House Advise: To Sell or To Rent?

[wade moore]

This thread: http://dynamic.gamespy.com/~fof/foru...ad.php?t=39534 .. Made me decide to post a dilemna that I may have here in the near future and get some advice from folks smart and wiser than myself...

I currently live in Williamsburg, VA. I bought a home in August, 2004 for $130,000.

I am going for a final job interview in the DC Area (Falls Church, VA to be exact) that would include a substanial increase in salary (and cost of living). If I get the job, I intend to take it and move to the DC Area. When I move, I will want to buy a house relatively quickly do to the quickly increasing housing costs. My intention is to move a bit away from the city (45ish miles away from Falls Church) and get a loan for no more than 350k-375k. I currently have very little saved up for a down payment, although with this job I could save a small portion of cash between my move and when I actually buy, but only in the 5% range.

So, here is my big decision:

Rent or Sell?

Do I rent or sell the house in Williamsburg? The house is 75 years old, on a half acre lot, 1,400 sq ft, 3 br, 2 bath, and is in an 'established, traditional' neighberhood. The value is VERY difficult for me to determine, because of the fact that it is so old and there are very few houses that are close to it. Houses that are 1,200-15,00 sq ft and were built from 1955-1970 seem to be ranging from 125,000-190,000 on the market (for sale price, not sold price). When I bought the house it was appraised at 138,000. There were some signficant cosmetic problems on the interior in addition to needing a major paint job and windows. I have fixed most of the interior problems (and would fix them all before i rented or sold) and intend to replace the windows and paint (or have vinyl installed) the exterior before rent or sold.

The rental market in Williamsburg is good, particularly because of the college in town. Worst case, we could always get college kids to rent. There is a house across the street that is about 1,200 sq ft, 2br, 1 bath with a much smaller yard (but the house is only 10 years old) that rents for $1,200 a month. My mortgage payments (with tax and insurance) is about $950.



Thoughts?

[Balldog]

When I was selling my house last summer I had a lot of people ask if I would just rent it out. I didn't because I didn't want to worry about someone doing damage to the place and I also didn't want to deal with the maintenance of an additional place.

The house I was selling was only 3 years old though.

Your situation sounds more feasible to rent though, the renters in the town I was living were typically single moms with 2-3 kids with a lower income.

[stevew]

Maybe you try to "Lease option to buy" your old place? Figure you might get like 2-3K out of someone for a 1-2 year lease option and lock them in at like 1300 bucks a month, with 100 or so rebated to them at closing. That way the person you rent to would have a bit more invested into it, and would be less likely to mess it up.

[wade moore]

Originally Posted by stevew

Maybe you try to "Lease option to buy" your old place? Figure you might get like 2-3K out of someone for a 1-2 year lease option and lock them in at like 1300 bucks a month, with 100 or so rebated to them at closing. That way the person you rent to would have a bit more invested into it, and would be less likely to mess it up.

elaborate? I've never heard of this.

Is this basically like a "rent to own" on a TV? Someone does not have enough money to buy now, so they rent for a couple of years and then buy at the market standard at the time they buy?

[stevew]

I'm not a real estate agent or anything, but ive been looking into various things of late, in order to perhaps purchase some properties.

This link might be helpful, http://www.reiclub.com/articles/sell...-lease-options

Selling one of your properties on a lease-option gives you the biggest benefits of renters and buyers without the downsides that normally go along with selling or renting out your property.

When you lease-option your property you get the best parts of having a renter: monthly streams of cash-flow, tax benefits of maintaining ownership, loan amortization, and a healthy chunk of the future appreciation. You get all this without having to deal with the headaches and hassles of traditional renters.

When you lease-option your property you get the best parts of having a buyer: a large chunk of money as an up-front option payment, someone else who will take care of the day-to-day maintenance of the property, and a large profit when your buyer gets a new loan on the property and cashes you out.


Here Are the Four Steps to Sell Your Property Using a Lease Option:


Step One: Spread the Word

There are three magic words to help you find your tenant-buyer for your property. These words go in bold, large print in all your advertising for the property. They are: Rent to Own. People instantly know what "rent to own" means and they also know they want it.

