To rent or to sell (sale, real estate, rental)

[vauser]

Moving to a new home soon, contemplating whether or not the current, primary residence is best SOLD or RENTED. Here are some details:

* 15 years old.
* Single car garage townhouse.
* Maintained very well with about $50K worth of upgrades done in the last 2 years (was planning to live here a while before there was a change of heart).
* Located in Ashburn, VA about a mile from the "Loudoun One" project (Loudoun County Parkway and Route 7).
* Expected rent: $1,800/month
* Expected sale price: about $325K
** Highest we have seen the price go (in the peak/best of markets): $465K.
* Rent would cover mortgage very comfortably.

What would be a prudent thing to do from an investment standpoint?

[boyd888]

Can you afford to pay the mortgage + whatever your new mortgage is on your new home if you have a couple of "tenantless" months?

Personally I would sell it assuming it is not underwater. Being a small time landlord seems great on paper, but for many it is a total nightmare. All it takes is one bad tenant to ruin everything and even with a good tenant it is not the "sit back, relax, and collect your $1800 a month" people think it is.

Ashburn is also pretty out there and I would expect the rental demand to be nearly as strong as say somewhere inside the beltway.

[saganista]

As NOVA is a notably transient area, there is a significant supply of and demand for rental housing. This means there is also a significant number of professional property management firms who will gladly take over all those headaches of being a landlord for you in exchange for a reasonable fee. Obviously, the word "reasonable" means different things to different people, but there is potential value here. Anyone considering the idea of renting out a property should take a serious look into the option of professional management.

[oneasterisk]

I'm assuming you have equity in the house? So if you sell, you would be able to pay off the mortgage and be able to pocket the money. I think If you've lived there for the last 5yrs, you wouldn't have pay taxes on a certain amount of the proceeds. Then you could take that money and invest it and hopefully make a return on it year after year.

The other side is if you rent it, the tenants can pay off your mortgage and build your equity. Also if the home appreciates, then you can sell at a later date, but don't use appreciation as a huge reason to rent it. It's not something we can control or predict, so instead ensure that the property cash flows monthly and if it appreciates then that's a bonus. Like boyd888 mentioned, you do have to set aside money in case the TH is vacant as well as expected maintenance and repairs. You say that the rent would be able to comfortably pay the mortgage, but is it enough to cover maintenance/repair/vacancies?

Also not sure if you've looked at using a property management company, but that can be an option. I use one on my rental and they charge 8% of the monthly rent, some I called were 10-12%. They take care of finding and screening tenants, though they do charge a finders fee. In my case it was half a month of rent. I gladly pay them their fee for the hassle of not dealing with the tenant. Plus their fee is tax deductible

[brenpilot]

Originally Posted by oneasterisk

I'm assuming you have equity in the house? So if you sell, you would be able to pay off the mortgage and be able to pocket the money. I think If you've lived there for the last 5yrs, you wouldn't have pay taxes on a certain amount of the proceeds.

Close, its actuallly even better than that!

If you owned and lived in your house for two of the five years before the sale, then up to $250,000 of profit is tax-free. If you are married and file a joint return, the tax-free amount doubles to $500,000.

Here's what I'd recommend: If you can afford your current mortgage, plus any future mortgage, plus your living expenses, AND be able to weather a couple of tenantless months, keep the townhouse for a couple years.

If you hate being a landlord, sell in 2-3 years, and it'll still be taxfree income!

[spleuchan]

Originally Posted by boyd888

Can you afford to pay the mortgage + whatever your new mortgage is on your new home if you have a couple of "tenantless" months?

Personally I would sell it assuming it is not underwater. Being a small time landlord seems great on paper, but for many it is a total nightmare. All it takes is one bad tenant to ruin everything and even with a good tenant it is not the "sit back, relax, and collect your $1800 a month" people think it is.

Ashburn is also pretty out there and I would expect the rental demand to be nearly as strong as say somewhere inside the beltway.

I'd have to agreewith Boyd. Renting might make you a few bucks if you are lucky, but you can lose a lot if you are unlucky. To me the negatives far outweighs the positives. If you list with an agent, thats equal to a months rent. If you use a management company, that is a months rent a year. Not sure when you have last replaced some of the major items in your house (A/C, furnace, roof, major appliances, etc.), but those could come into play soon. You might be able to factor in the rentor missing a couple mortgage payments, but what if they destroy the house? You can always sue and win, but collecting is sometimes harder. I'd put it on the market and see if you can sell it. I'd rent as a last resort.

