To be a landlord or invest in a new property?
November 4, 2015 9:51 AM Subscribe
How do I determine if it’s better to continue being a landlord or sell my rental property to invest in a new primary residence?
I am having trouble re-renting my property due to the time of the year and have dropped the monthly rental price from $1500 to $1300. I have been told that $1500 is reasonable if I had it on the market in July or August.
Here are the details:
Home value: Let’s say $180,000
Purchase price $147,000
Amount owed $120,000 and 27 years left to pay it off
Interest rate 4.125%
Monthly payment - $800 mortgage and $200 HOA fee = $1000
I want to buy a new home: $250,000-$300,000. I'm estimating the same interest rate, 4.125.
I have $60,000 that I can put down but if I sold the other place I could probably have around $90,000 to $100,000 down payment.
I am in a very hot market for both home sales and rental prices and it will continue to go up. The current home is in Lakewood, CO 80235.
I am staying with family currently after an overseas stint.
There doesn’t seem to be any calculators online and I can’t find a way to calculate this myself. Are there any resources or formulas I can use to determine if I should continuing to rent out or sell to invest in a new home?
I am having trouble re-renting my property due to the time of the year and have dropped the monthly rental price from $1500 to $1300. I have been told that $1500 is reasonable if I had it on the market in July or August.
Here are the details:
Home value: Let’s say $180,000
Purchase price $147,000
Amount owed $120,000 and 27 years left to pay it off
Interest rate 4.125%
Monthly payment - $800 mortgage and $200 HOA fee = $1000
I want to buy a new home: $250,000-$300,000. I'm estimating the same interest rate, 4.125.
I have $60,000 that I can put down but if I sold the other place I could probably have around $90,000 to $100,000 down payment.
I am in a very hot market for both home sales and rental prices and it will continue to go up. The current home is in Lakewood, CO 80235.
I am staying with family currently after an overseas stint.
There doesn’t seem to be any calculators online and I can’t find a way to calculate this myself. Are there any resources or formulas I can use to determine if I should continuing to rent out or sell to invest in a new home?
It sounds like you are interested in buying a new home regardless of whether you sell the old property, in which case the only question is "is the existing property a worthwhile investment?"
You might find this article interesting: If You Wouldn't Buy It You Should Probably Sell It.
If someone said to you right now, "I will sell you this house for $180K. The HOA fee is $2400/year, and the property taxes are $X, and the insurance is $Y. It is currently rented for $1300 a month," would you even give that deal a second glance?
The "1% rule" is pretty popular with income property investors. Basically your rental should be giving you at least 1% of its worth each month. Assuming your tenants pay the utilities, you're currently bringing in around $1100 a month (rent minus HOA fee) on a $180K house. That's about 0.6%, a lot less than 1%.
That's just a rule of thumb, though - if you expect the value of the rental property to appreciate a lot, it could still be worth it. But it doesn't sound like an obviously amazing investment.
posted by mskyle at 10:15 AM on November 4, 2015 [5 favorites]
You might find this article interesting: If You Wouldn't Buy It You Should Probably Sell It.
If someone said to you right now, "I will sell you this house for $180K. The HOA fee is $2400/year, and the property taxes are $X, and the insurance is $Y. It is currently rented for $1300 a month," would you even give that deal a second glance?
The "1% rule" is pretty popular with income property investors. Basically your rental should be giving you at least 1% of its worth each month. Assuming your tenants pay the utilities, you're currently bringing in around $1100 a month (rent minus HOA fee) on a $180K house. That's about 0.6%, a lot less than 1%.
That's just a rule of thumb, though - if you expect the value of the rental property to appreciate a lot, it could still be worth it. But it doesn't sound like an obviously amazing investment.
posted by mskyle at 10:15 AM on November 4, 2015 [5 favorites]
I don't know your market. But it would make more sense to me that you look around for a home you love that has a legal basement suite and perhaps a laneway cottage or a suite over a garage. Then you could rent those out (or AirBnB?) and have the home you like, while having an income. You'd have $150k to put down. Perhaps you could use this income to make double payments and pay down your own home. Then, when you are in a position of having paid off the home, you can look at what investments you would like to make.
My mortgage broker told me not to get into real estate investing until I've paid off my own home. He said there are so many uncertainties and that he frets about people getting hit with a foundation problem, assessment, etc.
posted by Chaussette and the Pussy Cats at 11:51 AM on November 4, 2015
My mortgage broker told me not to get into real estate investing until I've paid off my own home. He said there are so many uncertainties and that he frets about people getting hit with a foundation problem, assessment, etc.
posted by Chaussette and the Pussy Cats at 11:51 AM on November 4, 2015
It sounds like you fell into landlording accidentally?
