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Should I sell or rent my house?
September 4, 2012 5:16 PM   Subscribe

Should I sell or rent my house when I move to a different part of town? I would just about break even in either situation.

I bought a house about a year ago, and am finishing up the refinancing process (for 20% less per month) this week. It's a cute house in a nice neighborhood. I made some updates, but the kitchen and bathroom are still outdated, and the house is not exactly level. The house also has two small bedrooms, with an additional attic bedroom, and only one bathroom. It's a bit big for my boyfriend and me (though only 1150 sq ft) but too small to rent out a room to anybody else.

I'd considered renovations, and taking out a large loan to make it a duplex (income property). But the crux of it is: I don't really want to live in this part of Seattle anymore. So I would like to move sometime in the next year. I'm looking at moving into an apartment rental downtown, so I won't need to take out a second mortgage. And at that time, as I see it, I have two choices: renting out the house or selling it.

Renting out the house's biggest problem is of course, bad tenants. I should be able to break even or even make a hundred or two a month. I would consider remodeling the kitchen to get a higher rent, though I would rather not. I have a year's worth of payments in savings in case of bad tenant or needing to fix up the house. And I will be in town to take care of landlord business. So I'm tempted to do this.

Selling it would obviously lessen my financial obligations, thus giving me more financial freedom. However, after agent fees and other fees, I would have basically zero dollars after selling the house. (I bought the house with only 3.5% down.) It is an old house (so it will need repair/maintenance/updating sooner or later), so getting rid of it completely is not necessarily a bad option.

I am also considering hiring a rental company and possibly taking a small loss.

I don't make super lots of money, but it's still a decent number. So I'm not quite sure what the tax implications are. (Since this is not happening immediately, I haven't spoken with a CPA about it yet.)

I'm vaguely considering going into being a landlord in the long term and I also wonder if having a SFH would be helpful to that at all. (Or if I should just try again later with an n-plex.)

Has anyone else on MF been in a similar situation? What did you do? What would you recommend I do (or the factors that I should look at)?
posted by ethidda to Work & Money (12 answers total) 4 users marked this as a favorite
 
That one or two extra hundred dollars you might be making per month will be eaten up once the roof leaks/major plumbing breaks/other physical repair disaster occurs.

Plus, there is different insurance required if you rent it out. Surely that will make it more expensive to hang on to.

Sorry, I think you should sell.
posted by jbenben at 5:21 PM on September 4, 2012 [4 favorites]


There is a lot of risk involved in being a landlord -- tenant doesn't pay, have to evict, moves out early, you can't find tenants... If you're willing to take the risk, go for it. If you'd rather have stability or certainty, sell it.

The other thing to look at is whether the housing market is predicted to go up where you are. It's a buyer's market right now, so you might make a profit if you wait a few years to sell.
posted by DoubleLune at 5:47 PM on September 4, 2012


In this uncertain market, if you can sell the property and break even, I would definitely advise you to SELL.

I have been a landlord for nearly 10 years, in a similar situation to yours....first house (a duplex), outgrew it quickly, then kept it as a rental. It has been nothing but hassle and a money pit. Any monthly profit I found was quickly eaten when a unit was between tenants, or when repair or maintenance needed to be done - a furnace, exterior painting, and hot water heaters were some of the issues. A professional rental company was not an option for me...it would have cost 10% of monthly gross + a full months rent for each turnover, leaving me with nearly no profit.

My second house & primary residence got short-shifted: any maintenance money had to go first to the rental to retain tenants and positive cash-flow. Timing of maintenance is often unpredictable: notably, I was unclogging the tenant's toilet 2 hrs before I was due to be a guest at a wedding - these things can't wait.

It complicated my taxes with the Schedule E, which requires a fair amount of additional recordkeeping. I always ended up with a paper loss, which usually upped my modest refund a bit. However, when you do sell, if you keep it for more than 3 yrs after you move out, you will need to pay capital gains tax on any price appreciation, since at that time you become ineligible for the homeowner's capital gains exemption on the sale of a primary residence.

And, throughout all of this, I did not have any MAJOR repairs needed nor any massively horrible tenants. SELL, SELL, SELL.
posted by Ardea alba at 5:54 PM on September 4, 2012 [2 favorites]


Being a landlord is a pain in the ass. I wouldn't do it for all the money in the world. It's annoying and if you get tenants that are horrible or don't pay, you will spend days stewing in anger. It's not worth the few extra hundred bucks you'll get so I advise you to sell.
posted by cyml at 6:08 PM on September 4, 2012


I'd suggest you find out as much as you can about the local housing market before considering selling. I was in your position a little over three years ago, bought a house two years prior but due to several factors (lost job, roommate relocated) decided that I need to downsize. Tried selling, but thanks to real-estate crash no luck - even at $15k below what I purchased it at I couldn't get an offer. Put it up for rental and had tenants within a month.

