Sell house or rent it?

foxygirl346 · December 2015

We are looking to sell our townhouse in the next year and buy a single family home for around $400k. We currently have about $35k in debt (30k student loans, 5 car loan). I want to pay off more debt in the next year but hubby says we need more cash for the down payment (he is more about savings where I am more debt averse). We have about 30k in savings. So my question is what factors financially would help you determine whether to sell your house or rent it out. We bought at the height of the market but have since refinanced. If we sold our house today we would get $225 and owe around $195k. The market is turning here and hubby wants to rent till we can get mor eout of the house. We can rent it for a little more than our monthly payment of $1432. Thanks for your thoughts.

blondie42107 · December 2015

There are a few people on this board that have income property so they will be really helpful!

The things that come to mind with me is getting prices on your home insurance, because that will change. Same for your property taxes, I'm assuming. In my state, if you own a home/property and it's not your primary residence, the taxes can increase quite a bit.

CuriousKiddosMama · December 2015

I would not rent if you can barely cover your costs. There are too many factors involved in a rental property that can make things go bad too easily. Your insurance will go up for sure.
Couple scenarios that can easily happen. You need to decide ahead of time how/ if you want to deal with these.
1. What happens if the house sits empty and unrented for 6 months? Vacant property insurance is super expensive, and can you cover both mortgages?
2. What happens if your renters move in and trash the place? You were barely covering the mortgage and now the condition of your property is worse than when you started so you will get less on the market. (Make sure you screen you renter very carefully, which means you may need professional help with this, which generally costs first months rent plus up to 10% each month) and even professional help doesn't mean you won't have a bad experience.
3. What happens if a major system goes out in the rental? In both houses close together? You have a good savings account now as a buffer but it also sounds like you are using that as a down payment so it won't be there.

Honestly, I wouldn't do it. We ended up renting my house when dh and I got married. The first experience was a nightmare (supposed to be a couple with their 2 teenage kids. My realtor never asked for proof on the 'kids' and they were college students who moved in without the parents. It was a frat/party house for a year. And we were making several hundred a month on the house, but the net after damages was 0.
My next experience was much better, I had a friend move in and he took impecible care of the house like it was her own.
We are currently selling the house (the only reason we ended up renting was because we had a sale that dragged on for months finally fall through and decided to try this route). Due to bad luck trying to find a good renter, and then 2 offers on the house falling through it has been vacant since mid-August. We don't even have a mortgage anymore on the house and it's still costing us a minimum of $4-600 a month. Mostly this is taxes and insurance. Our current vacant home insurance was $1000 for 3 months! I never imagined it to be that high, but there is huge risk for insurance companies when a house isn't lived in is what I was told.
Feel free to ask me any queations, but honestly the short answer is if you can only cover your expenses, not make significant $$ every month, there is no way I would rent. Sell it and move on!

simplyelise · December 2015

You need to think about how much maintenance would need to be done to the townhouse over the course of the time it's rented out. You also need to look into the rental market in your area and see what places are rented for and get a feel for how quickly it moves. IIRC, most land lords put about 10% of the monthly rent amount aside for small repairs and large replacements as well as to cover the empty months between renters. And if you have any friends or acquaintances who are landlords, see if you can pick their brain and determine if it's something you'd like to do or not.

But from what you've said about being debt averse, it seems like you wouldn't want to have one mortgage of around 380, another mortgage of around 190, and around 30k in other debt. That is quite a lot of risk.

Before getting a home, especially one that is so expensive, I would want to have at least 40k saved for down payment & closing costs and a separate 6 months of expenses (including the estimated mortgage for the new house) saved up. If you guys can get that much saved before you buy the new home, than I'd be okay with renting out the townhome. If you can't save that much but you really want to be landlords, I'd wait to buy until you have that saved up. OR I'd give up the landlord idea and just take what you can out of the townhome to help you save for the 400k home.

As a last note, consider the housing value trends where the townhome is. In my town, home values only rise about 1.8% a year. You pay more than that amount in interest and insurance. It might also be the case that in your town, "waiting to sell until you get more out of it" is a misnomer. You may get more out of it, but you probably won't get more out than you pay in during the intervening years. Unless you're in a market that you expect to really jump largely in home values, it probably doesn't make sense to turn it into a rental if that is your only reason for doing it.

orangehills · December 2015

I would sell. We just sold what would have been the perfect rental house, because, well for one we used the money we got out of it as our new down payment, and we wouldn't have had enough to cover both mortgages and maintenance. If you don't make enough per month to do that, and it sounds like you only have enough in savings to safely take care of one place, don't do it. Moving is crazy expensive- you want a healthy savings after the down payment is gone for all the things that pop up!

JoanE2012 · December 2015

I would sell. If you're only getting "a little more" than your mortgage, doesn't seem like it would be worth the hassle (and potential for the house being unrented at times).

