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I currently own a single-family home that I rent out, and am debating what I should do with it. I bought the house in late 2007 but due to a number of sudden life changes (chief among them losing my job) I moved out and started renting the place out in late 2009. Ever since, I've been renting it out via a management company.
The house: in suburban Kansas City, 3-bedroom, somewhat older (1950s construction) but in very good shape and in a good neighborhood. Has a solid poured foundation (a rarity in that neighborhood), hardwoods, finished basement, fireplace, newer roof, etc plus tons of curb appeal. It's not the most sleek or modern house (no designer kitchen or anything like that), but it is clean, solid, and trouble-free. Unless it gets hit by a tornado or something, I don't anticipate any major maintenance for the next couple of years. It was my first house purchase, I financed it with a 30-year mortgage w/ 20% down.
The rental has gone well - I've been lucky enough to have the same tenants for the last three years, and have had no major maintenance issues, no issues collecting rent, etc. However, it's a money drain: I've been losing at least $600-700 / year because the rent I've been able to collect is less than the mortgage payment + management fees (I lose more if I have to do any maintance).
As for me: early 30s, stable job, single (although that might be changing in the next year...). Not rich but doing okay financially - modest savings plus a good-sized 401(k). Moved to DC for work in 2010 (I rent an apt here), and will be moving overseas for work next summer for at least a couple of years. Should probably also note that I never plan to live in Kansas City again.
So my question: my tenants lease is up next spring and I'm debating if I should ask if they're interested in buying, or if I should continue renting the house out for another few years. I know that if I sell, I'd lose money but I'd still walk away with a check and be free and clear. If I wait another few years (say at least 3-5 years), the market might improve but I risk losing more money on the rental. So what do you think, sell or wait?
I know that if I sell, I'd lose money but I'd still walk away with a check and be free and clear.
Would you? If so that is doing very well.
Confirm the details underlying your assertion (and mine).
Quote:
it's a money drain: I've been losing at least $600-700...
my tenants lease is up next spring and I'm debating if I should ask if they're interested in buying,
or if I should continue renting the house out for another few years.
If you can sell and walk away without a loss... do so.
If you can sell and walk away with any cash at all... start planning for it.
I currently own a single-family home that I rent out, and am debating what I should do with it. I bought the house in late 2007 but due to a number of sudden life changes (chief among them losing my job) I moved out and started renting the place out in late 2009. Ever since, I've been renting it out via a management company.
The house: in suburban Kansas City, 3-bedroom, somewhat older (1950s construction) but in very good shape and in a good neighborhood. Has a solid poured foundation (a rarity in that neighborhood), hardwoods, finished basement, fireplace, newer roof, etc plus tons of curb appeal. It's not the most sleek or modern house (no designer kitchen or anything like that), but it is clean, solid, and trouble-free. Unless it gets hit by a tornado or something, I don't anticipate any major maintenance for the next couple of years. It was my first house purchase, I financed it with a 30-year mortgage w/ 20% down.
The rental has gone well - I've been lucky enough to have the same tenants for the last three years, and have had no major maintenance issues, no issues collecting rent, etc. However, it's a money drain: I've been losing at least $600-700 / year because the rent I've been able to collect is less than the mortgage payment + management fees (I lose more if I have to do any maintance).
Edit: If you anticipate inflation, and I do, a nice asset like a home is a great thing to have money that is not needed immediately tied up in.
As for me: early 30s, stable job, single (although that might be changing in the next year...). Not rich but doing okay financially - modest savings plus a good-sized 401(k). Moved to DC for work in 2010 (I rent an apt here), and will be moving overseas for work next summer for at least a couple of years. Should probably also note that I never plan to live in Kansas City again.
So my question: my tenants lease is up next spring and I'm debating if I should ask if they're interested in buying, or if I should continue renting the house out for another few years. I know that if I sell, I'd lose money but I'd still walk away with a check and be free and clear. If I wait another few years (say at least 3-5 years), the market might improve but I risk losing more money on the rental. So what do you think, sell or wait?