The two best places to invest in advertising your properties are your local newspaper and in signs around your property. Place a small classified ad in the "For Sale" section of your local paper. Also put a large "Rent to Own" sign in the front yard of the property. And put twenty to thirty signs around the neighborhood on all the major access roads leading past the property. These signs can be professionally printed, but chances are they won’t last long so do them as cheaply as possible. I have found that handmade signs on inexpensive posterboard work as well as the more expensive signs.

Both your classified ad and your signs should have the phone number of a voice mail box where you have recorded a 60-90 second message singing all the biggest benefits of the property and how easy the rent to own program makes for them to be able to own it. Use your voice mail as a screening device—ask callers how much money they have to work with as a down payment. When you run a "rent to own" ad your biggest problem will be getting too many calls! By screening callers through a voicemail box you will spend your time calling back only those who have a healthy sized chunk of cash to give you as their up-front option payment.


Step Two: Calling Back Prospective Tenant-Buyers to Set Up a Group Showing

Have you ever been faced with a prospective buyer who just won’t make up his mind about whether he wants the property or not? Or have you ever raced over to one of your units to show it to someone who just didn’t show up? There is a better way of doing it—group showings.

Whenever you can get several prospective tenant-buyers all to look at the property at the same time your property just became more attractive. You are creating a competitive environment and that means the person who wants the property needs to act fast or they will lose out to someone else. This competition will be your biggest aide to closing the deal.

The biggest mistake you can make when you are calling back the people who left their name and phone number on your property voice mail box is to invite them to a "showing" for the property. Instead set a definite "appointment" with each person to meet them at the property to have them take a look. Simply set each individual appointment all at the same time! This way not only are you creating that competitive situation, but you are also protecting your time since if two out of the nine people scheduled to meet you don’t show you still have seven people to show the property to.


Step Three: Get Them to Fill Out an Application on the Spot

Some people won’t want to hurt your feelings by saying no. Instead they will ask for an application and tell you they will send it in later. Don’t fall for this common pitfall. Simply tell them that if they are really serious about the property then they should take a few minutes and fill it in right there. Also make sure you charge $10-20 for each application. Not only will this pay for your credit check of each applicant, but it will also screen out those last few people who are not truly serious about the property.


Step Four: Choose the Best Person and Call to Give Them the Good News

Speed is of the essence here. If you have someone who wants to have the property who has a healthy option payment and good monthly income I recommend that you get a non-refundable deposit from them to hold their position to rent to own your property. You should collect this deposit as soon as possible. Of course you will make this agreement subject your satisfactory approval of their application (if they don’t pass your evaluation your deposit agreement should say you will return their deposit to them and cancel the agreement.)

This is how you market your property as a "Rent to Own" property. Next month I’ll explain how you can get above market prices and cash-flow for your properties. You’ll learn exactly how to price your "rent to own" property so it sells fast and makes you a large profit.

Then again, your property may be too expensive to do this on, but perhaps it would be something to look into.

[Raiders Army]

I heard somewhere that all of your rent money that you receive you must claim as income.

[mhass]

Originally Posted by Raiders Army

I heard somewhere that all of your rent money that you receive you must claim as income.

That's true. And depending on the equity you have in the house, you might approach the downpayment on the new house with the sale of the old one. In the end it comes down to whether you want to be a landlord that far away or not.

[JonInMiddleGA]

Depends on whether your wallet or your stomach rules the day, I think.

Off-hand, I'd say renting is the better economic move but selling is the better move in terms of not having yourself driven stark raving mad by dealing with the misery of being a landlord.

[wade moore]

Originally Posted by JonInMiddleGA

Depends on whether your wallet or your stomach rules the day, I think.

Off-hand, I'd say renting is the better economic move but selling is the better move in terms of not having yourself driven stark raving mad by dealing with the misery of being a landlord.

You paint such a nice picture ...

I'm still not 100% sold that it is the clear-cut economic advantage.. the logic being that some argue the house in the DC Area will increase in value faster than the one in Williamsburg.. therefore I'd be better off putting whatever profit I get off of the Williamsburg house into equity in the DC Area...

[Raiders Army]

I'd hold onto your property in Wiliamsburg. Who knows when a greedy tycoon wants to build a mall or road through your property and will pay meeeeelleeeeeons to buy your house.

[Raiders Army]

Oh, and buy the two houses adjacent to yours so that if anyone lands on your property they must pay double.