Also, you say you want to buy a 400k house and have 30k in savings - that's less than 10% down. Personally, I wouldn't put less than 20% down, but even if you sold it you wouldn't get there....but at least you could put 10% down and still have 20k in savings.

ETA - Actually, that 20k will be whittled down with closing costs and whatever else you would want to do when first moving in (ie new appliance? new furniture? paint?). I wouldn't be comfortable buying at that price point, even with selling the house. I'd save up more.

CuriousKiddosMama · December 2015

simplyelise said:
You need to think about how much maintenance would need to be done to the townhouse over the course of the time it's rented out. You also need to look into the rental market in your area and see what places are rented for and get a feel for how quickly it moves. IIRC, most land lords put about 10% of the monthly rent amount aside for small repairs and large replacements as well as to cover the empty months between renters. And if you have any friends or acquaintances who are landlords, see if you can pick their brain and determine if it's something you'd like to do or not.

But from what you've said about being debt averse, it seems like you wouldn't want to have one mortgage of around 380, another mortgage of around 190, and around 30k in other debt. That is quite a lot of risk.

Before getting a home, especially one that is so expensive, I would want to have at least 40k saved for down payment & closing costs and a separate 6 months of expenses (including the estimated mortgage for the new house) saved up. If you guys can get that much saved before you buy the new home, than I'd be okay with renting out the townhome. If you can't save that much but you really want to be landlords, I'd wait to buy until you have that saved up. OR I'd give up the landlord idea and just take what you can out of the townhome to help you save for the 400k home.

As a last note, consider the housing value trends where the townhome is. In my town, home values only rise about 1.8% a year. You pay more than that amount in interest and insurance. It might also be the case that in your town, "waiting to sell until you get more out of it" is a misnomer. You may get more out of it, but you probably won't get more out than you pay in during the intervening years. Unless you're in a market that you expect to really jump largely in home values, it probably doesn't make sense to turn it into a rental if that is your only reason for doing it.

I have to say that the wait to sell until you get more can be a complete and total lie/misnomer. In the 5 years between trying to sell our house the first time, and it now being under contract, the house was listed for 10k more. Not worth the hassle for that either!

brij2006 · December 2015

Ask yourself this. If you had an extra $225,000 laying around, would you buy this property to rent it out? If the answer to that is "no," then sell it.

The others have made a few notes on this, but you stated that you have $30k in savings. Make sure you have enough for 3-6 months of living expenses, including this new mortgage payment. That should be separate than the down payment amount that is saved.

Me personally, I'm debt adverse. I would actually take the $30k and pay off the student loan and car. Then would start rebuilding the savings to 6 months of living expenses, then start working on saving up for the down payment on the next house. However, I would also include the $30k in equity from your current home, when it comes to figuring up how much of a down payment you have. Would actually probably only consider it $20k just to be safe, after closing costs and commissions.

julieanne912 · December 2015

I agree with everyone who suggest selling it.

We actually were dealing with the same issue... we had a home with about $50k in equity, and the market here in Colorado only continues to go up. We could have held onto it longer and rented it out and actually make about $500/mo on it (mortgage was $1400, we could have rented it for around $2000). But in the end we decided to just sell it and put the money towards the new house (it meant we could buy a more expensive house), because being landlords can sometimes turn into a part (or full) time job. We weren't willing to take that on at this stage in life.

Consider the time involved when renting a house:

1) Time to prepare house for sale (most renters, especially in a higher price point like yours, expect clean carpets, new paint, etc)

2) Time to meet prospective tenants to show them the property (this could be all hours of the day/evening)

3) Time to screen each tenant, ie... submit for credit checks etc.

4) Once a tenant is in, time/money to fix things that might break. Most tenants don't care for a home like you would as the owner, so you'll still have to go in and do the regular maintenance you do when you owned it.

5) You get to do this all over again when your tenant decides to leave... so even if they sign a lease, they could leave a year later and you have to spend all that time/money again.

6) The money involved to cover the cost of the mortgage when you have no tenant.

As others have mentioned, you also have to consider the time/money involved if a renter doesn't pay their rent, which means court/legal fees, and the long process of eviction. You also have to consider the cost/time involved if a tenant trashes the house. Can you afford to pay that mortgage payment if your townhouse sits empty for 3-4 months while you repair it?

You could also hire a property management company but their fee would likely cause you to lose money if the rent is barely covering the mortgage.

