Sell it or Rent it?

[gooddecisions]

I think I'm finally ready to look for a new home. I bought my 3 bedroom townhouse in 2004 for $165,000. I'm luckier than some considering neighbors on both sides bought their 2 bedroom units for $205,000 in 2007.

If I rent it, I could get about $1100/month (based on what I've seen others rented for)- assuming I can find a renter. Mortgage, insurance, taxes and homeowners association dues add up to $1063. Having a potential net loss on the rent shouldn't be a hardship. The temptation in this option is that as market rent goes up and the mortgage goes down, it could one day be a decent invest property.

If I sell it, $165,000 is probably where they would list it. My mortgage balance is about $130,000. I wouldn't have to worry about finding renters and being a landlord.

What would you do? Sit tight for awhile longer, sell it at a loss after fees, or rent it at a cost?

[Deleted]

Is clearing $10-15k make it worth it to you?

[phil5185]

Your depreciation basis would be $165k. You're in a fairly high marginal tax bracket, so you would get about $150/mon tax break to add to your potential $1100/mon rent - so, $1250/m income.

If you keep it 10 yrs, the loan will pay down about $40k, ie you will owe about $90,000.

The end-game has to do with your scenario selection. Eg, if you predict a 3 yr flat market, followed by a 7 yr appreciation of 5%/yr, the value would be $230,000. Your equity would be $140,000 when you sell. You would owe a 15% cap gains tax on the $65,000 profit. Plus some depreciation recapture. You'd get to keep maybe $125k net. And your nice tenant would have been paying the $1093/m for you for the whole 10 yrs, plus a little extra cash flow.

OTOH, there is the slight possibility that Obama to win in 2012 - in that scenario the real estate market would be bad for at least 4 more years and you would need to wait for 2016 to get some appreciation - and that isn't an entire failure, it just takes a bit more patience.

[Deleted]

1. Have you wanted to have an investment property/be a landlord (it isn't for everyone and the fastest way to lose money is to do something you are not cut out for).

2. Are your financially secure enough to have a DP for the next house and still have emergency fund for both properties (i.e.. make sure you are not over leveraging).

No to either question above, then I recommend Not doing it.

[Deleted]

"Have you wanted to have an investment property/be a landlord (it isn't for everyone)."

I agree with this portion of the post. Is this thought a part of a larger wealth building strategy?

I would also be sure to check in with a couple lenders and make sure they will qualify you for another mortgage. The banks are being so conservative that it's important that you research it now so you aren't disappointed down the road.

[gooddecisions]

We have two other rentals breaking even, but the tenants know they are getting a good deal- so they are low maintenance. In both scenarios it was easier to rent than sell and we are lazy. I'm really indifferent about being a landlord and have always thought it was a waste of time if there is no positive cash flow. But, in the past- I had focused soley on short term and hadn't considered the end game numbers Phil posted for long term rentals.

We are financially secure. I'm intimately familiar with the lending guidelines and don't anticipate any issues even if it doesn't get sold and ends up unoccupied.

Since neither option is particularly desirable, we will probably just sit tight and make do. But on the other hand, I do predict at least a 3 year flat market- so might as well just move out and try to find a good deal on the next home. I guess it may depend on if there are renters or buyers interested and which option is easiest.