Hello All. I am 52 and my wife is 48. I am looking to retire in about 6 years. We have a rental home that i would like to sell and take the money and put in the market somewhere relatively safe. My wife is on the fence about selling because she thinks if something were to happen we would have that income from the rental. Rental home facts below.
Home value = $710k
Mortgage remaining = $260k
Mortgage payment with taxes is $2,700
Interest rate = 3.2%
Rental income from home is $4,200.
Out current tenants upstairs would like to buy the house as is but sure they want a little bit of a deal.
We have had the house for about 15 years and havent really had to put any money into it but now feel in the near future it will become a money pit. Boilers very old, needs major updating, needs roof etc.
Any thoughts on whether it’s best to sell or keep regarding finances? Thanks
Your situation is not clear to me. Do you have a single family home with an upstairs rented or do you have a house separate from your personal residence that has an upstairs tenant? If the later, are there other tenants currently?
I have had rental properties and understand very well, you are exactly one tenant away from trouble.
First item - make sure you know your tax situation if you sell. What is your basis? Accumulated depreciation? How much would that change if you had to replace the HVAC, roof and a total repaint say 14 months out and you needed to sell?
I would pay for a professional appraisal – Real-estate agents are happy to give you an expected sale or listing price that may or may not reflect actual, recent and comparable sales. They are reluctant to risk anything beyond their commission for a period of exclusivity.
A lot can happen for real estate markets in six years – things you can not control or avoid. Low mortgage rates following COVID are still a factor in housing – people without 20% cash downpayments can’t afford the house they want. During the late 1980s in Nashville TN there were hundreds of vacant duplexes built as “The Solution” to over 12% mortgage rates while builders were going bankrupt with those empty unsold units.
My suggestion is consider:
#1. Things you can’t foresee or control will happen. I think there is about a 25% chance six years out your choices will be selling the property at much lower price than is possible today or wait another 5 to 10 years for comparable dollar outcomes.
#2. Sell the property today and invest the funds with the assumption you will be in market for for 25 to 35 years. (Hint: that means over half in stocks – even 2.5% inflation will more than double the cost stuff.) A balanced portfolio returns probably will be less than the real estate if all goes will. But you can influence much of the risk.
When I was 50, I never expected to reach 85. I might in 20 days.
This is a generalization, and different markets have seen crashes for sure (Houston, Denver) but generally speaking real estate does not often go down significantly.
If you are going to be in the market for 25-30 years then that’s probably OK. But your outcome depends very much on where you start, and the market is now at an all time high, riding what most analysts believe is a historic bubble in AI and data center buildout. Will the bubble burst? Hard to say. A quick surmise in a past post tells me they last 6-10 years, and this one is 2-3 years old - but then things move faster these days what with flash trading and 24 hours markets and such.
I was a landlord for 35 years, separate property, and you are always at the mercy of a bad tenant. That said, they paid my mortgage and I made a bloody fortune when I finally sold it.
Since we don’t know the cost basis, I can only speculate that after paying off the mortgage you will have about $450k - taxes, so maybe $350k to put in the market? You’ll have to make 10% to match your current income, which I think unlikely, but you’ll lose the headaches of landlordism and the possibility of big expenditures coming at you for neglected repairs. Only you can decide, but in “life advice” I find it helpful to listen carefully to the wife.
Happy Birthday and joining the 85 Club, I did that last week, a lot of friends and family didn’t!! Enjoy!
On the topic, when we sold our first home, it was an option to keep it, rent it, but I was on the road so much, I’d be practically an absentee landlord. Plus after all the work I’d done to the place, I didn’t want to see it torn up… OTOH, my DD’s in-laws, did rentals, from a few locals to 2-300 units in the Houston area, did great, but he was a hars@ss from his earlier experiences, they argued about the common pool, he had it filled, made it a lawn/play area, plumbing troubles, replaced all the toilets, upgrading, he also had a couple local managers, helped them out over the years to do their own buys, rentals, as age crept up he liquidated, relaxes with just a couple homes, here in CA & NV to keep his toys happy…
Net income = 12 x ( 4200 - 2700 ) = 18k
Equity = 450k
Return on equity = 18/450 = 4% annual
Total return =
4% operating income
plus some principal repayment
plus some home price appreciation/depreciation
minus maintenance costs
minus your time
For me, personally, a 4% return isn’t worth the time and risk.
What are the risks?
Undiversified asset
Liability
Of course, it’s personal, each person has their own cost-benefit preferences and risks can be managed.
I read it as almost a certainty, not a “possibility”. Over the long term, owning a rental property means that many of these expenses are a certainty. So, over the next 6 years, in 2 years, boiler goes and needs to be replaced, $8k (about half a year of rental profit). Then a year after that the roof needs to be replaced, that’s $24k (roofing prices are insane lately) that needs to be spent (about a year and a half of rental profit). Then you’re coming up on 6 years and you want to sell anyway because you don’t want to manage a rental property in retirement, you’d rather travel a couple of months a year, far away from the property in question. Maybe RE prices went up, maybe they went down, maybe they stayed the same, but either way, you’ve spent more than a third of the rental profit over the 6 years before retirement.
Now run the numbers again with all those things included.
