Money Matters
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Our tech team has launched updates to The Nest today. As a result of these updates, members of the Nest Community will need to change their password in order to continue participating in the community. In addition, The Nest community member's avatars will be replaced with generic default avatars. If you wish to revert to your original avatar, you will need to re-upload it via The Nest.
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WWMMD? Rental house question
This may get long, I'm sorry.
We have a rental house. It was my first home bought before we were married. The past 2.5 years it was rented to a friend of mine and we had no issues, before that we had it rented through an agent and it was a nightmare. It is not in the best neighborhood around and so that affects things. We've had it on the market for 3 weeks, which according to my agent at this time of year right before school starts we should have a TON of showings. We aren't. Today we are dropping the price of the rent to see if that will help us find somebody. My realtor has warned me though that if we have to drop it too much more, we most likely aren't going to get a good tenant. Or that they are a lot harder to find in that price range around this city.
So here's my dilemma. The house is paid for, on average we are making about $1000 a month. Minus expenses that gives us about a 10% return on our initial investment every year, which is pretty good. When we can get it rented. (And I"m not panicking here yet, but I will be in about a month.) We can probably sell the house right now for 110-120,000 because the market is so strong.
This $120,000 would pay off our current home we are living in..... (And I'm a Dave follower for the most part). So what would you all do? Selling would tighten our budget a little bit, but its liveable. And I may have screwed up the math on that, I need to double check. Our budget may just be a little tighter because I'm looking at our post baby #2 budget.
So what would you guys do if you were in this situation. A paid for home is really appealing to me, but the investment and diversification is also appealing. Thanks in advance.
Edited to add: This was a house we never intended upon keeping. We had a sale fall through, and ended up renting it as kind of a last resort.
We have a rental house. It was my first home bought before we were married. The past 2.5 years it was rented to a friend of mine and we had no issues, before that we had it rented through an agent and it was a nightmare. It is not in the best neighborhood around and so that affects things. We've had it on the market for 3 weeks, which according to my agent at this time of year right before school starts we should have a TON of showings. We aren't. Today we are dropping the price of the rent to see if that will help us find somebody. My realtor has warned me though that if we have to drop it too much more, we most likely aren't going to get a good tenant. Or that they are a lot harder to find in that price range around this city.
So here's my dilemma. The house is paid for, on average we are making about $1000 a month. Minus expenses that gives us about a 10% return on our initial investment every year, which is pretty good. When we can get it rented. (And I"m not panicking here yet, but I will be in about a month.) We can probably sell the house right now for 110-120,000 because the market is so strong.
This $120,000 would pay off our current home we are living in..... (And I'm a Dave follower for the most part). So what would you all do? Selling would tighten our budget a little bit, but its liveable. And I may have screwed up the math on that, I need to double check. Our budget may just be a little tighter because I'm looking at our post baby #2 budget.
So what would you guys do if you were in this situation. A paid for home is really appealing to me, but the investment and diversification is also appealing. Thanks in advance.
Edited to add: This was a house we never intended upon keeping. We had a sale fall through, and ended up renting it as kind of a last resort.
Re: WWMMD? Rental house question
Ac is new from 2 years ago. There are no major expenses coming up that I can think of. House was built in 2004, so not very old.
Neighborhood has become a low income neighborhood because there were a ton of for closures when the market crashed several years ago. It was also poorly planned. It is based on an alley way system, with no parking, so if you have 3 cars one has to be parked on a more major street in the neighborhood. The schools are also not the best, but they are building a new high school so that may appeal to some buyers.
We are currently in a sellers market, so that is appealing. We could get a premium for this house now.
Never planned on being landlords, it just kind of happened. It completely sucked with the first lease (parents leased it for their college kids who pretty much turned it into a frat house) but with my friend in there the past several years it has been great.
And no, to answer Daves question, there is no way in hell I would take a mortgage on my house to buy this rental.... Which is why this is such a toss up. It is good income, but a paid for home means a lot.
