Sell or keep rental house?

[EdithKeeler]

My tenant's lease is up the end of July. He's been an awesome tenant, and if he wants to renew his lease, I will do it again with a minimal hike in rent--probably just $25 or so. Seriously--this guy is as clean as can be, takes care of the yard, is apparently super quiet--he's lived there 5 years and was late with the rent (1 day) only 1 time. So, that's a given--he wants to stay, he stays.

BUT... if he decides to leave me, I'm thinking about selling the house. This house was my house when I lived in TX, and when I had to move, the market was terrible and I would have been upside down if I sold. But, that was 6 years ago, and the house has gained back all its lost value and then some. I currently rent it for $1425, and I pay the management company $142.50 a month. I'm very happy with the management company, even though they cost a little more--there are some services built into that higher number that I'd have to pay for with another company.

If I choose to continue renting it out (assuming my tenant doesn't stay), realistically I could get a higher amount in rent, probably around $1700 or $1800 a month--IF i do some upgrades to the house. (My house is vintage 1972--avocado tile in bathroom 1, harvest gold in bathroom 2), and has a typical 70's size kitchen. Everything is in REALLY good shape... it's just dated. It's probably going to need a new roof in a few years--5 or maybe a little longer, and I'm probably going to have to start replacing appliances before too long. I put new HVAC in 2006, so we're good for a bit there, and the water heater was just done

Right now I owe $95K on it, and I've got about $125K equity in it (not counting taxes I'd have to pay or realtor costs). Call it $100K after that, I guess. Mortgage payment including taxes and insurance is $923 a month; I actually round up my monthly payment to $1000. I refinanced a couple years ago, so I have 24 years or so left to pay on it.

I could update it and rent it for more.... but it would take a while to see a ROI on any updates. I'm figuring if I put in $10K to fix up the bathrooms and kitchen a bit and probably flooring, it's going to take 33 months to break even. I'd probably make a little more money if I went to sell it after I fixed it up... but my realtor is telling me 10K-15K more or so if I update, so not SO much. I've thought about updating a little bit between tenants--like if current tenant leaves, I could spend less money and just do the kitchen, and then the bathrooms between the next tenants... but I probably wouldn't get significantly more rent.

I'm really tempted to just sell it and invest the money. Even if my return is only 4% or so--a very conservative estimate--that's about what I'm making now--but I make a lot less if I have repairs. I'm really not quite sure how rental expenses fare under the new tax law.

I'm really thinking I might sell it.... but I'm also a little afraid I might regret selling down the road, for a few reasons. One: having the house in Dallas gives me a place to move back to, and in the back of my mind, I'm thinking I'd like to go back, and live there at least part time, once i retire. Two: it seems like I'd be giving up an income stream. Sure, I'd have interest if I invested the money.... but the house is an asset that gives me diversity that I don't otherwise have (I also own the house I live in... it's small and not exactly appreciating significantly, but it is cheap. Worth about $70K and not inclined to significantly increase in value. But--no mortgage). And it feels a bit like killing the Golden Goose. Once it's paid off (likely much sooner than the current 24 years), it's a significant amount of income every month. I think it will increase in value some over the years, but I don't think it will double in value or anything, and I suppose there's a risk that the neighborhood or the city could change.

So--sell or continue to rent? And, if I continue to rent it out, should I bother with any upgrades (my thought is no. The house is in a pretty desirable area in terms of access to different parts of the city, and I'm pretty certain some people will put up with olive green tile during their morning shower because of the location). It's also a 4 bedroom, which people like as well.

Appreciate the wisdom of the crowd here.

[Peanut]

I'll let others crunch the numbers...
All I can say for certain is I would definitely not update if it's not actually necessary condition-wise. Some people actually like retro looks and it would be a plus for them as long-term buyers. Many renters especially men do not care about colors as long as the price is right.

If there are structural updates to the kitchen that would be advantageous that's something else. But there too I just think often what one person thinks is a good remodel another person thinks is a crime.

Like I dislike the whole open-plan concept and cannot believe when I see Victorian homes have their parlor walls demolished so they 'flow' into the living room. I don't trust any realtor's aesthetic taste or recommendations because if it were actually great they'd be an architect or interior designer. I would trust a home stager who can make odd colors exciting, however.

As for selling if you think you may want to move back there definitely hold off for a while. Do you plan to keep your current home? If not, then again, maybe don't make a quick decision even if you have to look for a new renter.

[Mister Imperceptible]

Keep it.

The stock market is overvalued.

You have an alternate income stream that you can more easily calculate. You understand the local market, and you have it in a good location as you say. Who knows what the stock market is going to do. Stocks have more room to go down than up. (Take a look in that “Rate of Return on Everything from 1870-2015” thread. Housing has better risk-adjusted returns than stocks.) Plus you’d be paying taxes if you sell.