[wade moore]

I know you are somewhat joking... but...

That's what's going on around my house a lot.. there's a weird power grab between developers, the local winery, and the local regional airport...

[Raiders Army]

Originally Posted by wade moore

I know you are somewhat joking... but...

That's what's going on around my house a lot.. there's a weird power grab between developers, the local winery, and the local regional airport...

Oh, I was totally joking...but that sounds great! Probably the worst that could happen is they extend the airport nearer to your house and your tenants have to hear aircraft day and night.

[wade moore]

Originally Posted by Raiders Army

Oh, I was totally joking...but that sounds great! Probably the worst that could happen is they extend the airport nearer to your house and your tenants have to hear aircraft day and night.

Nope, it's a regional airport with little prop planes... they want to allow bigger planes, but not expand hours.. they really are just buying up property so that they can rent it out and not have anyone to say "no, you can't have bigger planes"..

[Samdari]

Originally Posted by wade moore

I'm still not 100% sold that it is the clear-cut economic advantage.. the logic being that some argue the house in the DC Area will increase in value faster than the one in Williamsburg.. therefore I'd be better off putting whatever profit I get off of the Williamsburg house into equity in the DC Area...

Seriously, if you can afford the down payment on a house near DC without selling the one in Williamsburg, and you wanted the economic benefits of owning a house and renting it out, why wouldn't you do that, AND sell the Williamsburg house, and buy a spare one in DC to rent?

[Dutch]

Wade,

I am a bit cautious when it comes to things like this. I wish you would have a better grasp on what you are getting yourself into in DC. That is a very expensive place to live. And if you are renting property on the side and something goes wrong, you will have to fix it.

So without a lot of capital just sitting around (that's an assumption on my part) you could find yourself in a tricky situation.

Just be careful not to get in over your head. At 75 years old, the place probably isn't gaining value at this stage with the exception of the land it is sitting on.

I would be more inclined to sell it and start fresh in Falls Church. A little extra money might be nice, but a little extra sanity is nice too.

[Bee]

I'd sell. Too many negative factors in renting a place out and based on the numbers you showed in your post, you could easily lose money if you get unlucky on renters. You'll be making a profit of $250 a month and then have to take care of maintenance and stuff for a house that far away...ugh. Then you'll have to deal with taxes and stuff on top of that and then there's the possibility of someone moving out and trashing the place. Then having to keep finding new renters, etc. Definitely not worth it IMO.

[Blackadar]

Unless there is an overriding reason to keep the Williamsburg property - you think there will be a huge market upturn or your property will be worth a mint when they build the new highway or something like that - I'd sell it. Trying to be a 1st time landlord when you're 2-3 hours away would be a pain in the ass. And renting it to college students would be even worse.

[Blackadar]

Oh, and there's one other consideration - what happens to you financially if the property FAILS to rent? Are you stuck with two mortgages and can't afford them?

[wade moore]

Dutch - Your assumption about capital is correct. The point about major repairs is a good one, although most of the "major" things that can go wrong shouldn't - just replaced heat pump, relatively new roof, going to replace windows...

Samdari - did not know there was a market in the DC Area fro $130k homes that you can rent out? Not trying to be sarcastic, but seriously, where in the world can I catch on to a mortgage that low.. I imagine anywhere I could it would be almost a guarantee that the rentors will destroy the place..

Others - That seems to be the advice everyone is giving me and i'm leaning towards - selling. Even if I may make out a small amount better, that's the best i can hope for - a little extra cash unless the Williamsburg market blows up and goes crazy (which is possible, it seems we are on the cusp of a big increase in housing costs.. but that is just a gut feeling).. I do not thing renting will be a problem like blackadar mentioned, but it is always a possibility. I could afford the mortgage for a few months just because it is so low, but it would get painful if it lasted too long.

[damnMikeBrown]

This isn't a hard question to answer at all, although I'm not going to do it. What you have to do is assign a probability of non-payment by renters or a period of failed rent(5% is ideal). If you're that far away, assign a value for a management company(they can rent the place for you as well). Probably around 8-10% of the cash flow for the rental. Then all you have to do is work the cash flows. Is it bringing you in money or not? How much? Could you reasonably expect a better return? Is the return worth the risk?

