should i rent or sale? - Posted by David Gracy

Posted by David Krulac on October 29, 2001 at 18:27:45:


should i rent or sale? - Posted by David Gracy

Posted by David Gracy on October 28, 2001 at 10:04:12:

I’m a newbie wondering if my first Real Estate investment should be the house that I live in now. I purcharsed it 2 years ago with an FHA loan 7.87%(3% down) for $140K, and it’s now worth $155K. My mortgage payment is $1,450.00. Rentals for my size house are going for 1,400.00. Doesn’t sound like I should rent it out since my rental income would be less than my current mortgage payment. However, I could refincance at 6.5% which might bring my monthly payment to $1,300.00. Any thoughts or ideas???

One more thing. I have to move in a few months regardless…so I either sale it or rent it. Thanks inadvance for any advice

I must be missing something - Posted by Alex Gurevich, TX

Posted by Alex Gurevich, TX on October 29, 2001 at 10:37:20:

While somebody below suggested that you COULD sell your home without a broker, unless you are in a hot market this task could be far more challenging than you think. The main reason is lack of exposure. It’s hard to get firm statistics on that, but I don’t believe the figures for FSBO sales are at 15% (as was stated) or even anywhere close to that.

If you go with a standard route of selling through a realtor, you’ll have nothing to show for your efforts. The cost of sale via a realtor is about 10% (6-7% commissions and 3-4% closing costs). That would leave you with nothing.

Under the circumstances I have to assume that the post about $500,000 tax free capital gain was a joke. You won’t have to worry about capitals gains to begin with.

The way to mix the best of both worlds (rental and sale) is with Lease/Options. In your circumstances it appears to be the most viable option that could offer you an eventual (not immediate) sale at a much higher price than what you think if possible and much better cash flow, by $300-500/month higher than what you are looking at right now. Of course you need to know what you are doing to get these results.

Re: should i rent or sale? - Posted by Joe M.

Posted by Joe M. on October 29, 2001 at 02:05:55:

David, Am I missing something. $140,000 at 7.87 for 30 year should only be around $1000 a month. I’m new at this so I’d love to hear back from you. thanks

Re: should I rent or sell? [long response] - Posted by Ronald * Starr

Posted by Ronald * Starr on October 28, 2001 at 21:12:27:

David Gracy---------------

You’ve gotten some good advice already. Here are a couple of things more to consider.

When you refinance, you may have to state on the loan papers that you are going to continue to live in the house. Because you probably are not going to do so, you probably better check ahead before going through the full application process and ask if you will have to sign such a statement.

The idea to get a lower mortgage payment is good.

Think about after-tax cashflow, not pre-tax. If you are in a pretty high income bracket this could be a good deal for you. If you are in a rather high bracket, the income tax benefits of rental properties are considerably reduced. Try to calculate the after-tax income situation for yourself.

Are you going to need the cash from the sale of this house to help pay for the next one? If so, sell.

You do not have to sell through a real estate broker. About 15% or more of houses are sold without a real estate broker. If you decide to sell it yourself, you probably will want to read a couple of books on the topic, preferably ones targeted to your state.

Are you wanting to get into the rental property business? If you want to, then this might be a good step for you. However, this might not be a particularly good house for renting out. What is a good house for renting out? Well, that depends upon your own tastes and approaches. However, one factor I suggest is highly important is that it is a good, efficient income generator. In general, the lower-priced neighborhoods will get a better rent compared to the price of the house. For instance, if there are $75K or $80K houses in your area, you might find that you can rent them out for $800 a month rent, so two would gross $1600, not $1300, as the current house would, using your figure. If there are $35-$40K houses in areas in which you would be willing to own, you might find that you could buy four houses and get $450 or $500 a month rent on each one–for a monthly total of about $1800 to $2000. See how that might be better than $1300 a month coming in?

For the above reason, I suggest that rental properties should be in as low-income an area as you can stand. They may require somewhat better rental applicant screening than where you live, but the added income could be worth it.

Now, if you find that there is a linear relationship between the rents and the property value, this analysis may not apply where you live. But, I’ve yet had anybody tell me it did not apply where they lived.

The appreciation of rental properties is an important source of long-term wealth-building. In properties that are near each other, over a long-term period, say over 10 years, the amount of appreciation will probably be about identical for high-, middle-, and low-priced neighborhods. At least, this has been the case in every place I have heard of. However, I don’t know where you are (except to tell it is not the San Fran Bay Area, your house is too cheap to be here) and don’t know the statistics where you are. In some inner-city areas in some towns this relationshiip may not hold. You need to verify what happens where you are.

I do encourage you to ponder this decision and get other input. The people on this forum understant real estate investing, but they don’t know you. And they probably don’t know how your market is for investing. You might want to talk with friends, neighbors, and relatives who know you well and might give you some feedback on whether they think you would be good at property ownership and management. Best would be to talk to people who know you and are experienced real estate investors. And, I say this knowing that some people may feel somewhat threatened by your moving up to the landlord class while they are not doing so. So some people may be negative about the idea for their own emotional reasons.

Good Investing*******Ron Starr

honestly… - Posted by David Krulac

Posted by David Krulac on October 28, 2001 at 20:30:54:

its too skinny for rental. since you lived in it for two years if you sell ALL the gain up to $500,000 for a married couple is tax free. I’d take the money and put it some place more profitable, but that’s just me.

Re: should i rent or sale? - Posted by Robert (NC)

Posted by Robert (NC) on October 28, 2001 at 13:51:23:

WE had the same problem. We wound up doing a l/o where the person that signed the lease is responsible for the maintence… We did get a higher rent payment so the Mortgage, insurence, taxes, are taken care of. Becuase we didn’t have much time we settled for a break even deal. If everything holds, then next summer the current tenant should exercise his option. And we will roll that money over into a profitable rental unit closer to where we live at now…

Robert (NC)

Just some things to consider - Posted by Becky IL

Posted by Becky IL on October 28, 2001 at 10:19:32:

The pros and cons are what you have to look at to decide what’s right for you. What I would do isn’t necessarily what you would want to do.

Keeping the house, refinancing it, and then renting it would be financially beneficial to you in the long run because the house would continue to appreciate and you’d get a little cashflow out of it. However, you would become a landlord and (you don’t mention if you’re moving far away)that requires some work and headaches. Also, if you are buying a new home, your new mortgage company would only consider 75% of the rent towards your income to debt ratio for purposes of qualifying you for another loan on another house, so this is a consideration if your income to debt ratio is high.

You can also lease/option the house in order to get greater profits and release yourself from some of the landlording headaches (you can also bump up the price of the house)- just something here to consider. Check the archives for lease/options (L/O) if you don’t know how to do this.

There are many creative ways to sell your house besides selling it for cash that would boost your profit and get your house sold, but on different terms. I’m not going to go into everything here, but besides L/O’ing it, you can also sell with owner financing under a Contract for Deed (Land Contract), which essentially is an installment sale.

Look at your options, get educated on these methods, and decide what you want. Good luck to you and good luck with your move!