Converted Residence To Rental - Should I Sell?
Last year about this time I relocated to another state for a new job. The house I lived in at the time was purchased in 2000 at a significant discount to the rest of the area (from a family member) and I put a significant amount of work into it. I put all high-end fixtures and components into the house (it was meant for my use, not as a rental). It's in a very nice area that has had great appreciation over the last 5 or so years, mostly young families, nice parks, good schools, etc. It seems like this particular neighborhood does nothing but increase.
I converted the house to a rental as a long term investment or in case the job didn't work out (someplace to come back to). It's a year later now and it looks like I'll stay in the new state for at least 3-4 years, but I will definately return to my original area someday. I wanted to get thoughts on what others might do in this situation. Should I hold onto the property (which is 1500 miles away) or sell it?
My company will pick up the tab for the agents commission and other closing costs, so it makes for a compelling reason to sell ($14k in costs). I have had renters in the house since I move out, they were friends and I charged them a below market rent... I knew it would be in good hands and it allowed me to 'ease' into being a landlord. Yes, it could have been a mess, but I am very happy with the way it worked out, they were ideal tenants (when I told them I was having someone come over to clean the gutters they said not to worry, they already had! Seems good to me). They were month to month and are now moving on.
So my choice is to put new renters in there (this time at the full rental price!) or sell it. The property is 1500 miles away from my new residence, so any maintenance would be hired out and possibly even the entire management of the property if it stays as a rental.
The details on the house:
- $80k equity
- About $100/month cash flow negative - two factors: 15 year mortgage @ 4.625% (from when it was a primary residence) and the initial below market rent I charged. Would be right around break even cash flow wise with fair market rent.
- If I sell now I pay no closing costs (relocation package), so I get the full $80K nontaxed
- Very stable area, good appreciation, rentals tend to not stay on the market very long
- The house is 50 years old but all major subsystems (roof, plumbing, electrical, HVAC, etc) are new within last 2-3 years.
Personally I am looking to do some more real estate investing, whether it be flips or rentals, I'm not sure. I think the decision I make with this property will influence my next steps. I currently have about $25K in cash available for investing not counting the equity in the rental property.
I am torn between holding on the property indefinately, hold on to it for two more years (further appreciation but still nontaxable gain at sale), or selling the property now. I'm sure there are other scenarios I haven't even thought of (like taking an equity loan for other investment or refinancing @ 30 years to get cash flow positive).
Any thoughts???
How much will your negative cash flow be if you got full market rent, but also paid for professional management?
Do you need positive cash flow, or does your job meet all your lifestyle needs? Can you use the tax benefit? What is your tax bracket?
This is really a personal question. It all depends on where you want to go with your REI activities. What is right for me may not be right for you. I personally would sell the residence for the following reasons:
1. Why own something with a negative cashflow? I am young and my primary goal is to get cashflow as high as possible.
2. You have $80k of equity in that property. That is a nice amount to add to your $25k if you are wanting to persue REI more.
3. Rentals tend to have different finishes than homes people live in. You updated the house nicely with expensive items. These items are the most likely to be destroyed and you'll have to collect a huge security deposit to cover the possible damage.
4. I personally like to be more actively involved with my RE investments. You'll likely have to pay a pretty steep management fee for the unit. Around here it is expensive if you want someone to manage just one unit. You may find a neighbor is best suited for this job should you decide to keep it.
You can pretty easily see my point of view but, like I said, this isn't something I can answer for you.
It really boils down to the Quo Vadis situation. Only you can make the decision. The other posters have said it well.
I keep a hook in a little town called Saffron Walden in England. I make no money from it. Now on my third generation of tenants. Long ago paid for it. Bought it for cash in 1941. I am older then god, but who knows. I survived many months of intensive aerial combat and each night when I arrived at that little Elizabethan Cottage, I would get off my bike, walk inside and the world of highly hostile Germanic Types trying to kill me disapeared. I would stretch out in the window seat, look out at the village going by and for an evening was transported to peace and the simple way of an English Village.
Oh wot the hell, I would get bored to death, get on my bike ride about 300 yards, go into the pub and celebrate my survival of another day.
Still, I keep it. I'll never go back. Never fly a Spitfire again. Times have changed. Nobody shoots at me anymore. Well, perhaps just a little, you know freeway rage and stuff.
And that's my advice from LaLa Land.
Cheers Lucius
Unless you have a huge emotional attachment (like Lucius' cottage) sell.
There are significant risks to owning property you cannot monitor. Bad tenants, Lighting, deteriorating neighborhood. I know, none of these are very likely but the odds are not zero.
In essence you have $70,000 of equity earning nothing except the principal reduction every month.
It came down to one of three decisions form me:
* Sell now - pay no closing costs and no tax
* Sell in 2 years - no tax (I've been gone 1 so I have 2 years before I'd be beyond 2 out of the last 5 for tax rule)
* Hold on indefinately
Making some basic and conservative assumptions regarding appreciation, I come out ahead selling now (closing costs end up being close to 7%).
My plan is to invest in some low income single family residences or small multifamily properties (like a duplex). My job provides sufficient income for me, but I'd like to slowly move into investing full time. I'd really like to get some properties in need of repair, to start I will do the work myself. I've done serious renovations in the past (not just fixing a dripping faucet but installing new sewer lines for bathrooms, complete electrical reworks, complete tear downs to studs, etc) and it would help me ease in slowly to possible full time investing.
Anyway, the $105k in seed money should get me on the way.
Thanks for the points of view.