You actually have a position I envy. You have two properties, and only one mortgage, which you can either pay down early or keep as an inflation hedge. If you refinanced in 2012 your rates should be spectacularly low. (Short-term interest rates are rising. If they rise much more, your cash could be earning almost as much interest as you are paying on the mortgage.) Plus, the house itself is a real asset and itself an inflation hedge.

Even if we have a stock market crash/housing bubble burst, nothing can force you to sell. Just hold on and collect the rent checks.

Geographical diversification. (You’re in Memphis right?) As you said you have the option to go back, it’s nice to have that flexibility. I like the long-term prospects of price appreciation for housing in southern cities, and Dallas has a robust economy. We Yanks with any sense are looking to get out of this abysmal cold. I already have a rental in Raleigh.

Unless you’re some rock star stock picker or have some other fantastic alternative, I would keep it.

[jennypenny]

@EK--I'm not a fan of real estate in general, so my gut reaction is to sell the house to shed the responsibility and liability. Realistically though, it's a good diversifier of income as well as providing a place to move should you need to/want to at some point.*

If you sell, you'll get a good price for it because the real estate market is good, but then you might not have a great place to put the money for a while since the stock market is so hot. If you hold onto it, you might end up selling for less later on but get a decent income from it in the meantime. It's probably a push, which for me would mean doing the thing that provided the most options (in this case, keeping the house).

*Where does BF live? I'm sorry, I don't remember.

[Riggerjack]

You have a great renter, and a house to put him in. That's a great combination, I wouldn't break it up.

I have a great house, with great renters. The way I worked this out was to remodel a classic Craftsman, and all my leases are set to adjust for inflation, once per year. This is so the tenants feel like the rent adjustments make some kind of sense, rather than an arbitrary upcharge. In the Puget sound, housing increases far faster than inflation, so after a few years, they can't move without incurring a large rent increase.

If you decide to keep it, I recommend you take a similar approach. A good tenant is worth some effort to keep.

Now my current tenants are trying to buy the house. This is about an ideal solution. No realtors fees. No coordinating moving dates, minimal hassles. If you do decide to sell, talk to your tenants, and see if you can work something out with them. They know and like where they are, so they are ideal buyers.

But if it were me, I would keep it, and talk to the tenants about maintenance issues. Good tenants tend to be very good about onsite maintenance management. Which means they can save you management fees.

Then re-evaluate when the house is vacant. Also, with the prevalence of flipping shows out there, we have fixers selling for more than is justifiable when you consider what it will cost to fix it up. Buying a 300k fixer that will be worth 400k when completed doesn't make sense if the fixes will cost 100k and months of work. Worse if it'll cost 200k. So consider allowing someone else to have the full remodel experience.

[EdithKeeler]

You have a great renter, and a house to put him in. That's a great combination, I wouldn't break it up

Yeah, I agree. Ive already decided I will not do anything if he renews his lease.i have thought about offering it to my tenant to buy, but I don’t think he can qualify for a loan—his mom had to co-sign on the lease (he’s in his 40’s). I’m not quite sure what my tenant’s deal is, but I think he’s got some issues.

In an interesting (ironic? Serendipitous?) turn of events, I received an email from my mgmt company this morning. There have been some recent bad hail storms around Dallas, and they sent the roofing company to inspect. Apparently I need a new roof BC of the hail damage! So.... for the cost of my deductible, the roof issue will be addressed for now.

I won’t change the management situation I have right now if I keep the house. I’m 8 hours away and I can’t address maintenance stuff and don’t want to deal. Not worth the extra $142.50 a month for the hassle.

@jennypenny, yes, DBF is in Texas. He stops by my house from time to time when he’s in the area to peek at things.

[7Wannabe5]

I agree with everybody else. Keep the house, but if you decide to sell don't remodel. The smartest piece of advice I ever got, but didn't take was "Just clean it for a year." Anything "vintage", even if well-worn, can look pretty good if given thorough detailed scrubbing and whatever basic functional fixes are required. Like somebody walking in would think "Wow, some old Russian grandmother who got down on her knees in rolled support stockings every morning must have lived here with her sturdy son who walked around constantly wearing a tool belt!"

[wood]

From a numbers perspective I like to look at annual return on equity. You have 100k equity in the property. What is the annual profit? (Rental Income minus all costs excluding loan downpayment). Let's say your profit is 5k, which translates to a ROE* of 5%. Compare this to the return on your other Investments. If you can make more elsewhere, sell**. Put in other words, where will you put the money if you sell?

