Q: We purchased a small 2,000 square foot home on 2 acres about 7 years ago. Since then, we’ve subdivided the property (1 acre min here) and built a new larger home next door. We are at odds about whether to sell or rent the home next door. It was a fixer-upper when we purchased it, and there is still some work we have to do to it before we can sell it and make what we’d like to make on it, which will take about $5,000.
We refinanced the first home at the time we subdivided to have this land free and clear for building, and owe $100,000 on that home, monthly payments being $715. We could probably get $160,000 if we completed the work to sell the home. The new home note is for $220,000, with a $1,600 mortgage. We don’t have the cash to finish the older home now, so we don’t think we should sell it due to that. But will lose the capital gains write-off if we rent it. My husband thinks we can rent it for at least $800 “as is” and at least make the note and complete the remodeling within a year. When a new renter comes along we can up the rent to about $1,200 and keep it as a rental home. Then, use the $700 extra a month to put towards the mortgage on our new existing home we reside in.
This all sounds complicated to me, and I don’t know whether it’s worth the hassle. Part of me would like to sell the house and put whatever we make on that sell towards paying off debt, mostly incurred while building the new home ourselves (about $20,000),and refinance our home to lower the mortgage. Then, the thought of having some extra income from the rental property sounds lucrative as well. Our current 401K is at $40,000 and we have about 15 years until retirement.
What is the most financially sound thing for us to do?
A: You’re experiencing a little short-term pain for what sounds like a fine long-term investment. I think you should rent the home “as is” and ask the renter if he’d like to help with the upgrading. Or, you can wait a year and then do the upgrading yourself after the renter moves out. But I think as a long-term investment you can keep your eye on (because you’re so close), it might pay to wait a few years.
Real estate is a fine-long-term investment if you can stomach the repairs and occasional headaches that come along with landlord life. If you’re one of those people who’s nervous about landlording, decide if you can simply remove yourself psychologically and let your husband manage this investment. If not, then consider renting for a year and then selling for a profit.
Q: My husband and I are considering selling a rental property we have that is approx. 800 miles away from where we live now. What suggestions would you make on how to go about doing this? We have a real estate agent that is semi-retired who we pay a monthly maintenance fee too who is willing to sell at a discounted percent for us, but we are unsure if this is the right way to go.
A: I think you should talk to a couple of other real estate agents about the property, what’s going on in that neighborhood and what you can do to get rid of it at the best possible price.
Also, did you consider selling to your renters? That might be an option. If you’re in the position to take back the mortgage, you might even produce a steady stream of income at a higher interest rate than what you’d get in the market.
Finally, be sure to negotiate your listing agreement before you sign it. Limit your listing days to 90 because you can always renew. Also, make sure you understand how the property will be marketed, because you aren’t going to be there to check.
Q: I can’t get through to you on Clark’s show so here’s my question as briefly as possible…I bought 19 acres and plan to build. I purchased the land $2000-$3000 below appraisal so there is equity. I can rent my current home, based on comparisons in the area, for about $400-$500 more than the current loan payment. The home, based on comps, has about $35k -$40k in equity. Question…Is it better to sell the home or rent. I feel as if I need to rent because I need the overage in the payment to help me make the new home payment which will be considerably higher than my current payment. I would also like to use my first home as a way into the rental business, but what do you recommend?
A: As for entering the rental business, there’s more to the cost of owning and maintaining a home than loan payments. There’s taxes, insurance, maintenance, upkeep and upgrading that has to go on. Your rental payment must cover these things as well, and as the years go on, provide some profit.
Be sure you can afford to do both and that a lender will agree that you have good enough debt to income ratio to carry both loans. Finally, take out a piece of paper and write down your financial goals. If being a landlord is at the top of the list, I’m sure you’ll find a way to make it work.
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