I would probably try to sell it instead of renting it since you said it's not in the best of neighborhoods anymore. If things continue to get worse, you'll have a harder and harder time getting good tenants or trying to sell it. I would get out now.
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Do you think real estate in that area may continue to rise, or do you think it may fall? If the area is on the upswing with the new high school, it may be worth hanging on to the property a little bit longer to get even more out of it.
Otherwise, it sounds like selling makes much more sense, especially since you have had bad tenant experiences...just not having to worry about it anymore sounds like a relief.
This isn't a Dave Ramsey thing, but just throwing out another option to consider.... If you sold the rental, refinanced your home to a 30 year mortgage (which would probably compensate your loss of rental income), and invested that money, you would have nearly $1 million and a paid off-home in 30 years...and that is if you didn't put another penny in retirement (not recommended). With interest rates so low right now, you would be working the market to your advantage and cashing in on years of compounding interest. However, even if you don't do this, you are still doing great with an extra $120,000 to your name. Congratulations!
As an aside, I currently have the other half of my duplex up for rent and am having a much harder time getting it rented out than I ever have before. And supposedly there is a rental demand in my city. Sometimes it just happens that a rental take a longer time to be rented out. It sucks big time and I feel your pain!
I also wanted to adjust your math. You are only subtracting the "hard" costs from your rental amount. But, for your analysis, there are soft costs you need to consider as well...like repairs, capital expenditures, and vacancies. A good rule of thumb is also subtract from the rent amount 8% of the rent for vacancies...like you are experiencing now...and 10%-15% for repairs/capital expenditures. 8% for vacancy is equivalent to one month per year being vacant. Sometimes you do better than that...like you have for the last couple years...but on average you'll have about one month of vacancy per year of rental.
Even if the house is in good condition now, repairs are a fact of life and should also be accounted for in analyzing a rental house. Maybe you go five years and only need to replace a couple small things (repairs)...but then the roof (capital expenditure) needs to be replaced. To make the math easy, if you put aside 8% for vacancies and 12% for repairs/cap ex., you should subtract another $200 off your cash flow.
Also, it sounds like you are using an agent to rent it out? Divide that cost by 12 and subtract that away from your monthly cash flow.
Of course, since the house is paid off, you still come out ahead. But would you rather have $400/month in rental income or sell in a good market and then not have to pay the mortgage for your primary home?
Unfortunately, neighborhood and schools is a major deciding factor both for renters and home buyers. Like another PP asked, is the neighborhood on an upswing or a downswing? Or do you think it will stay stable? If you think it is more likely on a downswing, I'd definitely lean toward selling. It will just get harder and harder to rent out (or sell) as the neighborhood goes downhill.
Another option for finding a renter is have you considered (or do you) accept Section 8 vouchers? Section 8 is a national housing assistance program. Typically, the renter pays a small portion of the rent and Section 8 picks up the rest...and automatically deposits the money into your checking account every month. Section 8 tenants often get an undeserved (IMO) bad rap but, really, there are awesome Section 8 tenants and there are horrible ones, with the majority being fine...just like anybody else.
Pros of Section 8 are it opens up your rental pool and you might even be able to get more rent. Also, Section 8 tenants tend to stay longer term than non-Section 8 tenants. Cons of Section 8 tenants are they tend to be harder on rentals, which can result in more maintenance/repairs. You also have to deal with some bureaucracy. Your house will need to be inspected before a Section 8 tenant moves in and there are also yearly inspections. But, if the house is in good condition, this shouldn't be that big of a deal.
To sum up my long post, lol. Since landlording isn't really something you wanted to do anyway and it is a good selling market, you should probably sell. Maybe if you think the neighborhood is on an upswing it would be worth it to you to keep it. Maybe, but that would be up to your own goals and comfort level.
We've pretty much decided to give it 2 more weeks, and then post it for sale. Pp you had an excellent point about costs, I had not figured those in and that does decrease what we are making every year. I Had already figured in realtor fees (on market for $1350/month)
Thank you all!