Too many unknowns here. Is the area appreciating, depreciating, or stagnant? If its appreciating rapidly keep it and deduct your losses. If its declining, and you believe it will continue to decline, then sell it now. If its stagnant look to the area for indicators of future performance. $600-$700 year loss that is fully deductible is nothing if the home is appreciating.
Look at the market, look at your own circumstances.....I only make about $1500 yr on some of my rental properties but the appreciation and deductions are stellar. Even if I were to lose money in one year it would not change what I am doing.
Sell, sell, sell. You aren't going back to the area, you're negative every month and you're leaving the country. Sell! Even if you take a loss over what you paid you'll still walk away with money.
Also if you, like me, are anticipating quite a bit of inflation in the next 20 years, then so long as you do not have a need for the money that is tied up in the property, then its a great inflation protected asset to have your money tied up in.
You didn't say what you're going to do with the money after you sell. If you have a good idea where to invest that money and if the anticipated return is good, it makes sense to sell.
If you're just going to put it in a bank and collect a tiny interest, you may be better off waiting for the market to bounce back or use the house as a hedge against inflation.
Take the loss and sell it and move on especially if you are losing money on rental.
OP put 20% down in 2007 so is not underwater by the way. They will still be losing money and never get that downpayment back.
But sell property next Spring during spring selling season. I live in KCK during my school days. Selling in the fall/winter is hard. Plus I think op mentioned the lease is up in spring anyways.
Location: When you take flak it means you are on target
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From the minimal info available my advice would be to sell and cut your potential losses. I'd second the above poster, reno the property and sell in the spring.
If you have a vacancy for several months you could dump a LOT of money into the property - plus expect to have to do some serious cleanup to re-rent it after a 3 year occupancy - probably new carpet and paint at the least.
The only reason to hold and rent would be if your market is appreciating and will make the return worthwhile. As an investor in rental property my rule is "a property MUST CASH FLOW from day one" otherwise it's not an investment but a liability. A trailer on a lot can be a better investment if it cash flows $200 a month, than a 200K home with a pool if you have to pay $100 a month for your guests (er, I mean tenants) to live there. I will accept that sometimes there can be tax advantages to negative cash flow, but usually not worth the risk. You'd be better off with your money in mutual funds.
...it's a money drain: I've been losing at least $600-700 / year because the rent I've been able to collect is less than the mortgage payment + management fees (I lose more if I have to do any maintance).
That's just your gross money in/out "loss". To properly evaluate the financial performance of the asset you need to back out the principle paydown portion of your mortgage payment, add back any appreciation, and factor in the income tax effects from your Sch E on your income tax return.
Since you are depreciating the property and writing off all expenses, your actual financial result should be looked at after-tax. I own negative cash flow properties that are actually positive after-tax.
And, let me disclose that I'm one of those who thinks monthly cash flow is irrelevant. It doesn't matter to me, at all. Another thread, another time, but take that into consideration. I own many "cash flow negative" rentals that will be free and clear soon, because I pay them down faster. Am I "losing" money? No. Don't get hung up on dollars in/out, look at the bigger picture and how it affects your longterm net worth going forward.
Also ...
Construction materials costs are rising fast. As new construction gains traction again, and housing supply starts picking up, existing homes should start seeing appreciation again. Hopefully not "bubble" levels, but I expect good solid 5-7 year upswings in many metro areas as long as those areas are seeing job growth.
Finally, as someone else said, what will you do with the money you take out? For that matter, what will you do with the "negative cash flow" you get rid of? If you're just going to blow it on something stupid, like a car payment, it's better to leave it in the home.
You will want to do 3 things to get the best advice for your specific circumstances. (all this free forum advice can't possibly account for all the details & ins and outs of your very individual financial situation).
1. Consult with a certified financial planner (CFP) regarding your overall financial picture & short/long term goals. Discuss if a short sale would make sense in this situation.
2. Make a consultation appointment with a Real Estate Attorney in the state where the property is located to discuss legal - tax ramifications for various scenarios.
3. Consult with a CPA regarding the tax situation for your plan.
Many of these professionals will offer a free initial consultation, but if not, consider what you pay them to be an investment in your financial welfare. You most likely can find professionals in your area right here on this city-data site.
Good luck to you.
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