There are many of us who faced that question involuntarily after 2008. I did; I had put a big-ish down payment on a condo, and when the value plummeted I would have lost all that money by selling. So I rented it, saying things like -- it's a condo, the exterior stuff is taken care of by the association. It's pretty new, I did some renovating, so should be lower-maintenance. It's in a great area, I'll always have a good pool of tenants. For me, maybe I'll move back (to CA) someday. Landlording went ok, even when I had to turn it over in November.
But in reality, it was a great big financial and personal albatross for the next 7 years. It went well; always had tenants who paid, no big maintenance problems. But the money I'd sunk into it was ... sunk. I had no way of accessing it (or its imaginary value, really) until the market came back. I could not buy a new place (qualify for two mortgages, even with tenants). I felt I needed a much bigger emergency fund. I felt very financially stuck for a long time. If I could have solved that problem, I would have.
I did, at the first opportunity. I sold it last summer (for a great price in 12 days).
But what I can tell you now, the wisdom of hindsight and all, is this: if you have the choice to sell, and realize a gain on your small down payment -- do it. Run and don't look back. Be grateful that you HAVE that choice. It's not always there -- "hot" sellers' markets are relatively rare (2008-2012 was, for instance, one looooooong buyer's market). Yes, in theory you could get more eventually, but a frequent question to would-be landlords, asked above, is a good one: would you buy it as an investment, now?
Take the money and run, dude. pat yourself on the back -- you're lucky and you did well. Call it a day while you can do so easily, and move on.
posted by Dashy at 12:25 PM on November 4, 2015
There are many of us who faced that question involuntarily after 2008. I did; I had put a big-ish down payment on a condo, and when the value plummeted I would have lost all that money by selling. So I rented it, saying things like -- it's a condo, the exterior stuff is taken care of by the association. It's pretty new, I did some renovating, so should be lower-maintenance. It's in a great area, I'll always have a good pool of tenants. For me, maybe I'll move back (to CA) someday. Landlording went ok, even when I had to turn it over in November.
But in reality, it was a great big financial and personal albatross for the next 7 years. It went well; always had tenants who paid, no big maintenance problems. But the money I'd sunk into it was ... sunk. I had no way of accessing it (or its imaginary value, really) until the market came back. I could not buy a new place (qualify for two mortgages, even with tenants). I felt I needed a much bigger emergency fund. I felt very financially stuck for a long time. If I could have solved that problem, I would have.
I did, at the first opportunity. I sold it last summer (for a great price in 12 days).
But what I can tell you now, the wisdom of hindsight and all, is this: if you have the choice to sell, and realize a gain on your small down payment -- do it. Run and don't look back. Be grateful that you HAVE that choice. It's not always there -- "hot" sellers' markets are relatively rare (2008-2012 was, for instance, one looooooong buyer's market). Yes, in theory you could get more eventually, but a frequent question to would-be landlords, asked above, is a good one: would you buy it as an investment, now?
Take the money and run, dude. pat yourself on the back -- you're lucky and you did well. Call it a day while you can do so easily, and move on.
posted by Dashy at 12:25 PM on November 4, 2015
I'm in your area and I would hold onto a rental property. Denver metro is growing like crazy and apartment building is hampered by a law that holds builders responsible for defects the life of new buildings.
You can find your rate of return:
(1000X12)=12000 (costs/year)
(1300x12)=15600 (income/year)
15600-12000 = 3600 (profit/year)
3600/27000 (what I assume your down payment is) = .13 or 13% return on investment (pretty good, actually taking into account your lowered rent)
cap rate = (3600/180000)=.02 or 2% which is lower than your mortgage rate (also good)
also found this
posted by kookywon at 12:35 PM on November 4, 2015 [1 favorite]
You can find your rate of return:
(1000X12)=12000 (costs/year)
(1300x12)=15600 (income/year)
15600-12000 = 3600 (profit/year)
3600/27000 (what I assume your down payment is) = .13 or 13% return on investment (pretty good, actually taking into account your lowered rent)
cap rate = (3600/180000)=.02 or 2% which is lower than your mortgage rate (also good)
also found this
posted by kookywon at 12:35 PM on November 4, 2015 [1 favorite]
Sorry... had cap rate analysis backwards:
This means that you're generally not earning as much as you could by selling the property. The rule of thumb I've been told is that this should exceed your mortgage rate.
also, this
posted by kookywon at 12:44 PM on November 4, 2015
This means that you're generally not earning as much as you could by selling the property. The rule of thumb I've been told is that this should exceed your mortgage rate.
also, this
posted by kookywon at 12:44 PM on November 4, 2015
This thread is closed to new comments.
What are your goals, money-wise? Do you want consistent monthly income or do you want to have a payout in X years? How much can you afford to carry every month without renters if something goes wrong? How long would you need to own the house before selling to make it worth it for you?
There are ways to do some math, but you need to really think about what numbers you want to maximize and what numbers you want to minimize, as well as how risk averse you are and what you would be willing to risk before those calculators are useful.
posted by brainmouse at 10:09 AM on November 4, 2015