , and insurance are accounted for.

Should I consider selling to take advantage of getting my gains out tax free or just hold and have someone pay off my house.  I was originally planning on holding and treating the house as a savings fund for my sons future college tuition. Thoughts?
 
I'd say keep it and rent it if you are financially able.  Even if you're only making 1% on revenue, you will likely see a greater return after deductions (interest, taxes, maintenance, repairs, time, fees, etc.).  Having a long term supplemental cashflow is a huge deal, especially when it comes to kids' education and eventually retirement.

Even if you do decide to sell later, there are ways to minimize the hit on gains taxes, especially if you've invested in or improved the property.  Every penny you put into the house can lower your tax exposure.  In addition, if you sell down the road, you can re-invest your gains into another rental property and the net tax exposure is zero (with some limits, of course).

Lots of angles to play with and consider, but all said and done...I'd suggest keeping it.
 
I agree with gasman in general, however consider opportunity costs as well as cost of your time.  1% seems really bad for all that...
 
I was in the same situation when I moved to Irvine and try to decide rent or sell my previous home.

My previous home was in very good financial shape.  There's no more mortgage, bought long time ago so the property tax and MR was very low, it would be an easy cash flow positive rental property.  However there just few thing make me decide to sell instead of rent.

First of all,  the house had numberous relatively expensive "up grades" like hardwood flooring, plantation shutters, granite counter top, and extra thick sound reducing double panel windows, etc.  It's just make me cringe to think about the how much damage the renter might inflect on this house.  It wold be easier if the house does not have these items.

Second and the most important of all is that I don't really want to be a landlord.  The house is not close by and I don't think I have the time and energy to deal with this extra work.  And if I got a horrible tenant, the headache they bring is just not worth that extra rental income. 
 
Opportunity cost is something we definitely considered, which is what prompted this thread.  A few more background info:

Our new house will only be 2 miles away so it will be convenient to deal with tenant issues. 
Our current house is under 5 years old and luckily we haven't had any issues with the house. 
I've never been a landlord, but I can't imagine it being a fun job. 

Thanks for the feedback.  I guess we can give it a go for a year and if being a landlord becomes a nightmare, we could always consider selling then. 

 
Remember that if sell your house within the next three years you will get 250-500k as tax free gains since you will have lived there 2 out of the last 5 years. If you rent and sell it five years from now you will have more taxable income (granted at a capital gains rate). So you should model out the net profits for various scenarios (now vs 3+ years from now) considering the impacts of appreciation/taxes and profits made during the rental period
 
unless you need the cash.. i would rent it.  If you don't want to rent that particular home.. I would sell and buy another home for rent.  Best way to grow wealth is to have more assets.
 
When I moved to a SFR from a condo, I decided to keep my condo and rent it out.  I had equity in the condo (due to large down payment), but the value at the time was less than what I paid for it.  Renting instead of selling it was an easy decision.  Also, since it's a condo in Irvine, it's pretty easy to rent out.  I haven't had any vacancy in the last 3 years.  Cash flow is non existent, but if I factor in principal payment part of the mortgage payment, I am coming out ahead.  There have been a few issues with the rental, but I just hire a handyman to fix the problems.  At first, I tried to fix things myself, but then realized it wasn't worth my time or effort to do this.  $100 bucks here and there isn't a big deal.

Now that I'm looking at buying a larger SFR and my current SFR has appreciated quite a bit, the decision to sell vs. rent is a much tougher one.  The problem with renting out a SFR is that it's more difficult and from what I've seen there is more turnover.  Losing a month of rent every year or two is a pretty painful thought (prob around $3500-$4000).

I'm leaning towards selling my SFR and taking the tax free capital gain and then purchasing other properties that will cash flow better once I purchase the larger SFR.
 
meccos12 said:
I agree with gasman in general, however consider opportunity costs as well as cost of your time.  1% seems really bad for all that...
Click to expand...

