Rent home or Sell it at a small loss

[maverick]

Thought I would seek the advice here on pro and cons on whether we should rent our home out or sell at a small loss?

Some details to consider in this decision:

-we don’t have to sell due to financial reasons
-the home is in a high demand area due to the school district and lack of mello roos and HOA
-we put 20% down when we purchased
-we’ve made significant updates out of our own pocket = we did not use equity to fund this
-we have no experience being landlords and would hire a property management group to handle the rental
-we are in escrow now for another home to live in
-we are generally fiscally conservative
-we want to have child #2 sometime within 3 years
-we are comforted by the peace of mind of selling and keeping additional liquid assets in the bank despite the non-existing interest rates
-a realtor has approached us directly due to lack of inventory in our neighborhood with a good comp that had 16 offers presented w/in the last month…our home is bigger and much, much nicer and is willing to give the sale a shot and back down if we don’t get the price we want
-after we refi the rent will cover the mortgage, insurance, and property tax

[paramount]

This type scenario is becoming more and more common.

Based on my experience, I would try to sell the property 1st.

And trust me on this, a property management company can cause more headaches than just renting it out and managing the property yourself – not to mention the tenants (a property manage does not always insulate you from tenant headaches).

There are many many unscrupulous property management companies out there…do your homework.

Also, even properties in prime areas can sit vacant longer than you might think.

[spdrun]

Property management? WTF are those parasites needed for if you’re local?

Put it on Craigslist, use a lawyer to draw up a contract if needed, check references on your own, online credit check. This isn’t rocket science, kids.

[DataAgent]

I’d sell it. Playing landlord ain’t no fun. With or without the help of a property management company. Been there, done that, and would never do it again.

[spdrun]

What’s the problem with “playing landlord?” If you vet your tenants well in the first place, it’s very unlikely that they will be destructive or not pay on time.

[paramount]

Remember that we live in an entitlement society – particularly in so cal.

Many (if not a solid majority) feel they are entitled to own their house – part of this attitude comes from brainwashing of course (the American dream blah blah), and also a cultural resentment against those who own.

What does all of this mean? Most tenants do not want to pay you rent.

[spdrun]

Is SoCal really that different from the Northeast, where my family and I have both had good luck with tenants? Some messy people, but no non-payers.

[paramount]

[quote=spdrun]Is SoCal really that different from the Northeast, where my family and I have both had good luck with tenants? Some messy people, but no non-payers.[/quote]

It’s hard to generalize, but I suspect yes – although it may depend on what part of the northeast you’re talking about.

I don’t want to be overly dramatic, but when you couple the extreme materialism with very limited economic opportunity of SoCal you get interesting results.

The population of SoCal is probably 24 million or so, and it can be very tough to make it in SoCal because of that fact; but at the same time there is considerable conspicuous and concentrated wealth.

Yes, materialism is everywhere as is entitlement, but I think it may be more pronounced in SoCal than in most other areas.

To much California Dreamin going on, migrants to California were sold on a marketing gimmick.

[bearishgurl]

maverick, did you list your present home for sale before and did not receive any good offers? Can you get out of your home-purchase transaction and begin to look again after you have sold your present home? This would substantially fix your problem.

If you haven’t listed before, I’m just wondering why you are in escrow to purchase another residence before attempting to sell your old one, ESP since you stated you do not want to manage it yourself. PM companies charge about 10% of the rent per month to manage your property and you stated you have a young family and want more child(ren). This means frequent extra and unexpected monthly expenses coming up for you in the coming years when life happens.

I don’t need to know the location of your present home but if you have spent substantial money to fix it up like you want it, it has no HOA/MR and the school district is so good, why do you want to move?

I guess I am unclear as to why someone in such a position would enter escrow on another purchase for a principal residence.

[maverick]

[quote=bearishgurl]maverick, did you list your present home for sale before and did not receive any good offers? Can you get out of your home-purchase transaction and begin to look again after you have sold your present home? This would substantially fix your problem.

If you haven’t listed before, I’m just wondering why you are in escrow to purchase another residence before attempting to sell your old one, ESP since you stated you do not want to manage it yourself. PM companies charge about 10% of the rent per month to manage your property and you stated you have a young family and want more child(ren). This means frequent extra and unexpected monthly expenses coming up for you in the coming years when life happens.

I don’t need to know the location of your present home but if you have spent substantial money to fix it up like you want it, it has no HOA/MR and the school district is so good, why do you want to move?

I guess I am unclear as to why someone in such a position would enter escrow on another purchase for a principal residence.[/quote]

Thanks for your reply. I wouldn’t describe our situation as a problem but instead more of an opportunity and evaluating it both ways.

We don’t need to sell our current home to buy the one we are in escrow for now.

We are moving because we need a better set-up for my mother in law, who is 80, and moving in with us. I grew up with my grandparents (extended family) and am very greatful for it. I also happen to be one of the few who really get along with their in-laws.
The home we are in escrow is sectioned in a way that gives her independence while living with us.

[bearishgurl]

[quote=maverick][quote=bearishgurl]maverick, did you list your present home for sale before and did not receive any good offers? Can you get out of your home-purchase transaction and begin to look again after you have sold your present home? This would substantially fix your problem.

If you haven’t listed before, I’m just wondering why you are in escrow to purchase another residence before attempting to sell your old one, ESP since you stated you do not want to manage it yourself. PM companies charge about 10% of the rent per month to manage your property and you stated you have a young family and want more child(ren). This means frequent extra and unexpected monthly expenses coming up for you in the coming years when life happens.