Have been renting it out instead ever since and it's been going pretty well. I'm somewhat lucky in that I have great tenants and have only had one or two minor maintenance issues (hired a handyman to handle these). Management hasn't been an issue, however I had to move out-of-state for a new job so I was forced to hire a management company. All in all it's a fairly painless affair, requiring very little of my time.

The downside is that the rental is definitely NOT paying for itself. Once you take out management fees, the amount I collect in rent is just enough to cover the mortgage payment. That means I'm out-of-pocket for any maintenance, etc or if the tenants move out and I have a gap in rental income. There are some tax advantages to keeping the place (esp if I'm taking a loss on the rental) but it's not enough to Right now, I'm just hoping the market picks up soon so I can sell the place and stop losing money each year.

So is being a landlord bad? Not necessarily, but don't go into it expecting to make any money.
posted by photo guy at 6:46 PM on September 4, 2012 [1 favorite]


I was a landlord for a few years. I got into it by managing property for some old ladies who where too cheap to hire an agency. I got paid in beer, apple pie and some really great advice that lead to me owning and renting out my own property.

So I'm not voting yea or nay, I'm just going to throw out some ideas for your consideration.

Is the property viable as a rental? Forget about aesthetics and modernizing. Is the plumbing and electrical bullet proof and ready to take a beating? Is your 25 year roof on its 24th year? Does the property have any recurring issues that need servicing or attention? (If you're really thinking about this, I'd spend the $150 to $200 to have the place inspected to find weaknesses and correct them.)

Research renters rights for your area and learn about what your responsibilities are. Google up some rental and lease agreements/contracts for your locality and learn how to enforce them.

Do the math. As photo guy states, this isn't exactly viable if you're going to have to pay out of pocket for anything unless it's totally minor. Do you think you can do this for a few months while saving all of your rental income?

Initially the idea is to save as much as you can to cover expenses. After that, after you have between 5 to 10 Grand in the bank, you'll be doing alright.

Keep in mind that this is really only profitable over the long haul and definitely a long term investment. (A good one!)

FWIW, Seattle isn't bad at all for having a rental property, but either way good luck!
posted by snsranch at 7:44 PM on September 4, 2012 [1 favorite]


If I were you and I knew I could get out even-steven, I'd sell.

There are too many unknowns about the house itself and about prospective tenants for me to feel comfortable.

If you need to replace a large system in the house (like a furnace) or if your tenants stiff you on the rent, or if your place remains vacant for too long, you'll be in a financial pinch.

This is an investment, with the same potential for risk and reward.

Sure, you could end up renting out over the long haul, and then, once it's paid off, or if rental prices rise significantly above what your mortgage is, then you're making money.

Just as possible, the rental market could soften, others may not want to live in that part of Seattle, or the costs of maintaining the house could outstrip any income you may get from it.

Sell.
posted by Ruthless Bunny at 8:12 AM on September 5, 2012


If anybody knows Seattle, I'm in Ballard. Which is to say that it's a nice neighborhood with a lot of old school "Ballardites" and Yuppies. It's not the most expensive neighborhood, by any means, but it's very desirable for younger people who are doing well for themselves. They're doing a lot of new construction (apartment buildings and townhomes), but I'm not entirely sure how that affects my house price (either to sell or to rent).

I have, since moving into the house, replaced windows, put in hardwood floors, fixed the bathroom plumbing, redone the flooring of the garage, and replaced some kitchen appliances. I plan to replace the water heater, the roof, and the fence if I rent it out. Possibly renovate the kitchen, and replace the furnace. (The furnace is old, but very sturdy.) So ideally, the house would not need much fixing upping.

jbenben: I didn't think about the insurance going up for rentals. I'll have to figure out how much that is.

snsranch: I already have more than that much in the bank. I would have that much even after all the renovations I outlined above (if I budget for the kitchen reno).

photo guy: I'm not hoping to make money on a month-to-month basis, but if I'm not going to be making money over 30 years, then it's not worth it to me. But there is also a little part of me that really likes the house and the walkability, and that part hopes to retire to the house in 40 or 50 years.