*Note that you can manipulate the ROE number by reducing/increasing equity in the property (leverage/deleverage the loan).
**Assuming the tenant moves out. If he stays, keep it.

I'm currently in a similar situation and have decided to sell in 2019, because major upgrades are needed within the next 5 years (which will hurt ROE heavily). RE market also seems to have peaked a bit.

[Seppia]

I'm not a real estate expert so I'll let other comment about the numbers.
Few comments:

- I agree with all the others, if the tenant renews, definitely keep him/her and don't sell (unless it's to him/her)
- I personally don't like to own real estate, but like you I like the idea of having a place to go back to in case SHTF or retirement.
If the tenant moves out, you could consider selling this house and buying something smaller, all cash, maybe in newer condition (so lower maintenance costs, lower taxes, etc)

[IlliniDave]

I would be inclined to say keep the house until/unless you decide moving back to the area is not in the cards. That's coming from someone disinclined to own rental properties, even local ones. On the flip side, finding even a 4% return is far from certain right now, so selling would be more about convenience/streamlining than it would be about faster wealth building.

[J_]

Good advice from your fellow Americans I think national/state/town/local knowledge is the best.
Here I Europe (Netherlands and England) I have kept several real estate objects. No loans. Apartments and one office used for (civil/medical) services. With the apartments I saw the big difference between a good loyal renters (most) and a cheat. The cheat kept me busy until he was expelled. Because of the chance I got another cheat I decided to sell all of them (12) in the course of 7 years. The office building I kept for about 20 years with only two tenants, and sold it with (good) profit. The rent (indexed) during these 20 years was almost enough for my yearly expenses during those years.
My conclusion: A good, well located and sufficient maintained house or office building can be a good investment as long as you succeeds in finding reliable, long staying tenants. So if you keep it, pay a lot of attention to find such a tenant. A good method used Rube, described in his journal. He does not use an Agent. See there.

[TheFIminator]

Doing some very quick numbers in my head, you seem to be making positive cashflow out of this property. if that is correct, I would suggest keep it as its not costing you anything. You also have good equity in it. So you could perhaps borrow off the equity to buy another cheaper property and see if you can replicate the situation and get more cashflow. Of course you will need to assess your own situation and the area you buy in.

But the fundamentals of having a cashflow property or two is a good one. If the market crashes, you will still have income coming in and the interest rates might even go down, giving you more cashflow.

[EdithKeeler]

Yeah.... I want to get out of the landlording business. It was the right thing to do at the time—I would have lost way too much money if I’d sold. But at this point I feel like I have a significant amount of money tied up there, for one thing. And as good as my mgmt company is, I still have to deal with this house from time to time and it’s really more hassle than I want. (My goal: zero hassle life!). I’ve won the lottery with the current tenant; I’m sure I’d not be so lucky next time.

I’m pretty sure I’m going to sell “as is” if tenant doesn’t renew; if he does renew I’ll push the decision off to next year.

Thanks for the input—I wanted to make sure I was considering everything and you guys have helped.

[BackOfTheEnvelope]

Given that it sounds like you'd like to sell at some point in the not too far future and that you're not gung-ho about risk, I'd be inclined to lock in the profit and sell now. I wouldn't want to be stuck holding through another crash/rebuild cycle.

Just $.02 from the new kid on the block.

[wheatstate]

As RiggerJack was saying, selling to a tenant can be ideal. No vacancy, minimal repairs/updates, minimal/none real estate costs. Mentioning a price and a timeline has always been a good discussion with my tenants. Some jumped and some didn't. The conversation always helped me understand my options. There is a good chance there is a bank that will issue the loan especially if there is time.

For taxes, you want to move back in for two years and do the updates as rental damage fixes, or do a 1030 exchange into a equal or larger value rental.
For diversification, the steady income is great.
For simplification, selling is great.

Best of luck.

[TheFIminator]

You also have good equity in it. So you could perhaps borrow off the equity to buy another cheaper property and see if you can replicate the situation and get more cashflow.

I'd avoid overextending right now. The market is really high again. I knew a few people who used equity to overextend and ended up getting wiped out in the last crash. They had one really nice house, used the equity to buy 2 more rentals, and lost all 3 and declared bankruptcy.

I agree you have to be very careful not to overextend and I also know lots of people who went bankrupt by doing this. However, it depends on how you do this and how much you extend. Each personal situation is different of course but if you maintain equity-to-debt ratios that are strong enough to weather a storm, you should be ok as I was. My main point was that rental income continues to come in usually through tough times as well as people have to live somewhere. If you had the the same sum of money equivalent to the value of the rental property, in shares, you would have a lot more losses to deal with in a GFC type of event.