I think you need help with the numbers.  I find it implausible that your $300k positive on equity and wouldn't substantially cash flow
 
Mortgage is $480k. Comps for exact same 4bd/3bath floorplan in neighborhood have been $780-790k.

Monthly mortgage @3.5% is $2280/ mo
Property Tax + MR is $9600/yr or $800/mo
HOA is $134 / mo
Insurance is $500 / yr or $42/mo
Total expense: $3256/mo.

Expected rent for similar property (small yard, no driveway) is $3200-$3400.
 
There is a write-off on mortgage interest and property tax and also depreciation that may take your total expense lower than $3200.

The thing I didn't factor is when you sell your rental in the future, you will have to pay taxes on that depreciation.
 
scubasteve said:
Mortgage is $480k. Comps for exact same 4bd/3bath floorplan in neighborhood have been $780-790k.

Monthly mortgage @3.5% is $2280/ mo
Property Tax + MR is $9600/yr or $800/mo
HOA is $134 / mo
Insurance is $500 / yr or $42/mo
Total expense: $3256/mo.

Expected rent for similar property (small yard, no driveway) is $3200-$3400.
Click to expand...

All of that is deductible come tax time (well, the interest on the mortgage would be).  Assuming $1000 of your mortgage is interest (I have no idea where you are in your amortization schedule), you are looking at:

$38400 yearly revenue
$23708 yearly deductible expenses (as listed)
$2000 (est) agent listing/closing fees if you use an agent to list

Total deductions approx $26K...I don't know what your tax profile is, but even at 25%, you're looking at a $6500 return (overall state + fed).  Divide that by 12 and you are looking at an extra $540/month reduction in your costs, bringing your monthly costs to $2700.  Your 1% just become 15% net.

Just sayin. :)

Invest in improvements (appliances, etc.), and you get additional amortized deductions on a Schedule E.  All repairs, maintenance, cleaning, etc. that don't come out of tenants' security deposit are also deductions.
 
gasman said:
scubasteve said:
Mortgage is $480k. Comps for exact same 4bd/3bath floorplan in neighborhood have been $780-790k.

Monthly mortgage @3.5% is $2280/ mo
Property Tax + MR is $9600/yr or $800/mo
HOA is $134 / mo
Insurance is $500 / yr or $42/mo
Total expense: $3256/mo.

Expected rent for similar property (small yard, no driveway) is $3200-$3400.
Click to expand...

All of that is deductible come tax time (well, the interest on the mortgage would be).  Assuming $1000 of your mortgage is interest (I have no idea where you are in your amortization schedule), you are looking at:

$38400 yearly revenue
$23708 yearly deductible expenses (as listed)
$2000 (est) agent listing/closing fees if you use an agent to list

Total deductions approx $26K...I don't know what your tax profile is, but even at 25%, you're looking at a $6500 return (overall state + fed).  Divide that by 12 and you are looking at an extra $540/month reduction in your costs, bringing your monthly costs to $2700.  Your 1% just become 15% net.

Just sayin. :)

Invest in improvements (appliances, etc.), and you get additional amortized deductions on a Schedule E.  All repairs, maintenance, cleaning, etc. that don't come out of tenants' security deposit are also deductions.
Click to expand...

Thanks for breaking it down like this.  I knew about the deductions, but over simplified everything in my head.  Figured I would be able to off-set all most of the revenue after all deductions and just took whatever was left and divided it by my initial $130k down-payment. 

I'm only 2.5 years into a 30 year fix due to a refi so interest deductions are closer to $1400 / month. 

 
qwerty said:
Remember that if sell your house within the next three years you will get 250-500k as tax free gains since you will have lived there 2 out of the last 5 years. If you rent and sell it five years from now you will have more taxable income (granted at a capital gains rate). So you should model out the net profits for various scenarios (now vs 3+ years from now) considering the impacts of appreciation/taxes and profits made during the rental period
Click to expand...
+1  This is the most important thing to consider.  I had a handful of clients who rented their previous primary residence for 2-2.5 years and then had me sell it to go on to purchase 2 rental properties with the tax free proceeds. 
 
irvinehomeowner said:
There is a write-off on mortgage interest and property tax and also depreciation that may take your total expense lower than $3200.