Everybody else: What I'm hearing is to sell. This makes me sad, and possibly I just need to accept it.

Thank you all for your insights and please let me know if there's more.
posted by ethidda at 11:40 AM on September 5, 2012


Don't accept anything quite yet. You sound like you have your bases very well covered. The big question now is can you rent it for 2 or 3 hundred more than what your monthly mortgage payment is?

If you can and do, put those earnings right back into the principal. Build your equity, reduce the life of the loan and save many thousands in interest. Even $200 a month will build your equity pretty rapidly and your equity is what will make it a great investment.

After that, it's up to you. You can expand by using that equity to invest in or purchase more properties or you can watch it grow. Or you can refi in a couple of years, lowering your payment based on the lower loan amount and pay even MORE toward the principal.

There is quite a bit you can do and you sound like a great candidate for it. Just do your research and you should do well.

Good luck!
posted by snsranch at 5:02 PM on September 5, 2012


A follow-up: if you *do* decide to keep it and rent it out, do as much as you can to educate yourself about being a landlord. There are lots of great resources out there: books, websites, forums, etc.

I personally found The Landlord's Kit: A Complete Set of Ready to use Forms, Letters, and Notices to Increase Profits, Take Control and Eliminate the Hassles of Property Management by Jeffrey Taylor to be invaluable. Walks you thorugh the basics, from readying the place, screening tenants, handling the lease, dealing with repair requests, and doing the final walkthrough and security deposit refund. Has a lot of forms that you can use outright or use as inspiration for your own communications. There are lots of other good books as well; hit up your library or local bookstore.

Jeffrey Taylor has been a landlord for a *long* time. His website, MrLandlord.com, is chock-full of helpful information and resources. Especially helpful are the Q&A Forums, where you can post a question to other landlords throughout the nation, or just browse to see what success or horror stories others are having. The experienced landlords on the forums have managed property for years; they will give it to you straight and unvarnished, which is their kindness to newbies.

Before you start advertising and interviewing tenants, have an application form ready, and set yourself some basic criteria as to what you will accept in a tenant. Any of the above resources can help you out. Your best defense against bad tenants is to SCREEN, SCREEN, SCREEN at the application stage. Check references. Check credit (again, MrLandlord.com can help you get set up to pull prospective tenants' credit report.)

Get familiar with a lawyer who deals with landlord-tenant issues, and have the lawyer read over your lease before you present it to your prospective tenant. If you don't know a good landlord-tenant lawyer, ask the attorney that helped you close on the house for a recommendation. If you have a lawyer in your corner ahead of time, you'll feel that much more steady should you have to evict a tenant.

Also, either get familiar with recordkeeping and tax implications so you can keep proper records and receipts for tax time - or hire a tax preparer or accountant to help you. Again, meet with this specialist well before tax time so you know what you need.

Most larger metro areas also have landlord associations. If you have time, get involved with them - another great resource. Google brings up these possibilities for Seattle:
Rental Housing Association of Puget Sound
Washington Landlord Association

Last but not least, familiarize yourself with Federal, State, and Local landlord-tenant laws and requirements. For example, did you know you need to give a lead paint disclosure form and informational booklet to your tenant at lease-signing? Federal law. Most states require that you provide smoke detectors and carbon monoxide detectors in your units; they may have to be hardwired. Also, most states prescribe how and when you must return the security deposit or provide reasons why you are keeping it. My municipality has specific rules on what can be advertised as a bedroom: must have a certain square footage, a door, a window, and a closet. Be sure you get all the information you can on your responsibilities as a landlord.

Good luck! I will say that, despite all the hassles, it is satisfying to sell and realize that someone else has paid your mortgage and built your equity for you.
posted by Ardea alba at 7:27 PM on September 5, 2012 [2 favorites]


I also rent out my first house after having purchased a second one. I use a property manager to deal with the tenants (they do all the screening of prospective tenants, collecting rent etc..) I deal with minor maintenance stuff if/when it crops up but also rely on the property manager to handle larger issues.

At this point in time I lose about $50-100 a month once all the various expenses (taxes, mortgage payments etc..) are factored in. But what I get in return is equity in the house through accelerated mortgage payments, and the ability to leverage that equity for other things (such as the down payment on my current home)
posted by smcniven at 6:48 AM on September 6, 2012 [1 favorite]


Thanks all! It turns out that moving in the immediate future may not be necessary after all. But there were very interesting things I learned about evaluating the costs and benefits of rental home ownership.
posted by ethidda at 2:55 PM on October 10, 2012


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