If it's me, I sell. It may be something you're interested in, but you have a couple huge considerations. Firstly, it's your downpayment on the new house. The sale of you home provides that. You'd have to factor in the higher rates you'd have to pay for your new home in your cash flow analysis(higher rates due to low down-payment).
Second, you're far away. This is a MASSIVE investment for you, one that can be physically damaged, and you're no where near it. That is frightening, and risky.

Third, you're starting a new job. Do you want to have to deal with this, at all? If it's something you aspire to, look locally to start.

[Samdari]

Originally Posted by wade moore

Samdari - did not know there was a market in the DC Area fro $130k homes that you can rent out? Not trying to be sarcastic, but seriously, where in the world can I catch on to a mortgage that low.. I imagine anywhere I could it would be almost a guarantee that the rentors will destroy the place..

There is nowhere you can get a 130k home to rent. I just think that in the long run, you might be better off rolling whatever equity you have in that home into one in DC. Presumably, the house in Williamsburg has gained enough equity to let you borrow money for a rental property in DC. Then you would probably have the same sort of situation going on here as there - break even monthly (after taxes) and get your monthly equity buildup paid by someone else. The difference being that equity is far higher here.

You are probably better off rolling the equity into a new primary residence, but if you were interested in being a landlord, I don't see the benefit to doing it there rather than buying another home here. Other than the PITA factor goes way up by selling a house and buying two rather than just buying one.

[damnMikeBrown]

I just did a very long response and it didn't go through, so I'm a little pissed.

All in all, this is an answerable question.

If you want to rent this place out, I'd encourage you to look at getting radical with your financing. Refinance the old place with an interest only, and cash out your equity so that you have the down-payment for the new place. Your payment will drop a good deal.

If you're thinking rental, what you need to focus on are cash flows. What are the rental risks we have to think about?
1) failure to rent, or rent not paid on time
2) damage to property
3) liability (ex house fire due to wiring or some such)
You're going to be far away, so think management company. They will rent the place and handle the phone calls. That's 10% of your cash flow for the property. The property's rent is income, and taxed as such. There's 38% there. Time for good news. When you turn it into a rental, you can begin depreciating the property(for residential the period is 27.5yrs). Straight Line for a $140,000 house is $5,090.91/yr or 424.24/mo. That is directly taken away from the "income". More good news, the interest on the mortgage is also tax deductable. Say 6% on a 10yr is $8,400/yr or $700/mo. Take away those deductions, and whatever other expenses(like the mgmt company) BEFORE you figure out taxes. It may end up that you have a negative taxable income, but positive cash flow! Sound exciting?

As a little financial exercise, it is. The thing is, do you want to be a land lord? That house will represent a huge investment for you, is that what you want it to be? Are you comfortable being so far away from it? Do you want to be unconventional with your finances when you're just starting a new job? Do you want to have to worry about this place?

Probably not. Sell, get the downpayment for the new place, and put the rest in a Vanguard Index and stay sane.

[Dutch]

That's 3 votes for maintaining your sanity.

[wade moore]

Originally Posted by Samdari

There is nowhere you can get a 130k home to rent. I just think that in the long run, you might be better off rolling whatever equity you have in that home into one in DC. Presumably, the house in Williamsburg has gained enough equity to let you borrow money for a rental property in DC. Then you would probably have the same sort of situation going on here as there - break even monthly (after taxes) and get your monthly equity buildup paid by someone else. The difference being that equity is far higher here.

You are probably better off rolling the equity into a new primary residence, but if you were interested in being a landlord, I don't see the benefit to doing it there rather than buying another home here. Other than the PITA factor goes way up by selling a house and buying two rather than just buying one.

Gotcha..

Nah, i don't 'want' to be a landlord.. so if I sold this house, I would use it all towards a down payment on where I would live.

[henry296]

Originally Posted by wade moore

Gotcha..

Nah, i don't 'want' to be a landlord.. so if I sold this house, I would use it all towards a down payment on where I would live.

Unless you need to increase your down payment to make your monthly payment or eliminate PMI, you might want to consider investing the proceeds. With current interest rates you do not need a really high return to be better off. With a 6% interest rate and 28% tax bracket, if you can achieve a 4% after tax return on your investment you will have more assets than reducing your down payment.