Lastly, side note: 30k is not much when you're looking at a 400k house. Consider all the closing costs when thinking about your down payment. Also there's always work (in this case work=money) to be done when moving into a new house. We bought in a new development, and we actually already have a neighbor who put their house on the market because they didn't realize how much doing things like landscaping and furnishing a new house would cost them. The last thing you want to do is spend your entire savings to buy the house and be completely cash poor once you're in it.

jtmh2012 · December 2015

foxygirl346 said:

We are looking to sell our townhouse in the next year and buy a single family home for around $400k. We currently have about $35k in debt (30k student loans, 5 car loan). I want to pay off more debt in the next year but hubby says we need more cash for the down payment (he is more about savings where I am more debt averse). We have about 30k in savings. So my question is what factors financially would help you determine whether to sell your house or rent it out. We bought at the height of the market but have since refinanced. If we sold our house today we would get $225 and owe around $195k. The market is turning here and hubby wants to rent till we can get mor eout of the house. We can rent it for a little more than our monthly payment of $1432. Thanks for your thoughts.

Personally. I'd stay put for right now. Get the student loans paid off and get your down payment saved up. 20% of a $400,000 house is $80,000. Even if you completely used your $30,000 in savings and the $30,000 from the current value of the old house and your loan value, you're still short $20,000 and you'll have no emergency fund. And that's being generous. You won't see the $30k difference between the listing price and the loan value. Chances are the buyers will talk you down, then there's the agent commissions, etc.

Just as a side note, the car loan worries me less. And this is why.....assuming a standard 15 to 30 yr mortgage, some time during that, you'll probably need to buy a car. So you need to leave room for that in your budget.

short+sassy · December 2015

brij2006 said:

Ask yourself this. If you had an extra $225,000 laying around, would you buy this property to rent it out? If the answer to that is "no," then sell it.

The others have made a few notes on this, but you stated that you have $30k in savings. Make sure you have enough for 3-6 months of living expenses, including this new mortgage payment. That should be separate than the down payment amount that is saved.

Me personally, I'm debt adverse. I would actually take the $30k and pay off the student loan and car. Then would start rebuilding the savings to 6 months of living expenses, then start working on saving up for the down payment on the next house. However, I would also include the $30k in equity from your current home, when it comes to figuring up how much of a down payment you have. Would actually probably only consider it $20k just to be safe, after closing costs and commissions.

I do own rental property and agree with the other PPs that you are better off selling it. I think @brij2006 said it best with the bolded. Here is the general formula I use when analyzing a property I am thinking about purchasing as a rental. But it will work the same way for considering renting/selling your house. I'm going to make up the numbers I don't know, just to give you an example:

Rent: $1600

Mortgage: -$1432 (I'm going to assume you already have taxes/insurance in that payment)

Future Vacancy (8%): -$128 (An 8% rate assumes a one-month vacancy per year)

Maintenance (10%): -$160

Monthly Cash Flow: -$120

As you can see from my example, you will be losing roughly $1440 per year to hold this house. And that's assuming you can manage it yourself and have decent tenants who don't cause much damage and don't need to be evicted. Which, to be fair, is usually the case.

I pretended your insurance and taxes won't change, but it could. No offense to the other PPs, but you are actually more likely to have your insurance go down some because contents are not included in a homeowner's policy for a rental house. But check with your insurance agent. However, if you have a Homestead Exemption for your home, your property taxes will go up. And could go up significantly. If you don't have a Homestead Exemption, they will probably remain the same.

As for vacancy, unless you live in a rural area or have your rental amount priced wrong, you shouldn't have more than one month...two at the most...between tenants.

short+sassy · December 2015

Oh! I also wanted to add the extra importance of having an e-fund, or at least a good sized line of credit, if you are going to rent your house out. Because any necessary repairs or replacements...like if the heat goes out or the oven breaks...need to be fixed asap. It is a greater responsibility than for your own home.

Also, check out if you live in a state/area that tends to be landlord-friendly or landlord-unfriendly. If you're comfortable sharing what state you are in, I can probably tell you. Off the top of my head...CA, NY, NJ, MA...very landlord UN-friendly. In a worst case scenario, it can take months to evict someone and you usually need to hire a real estate attorney. TX, Louis., MS, FL...landlord-friendly. Evictions take no longer than a month, if that, and can be DIYed.

Erikan73 · December 2015

If I were in your position I would sell the home when you go to purchase a new home. That is based on the things that you have to take into consideration stated by other posters. You would still end up ahead.

AprilZ81 · December 2015

Another con of renting out your home is that once it becomes a rental property you may be subject to capital gains tax when you sell it since it is then an investment and not your primary residence.

I think you should sell it.

foxygirl346 · January 2016

Thank you all for the great feedback. It provided alot for me to think about and after talking more with DH we agree and plan to sell. We are working on building the efund and downpayment. We have been in heavy debt pay off mode and I only work part time (2 small kids at home) so we dont have alot of cash on hand. A few bonuses and large gifts from family have come since writing this and we are closer to what we need. Thanks again! Your words were helpful, constructive, and thought provoking.

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