I don’t need to know the location of your present home but if you have spent substantial money to fix it up like you want it, it has no HOA/MR and the school district is so good, why do you want to move?

I guess I am unclear as to why someone in such a position would enter escrow on another purchase for a principal residence.[/quote]

Thanks for your reply. I wouldn’t describe our situation as a problem but instead more of an opportunity and evaluating it both ways.

We don’t need to sell our current home to buy the one we are in escrow for now.

We are moving because we need a better set-up for my mother in law, who is 80, and moving in with us. I grew up with my grandparents (extended family) and am very greatful for it. I also happen to be one of the few who really get along with their in-laws.
The home we are in escrow is sectioned in a way that gives her independence while living with us.[/quote]

Thanks, maverick. Makes sense. But since you don’t want to manage yourself, I’m still with the Piggs who say you should list your current property ASAP. The “small loss” … or … you never know, maybe “no loss or slight profit” (due to tight available inventory) you may have upon the sale of your current home will be much preferable to dealing with intermittent vacancies in the coming years.

[Diego Mamani]

My ex-landlord experience might be useful to you. He and his wife, working in the banking industry (mortgages in particular), bought a house in the summer of 2005 for $890K or $895K. They put 20% down and financed with a 5/1 ARM. Their monthly payment, including escrow account for property taxes and insurance, came close to $4500. Three years later they saw their jobs threatened by the crisis, and decided to sell and move back to the Bay Area (where they had been born and raised).

So, it’s Spring or late Spring 2008, the house is worth at best $730K. At this point their down payment has been wiped out. It’s prime selling season, but there are no buyers. Naively, the couple lists the house for $799K. It doesn’t sell of course. So, they decide to rent, and list the house for $4000 or $4200. (Bear in mind that comps were renting for only $3000 or so!!!)

Eventually they reduced their asking rent to $3200. I came in, saw the house, and offered them a 2-year contract for $3000. They used the same realtor that had listed their for house for sale. I was also using a realtor to help me find a rental. What surprised me was how my realtor went to great lengths to make me pay more for the rental. He kept saying that $3000 was way below market and would not be accepted.

I overruled my realtor, of course, and my offer was accepted. But I couldn’t help thinking that my landlord was bleeding close to $1500 a month. I went to my county recorder website, made sure there we no liens on the house, etc., I even paid $35 to get a copy of the mortgage docs, that’s how I knew the details of their financing. I researched all this, b/c I didn’t want to pay rent to a deadbeat. Turned out that the landlord was a nice young fellow with an MBA and a good job.

The landlord didn’t hire a property management company. They used a realtor to find tenants, and I don’t know how much the commission was. There were minor issues with plumbing, etc., but the landlord sent his own handy man to take care of them.

Fast forward three years, Spring of 2011, interest rates are on the floor, house prices appear to have possibly hit bottom, and me, after 6 years as a renter (I had sold my house at a nice profit in the Summer of 2005), decided to buy a house and lock in a low interest rate in 30-year fixed loan.

My landlord listed his house again for rent, at $3200. There were a few looky loos, but the house rented right away, there was no gap in rent! I moved out on April 30, and on May 1 2011 the new family moved in. The new family decorated the house nicely, and appeared to be nice tenants.

But I just learned that those tenants lasted only a year…

[ctr70]

If you can get a healthy positive cash flow on the property (rent would exceed PITI + maint and give you a margin on top of that), and you have a good loan on it, I would keep it. And I would manage it yourself (it is not that hard, just pick up NOLO press landlording in CA and put it on Craigslist). If it’s in a good area you can attract a good tenant, just read up on screening tenants thoroughly (credit check, paytsubs, call prior landlords, call employer, eviction check, etc…). Where else will you get a decent return on your 20% down payment cash? You will also get to depreciate the property and write it off your taxes.

To me you can mitigate risk as a landlord hugely by screening tenants well.

If you would have a negative cash flow (PITI + maintenance would exceed rent)…SELL IT!!!

[Diego Mamani]

[quote=ctr70]To me you can mitigate risk as a landlord hugely by screening tenants well.[/quote] My preferred strategy is to price your rental slightly below market, but be very strict with tenants’ FICO scores, proof of income, references, no prior evictions, etc. That way you tend to get fewer vacancies.

[sdsurfer]

Well…I feel like this statement:

we are comforted by the peace of mind of selling and keeping additional liquid assets in the bank despite the non-existing interest rates

alludes to you kind of wanting to sell already. If I typed the statement above I would give selling a shot…you never know with the inventory the way it is you might actually get a profit or break even and get you peace of mind. You do not have to sell unless you get the price you want, but I would be open with that Realtor or whoever you go with regarding that “testing the waters” aspect.

Personally…I would keep it because I have a lot of faith in real estate to accomplish long term goals and I would worry about what I’m going to do with my 20% if I were to get it back and if I am making the smartest decision with my money. I do not like letting money sit in banks myself. I’m not a big time economist, but I think just about anyone you ask agrees that we are headed for some big time inflation in the not too distant future. If your 20% is in a home I could see the rent of that home going up too(good school district, condition, etc.). If the 20% is in the bank you have peace of mind for now, but less and less of it as your money is worth less and less.

The other consideration is taxes. It sounds like you do okay so you could probably use the write-offs. I’m not an accountant, but I know when I do my taxes I am very glad to have an investment property because if I did not have the deductions I would be giving the money to the IRS anyways…either way I do not get it. Ask your tax person about that one as they know your situation tax-wise.

My 2 cents….best of luck to you whatever you decide and a cheers to your helping out with the in laws…I love mine too and feel lucky for that since most people tend to feel otherwise.

[Author]

Posts