[saganista]

Originally Posted by brenpilot

Close, its actuallly even better than that! If you owned and lived in your house for two of the five years before the sale, then up to $250,000 of profit is tax-free. If you are married and file a joint return, the tax-free amount doubles to $500,000. Here's what I'd recommend: If you can afford your current mortgage, plus any future mortgage, plus your living expenses, AND be able to weather a couple of tenantless months, keep the townhouse for a couple years. If you hate being a landlord, sell in 2-3 years, and it'll still be taxfree income!

Except that one would normally have deducted depreciation on the rental home while it was being rented, and the ultimate capital gains deduction allowable upon sale may be reduced by those depreciation amounts. See a tax advisor or check out IRS Publication 523 for more info.

[gammann]

I thought you already owned 2 homes?
https://www.city-data.com/forum/north...ent-homes.html

So you should know if renting is for you, unless you aren't renting one of those homes.

And since we have seen some of your other posts....Have you qualified for the loan for your new home yet? If you plan to purchase your new home before selling your existing home, or you plan to rent it, most lenders will want to see that you have reserves to cover both mortgages for a period of time. My lender wanted to see 6 months worth.

And I wouldn't bother with that peak price, I don't think you'll see those prices for a long time. I do agree with others, that as the fed starts to cut back, this area will start to take a hit.

[vauser]

Originally Posted by gammann

I thought you already owned 2 homes?
https://www.city-data.com/forum/north...ent-homes.html

So you should know if renting is for you, unless you aren't renting one of those homes.

And since we have seen some of your other posts....Have you qualified for the loan for your new home yet? If you plan to purchase your new home before selling your existing home, or you plan to rent it, most lenders will want to see that you have reserves to cover both mortgages for a period of time. My lender wanted to see 6 months worth.

And I wouldn't bother with that peak price, I don't think you'll see those prices for a long time. I do agree with others, that as the fed starts to cut back, this area will start to take a hit.

I do own 2 homes and my question was if I should keep it at 2 or take it up to 3, essentially. We do qualify for the new loan without selling the current house but based on feedback and research that I've done, it looks like you couldn't go wrong either way.

Pros of selling: more cash in hand, less headache, no maintenance work to worry about, no tenant issues, no capital gain taxes, etc.

Pros of renting: gives a chance to benefit from possible appreciation, tenant pays off the loan so even if there is no appreciation, we would still own the property one day with someone else having paid it all off.

But, I get the feeling more people are inclined to selling and not maintaining multiple properties which begs the question: "what is everyone really investing on?" Stocks, 401K, IRA and that kind of stuff?

Seems a bit strange that real estate (other than the primary residence) doesn't seem to figure as one of the obvious means of savings for retirement or for investment, but I guess, it is what it is.

[spleuchan]

Originally Posted by vauser

I do own 2 homes and my question was if I should keep it at 2 or take it up to 3, essentially. We do qualify for the new loan without selling the current house but based on feedback and research that I've done, it looks like you couldn't go wrong either way.

Pros of selling: more cash in hand, less headache, no maintenance work to worry about, no tenant issues, no capital gain taxes, etc.

Pros of renting: gives a chance to benefit from possible appreciation, tenant pays off the loan so even if there is no appreciation, we would still own the property one day with someone else having paid it all off.

But, I get the feeling more people are inclined to selling and not maintaining multiple properties which begs the question: "what is everyone really investing on?" Stocks, 401K, IRA and that kind of stuff?

Seems a bit strange that real estate (other than the primary residence) doesn't seem to figure as one of the obvious means of savings for retirement or for investment, but I guess, it is what it is.

A general rule of thumb in financial planning is to diversify. I'm not sure your financial situation (how much you have in other savings such as stocks, bonds, CDs...), but having 3 houses would definately be putting all my eggs in one basket. House prices might go up a little, but with interest rates at historic lows and the country's deficit at a record high, I'm guessing interest rates 5-10 years from now will be higher than they are now. If interest rates rise, that will make it harder for house prices to rise, since most people finance a large portion of the house. Then again, just because things make logical sense to work out one way, doesn't mean they will.

I've never rented out a house, only have heard horror stories from others who have rented out their houses. You have experience with it, so sounds like you would know best whether or not adding another rental property to your portfolio is right for you.