The thing I didn't factor is when you sell your rental in the future, you will have to pay taxes on that depreciation.
Click to expand...
You write off EVERYTHING on a rental property...mortgage interest, property tax (including mello roos), HOA, insurance, repairs, depreciation, etc.  Steve, you will have a tax loss on your home due to depreciation.  However, you will most likely not be able to take the active real estate tax loss against your ordinary income because you will most likely be fully phased out of it (happens at an AGI >$150k for married folks).  Your tax loss will keep rolling forward.  If it were me, I would rent the home out for 2-3 years and then sell it and buy 2-3 rental properties with the proceeds (3-bedroom units so you aren't competing against apartments).
 
scubasteve said:
gasman said:
scubasteve said:
Mortgage is $480k. Comps for exact same 4bd/3bath floorplan in neighborhood have been $780-790k.

Monthly mortgage @3.5% is $2280/ mo
Property Tax + MR is $9600/yr or $800/mo
HOA is $134 / mo
Insurance is $500 / yr or $42/mo
Total expense: $3256/mo.

Expected rent for similar property (small yard, no driveway) is $3200-$3400.
Click to expand...

All of that is deductible come tax time (well, the interest on the mortgage would be).  Assuming $1000 of your mortgage is interest (I have no idea where you are in your amortization schedule), you are looking at:

$38400 yearly revenue
$23708 yearly deductible expenses (as listed)
$2000 (est) agent listing/closing fees if you use an agent to list

Total deductions approx $26K...I don't know what your tax profile is, but even at 25%, you're looking at a $6500 return (overall state + fed).  Divide that by 12 and you are looking at an extra $540/month reduction in your costs, bringing your monthly costs to $2700.  Your 1% just become 15% net.

Just sayin. :)

Invest in improvements (appliances, etc.), and you get additional amortized deductions on a Schedule E.  All repairs, maintenance, cleaning, etc. that don't come out of tenants' security deposit are also deductions.
Click to expand...

Thanks for breaking it down like this.  I knew about the deductions, but over simplified everything in my head.  Figured I would be able to off-set all most of the revenue after all deductions and just took whatever was left and divided it by my initial $130k down-payment. 

I'm only 2.5 years into a 30 year fix due to a refi so interest deductions are closer to $1400 / month. 
Click to expand...
Hard to do because sometimes things just happen out of the blue without having the time to plan them out, but if you were on planning to rent your home for a shorter term and then sell it then you might have refi'ed your loan to a 5/1 ARM loan so that way you get max principal payments before you sell it.  Anyhow, I would rent the home and see how things play out.  You may come to find out that being a landlord is not for you but as many have stated renting a property in Irvine to a good tenant isn't hard.  The vast majority of my rental listings rented within weeks.
 
i am also in the same boat.  i rent out my previous property and it is complete paid off.

my rent is 2000 - 300 property tax - 80 insurance - 200 (maybe repair bill).  i still can get 1420~1620 each month.

however, i am also concern about my liability.  my tenant has a akita dog.  if that dog bite someone, i may lose everything.

however, if i sell my house and i take that money and invest in a mutual fund and i assume the return is 5%.  i can still generate 1420~1620 each month.  However, i will NOT have any liability against me.
 
yaliu07 said:
i am also in the same boat.  i rent out my previous property and it is complete paid off.

my rent is 2000 - 300 property tax - 80 insurance - 200 (maybe repair bill).  i still can get 1420~1620 each month.

however, i am also concern about my liability.  my tenant has a akita dog.  if that dog bite someone, i may lose everything.

however, if i sell my house and i take that money and invest in a mutual fund and i assume the return is 5%.  i can still generate 1420~1620 each month.  However, i will NOT have any liability against me.
Click to expand...

Yaliu the vocal activist is a real estate investor  :D
 
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