<p>Almost on a lark, we picked up a small investment property in need of serious work. Have fixed it up very nicely ourselves and now have to figure out what to do with it. We are new to this sort of thing and would like some advice from those who have been in this position. We are not worried about value of the house decreasing as our area is not in much of a housing crunch.</p>
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<li><p>Rent it out. This would allow house to appreciate. We could probably get about 10%/year return of our investment in rental income in addition to the appreciation. Downside is that all the appliances/kitchen/bathroom are brand spanking new now and will not be so if we try to sell in a few years. Also dealing with renters etc. but the rental market in town is good.</p></li>
<li><p>Sell it. It really looks nice inside and I think we could get over 75% return on our original investment. This, of course, includes our sweat equity. I am sure there are other good buys out there, and we could put the money to work again. Alternatively, if we choose to sell it later, we expect to get that out at that time also. Even though it’s a low end house, the stuff we put inside is nice, mostly because it didn’t cost much more (Black friday) and we were experimenting with different stuff (IKEA cabs, for example).</p></li>
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<p>So, does anyone have any rule of thumb about when it makes sense to rent out vs sell outright?</p>
<p>I think it depends on which State and region you are in, but here is what I would do. I would rent it for two years and then sell it. I would be careful to screen the tenant to make sure he or she does not destroy the property in the meantime. The rate of new home construction is not keeping pace with the increase in population by a significant degree. As this continues for a year or two, we will see existing home prices start rising. If the number of new foreclosures coming into the market slows by 20 percent or more, there will firm pressure under housing prices causing them to rise. In many areas of the country, this is probably the best time in over twenty years to buy a home.</p>
<p>Our region (sparsely populated mountain west) has pretty stable economy and home market. Not a lot of population fluctuation although it is growing steadily.</p>
<p>That’s part of the thought. If we sold this one, we may be able to buy 2 others :).</p>
<p>Without full financials, it is tough to say definitively, but…</p>
<p>1) What assumptions did you make to come up with that 10% ROI figure? Is that with ideal conditions - that is, no repairs, no commissions, 0% vacancy, no tax increases, no insurance increases, etc? If so, a 10% ROI is not bad, but it is not all that great either IMO. Appreciation is an unknown, it could go up, it could go down. It’s a risk. I assume the property will generate a loss for tax purposes - can you take advantage of it? What % equity do you have? Dealing with tenants has its own set of problems - there are a lot of laws you have to be aware of.</p>
<p>If you have a lot of equity another option would be to put a mortgage on it to get the equity out.</p>
<p>2) 75% profit on a flip is pretty good. Have you owned it long enough for the gain to be long term? If so flipping seems like the way to go. If you haven’t owned it a year you can do a 1031 exchange to avoid paying taxes, although these can be tricky to do.</p>
<p>If you are going to start doing flips on a regular basis, eventually the IRS will consider it a business, and the profits will become income instead of capital gains. This leads to other tax issues, not the least of which is having to pay SE tax on the profits.</p>
<p>We did the same (have 3 now in 2 years). We are holding them a while and renting them, seeking to minimize the taxes on any gain. They do appear to have achieved a tidy amount of appreciation based on other sales in the neighborhood, but the rental incomes are steady and the tenants are good quality.</p>
<p>Being a landlord is no picnic. My husband and I have a rental property and would dump it in a heartbeat , if we could sell it for enough to break even …never mind make a profit. You’d be shocked at how other people live , even when you think they seem like decent , hard working people.</p>
<p>^^ agree with lje62
I have been a Realtor for 19 years. I have handled residential sales/been a flipper/property manager of our own, and other clients properties…good advise.</p>
<p>That changes things in my mind. If you can buy two more to fix up, and resell that would be the better way to go. However, you are no longer looking at an investment (what to do with one house), you are looking at a business (flipping several houses).</p>
<p>I don’t think landlording is that bad, but you have to know the laws, and you have to be <em>very</em> picky about who you rent to. You have to treat it like a business, don’t get overly emotional about your properties, and you can’t have an expectation that anyone will treat it as well as you would.</p>
<p>It is far better to let a property sit empty for another month than rent to a questionable tenant.</p>
<p>We do credit checks, employment checks, landlord checks, and require a certain rent/income ratio or better. My DW, who is a full-time RE agent who rents other people’s properties as a big chunk of her business, has a system and has developed instincts over the years which seem to be pretty good.</p>
<p>In 20 years we’ve only had to do one eviction (knock on wood), and in retrospect there were signs we should have picked up on that we missed in this case.</p>
<p>The bigger issue for us is that the housing stock is all 100+ years old, so there is a lot of deferred maintenance when you buy, and things break fairly regularly, and it always seems to be at 11:00 on a Saturday night. It helps that I can do a lot of the work myself. Except for plumbing. Our plumber likes us so much that last year we got a Christmas card from him. :)</p>
<p>I think this is what we are trying to decide on. And trying to see from a financial point whether one makes more sense for us than the other. I wondered if there was a magic formula for ROI that would help one decided one vs other.</p>
<p>Good news is DH can do just about all the work and we are not dependent on this for our livelihood.</p>
<p>As we were looking at just putting the capital gains back into another purchase, I hadn’t thought about tax issues but I guess I need to look at that with my accountant (after the 15th) :D.</p>
<p>Thanks much for all the real life experiences.</p>
<p>If you decide to sell it and re-invest, look into a Starker tax-deffered exchange. Doing this avoids capital gains tax until the 2nd property is sold. It is imperative to do this BEFORE you close and take possession of the funds. The Internal Revenue Code sets specifications for the # of days available to identify and close on the 2nd property. You need a third party to hold the funds until the 2nd property is bought and closed. Great way to defer tax.</p>
<p>^^^ 1031 exchanges are tricky and have lots of rules, but it is definitely worth looking into if you are going to flip. It’s not always easy to find properties you want to invest in that can close before the deadline.</p>
<p>And you have to be very careful who you use as an escrow agent. There was a case not too long ago where a large 1031 firm was parking their clients’ funds in CDS’s instead of putting it in the bank like they said they were doing. Then the financial firms collapsed, making the CDS’s untradeable and essentially worthless, and the company declared bankruptcy. A lot of people lost a lot of money.</p>
<p>I send my plumber, landscaper, and handyman a Christmas card with a $50 or $100 bill in it dpending how much we used them. They always come right away when we need them for something and we seem to get very good services for the money. But landlording is not for everyone. My wife tends to panic when the phone rings showing a call from Virginia. You learn to take problems in stride and just deal with it. Even with the downturn we think we are up about 25-30% on each property over 8 years. Buying an older home as a rental is not ideal but we planned to live in it until that changed. </p>
<p>But if I had a 75% profit already I’d take it now and move on.</p>