The Reluctant Landlords?

Posted on January 9, 2008 by Melissa
Filed Under Housing, Mortgage

C’mon $165! Last night we met with our realtor to discuss the fate our old home. Now that the new flooring is going down it is time for decisions to be made on how we will list it.

Prior to this meeting we told our agent that we were leaning towards selling it, provided we would be able to get a decent price for it. We simply wanted the home gone. He has always encouraged us to consider leasing it (he feels the area will appreciate nicely) but he said he would do the analysis based on selling it.

When we replaced the roof, the insurance company valued the home at $171K. I recognize it’s in the company’s best interest to value it high (higher deductible) but we still felt encouraged by that figure. However, when we looked up our home on Zillow it showed it being valued at $158K, which is the tax appraisal value. We looked up the homes currently for sale in the neighborhood to get a feel for what they were being offered for. Only two were on the market, both about 2000 sq ft (same as ours), and both were listed at $159K. We were really hoping to get no less than $165K for our home after negotiations, especially since we just spent $8K for a new roof, flooring, paint, and repairs. We started to wonder if it would be smarter to lease it until home prices rebounded. Maybe we could get enough in rent to cover the mortgage payments but we weren’t sure.

Our agent handed us a nice folder detailing all the recent sales and leases in our neighborhood. To our surprise, he said we could definitely list the home at $168K for an adjusted sale price of $165K. Apparently, the homes are selling very quickly in our area and the new flooring and paint could easily justify a higher asking price.

Wanting to know all our options before making our decision, we also asked about leasing. Our agent owns ten rental properties and even runs a rental management company so he is very knowledgeable about that market. He felt confident that he could get a tenant in our property at $1295 a month. Again, we were pleasantly surprised to hear that. Our old mortgage, with taxes and insurance comes to $1045. That’s a profit of $250 a month!

A few of our friends own properties in other areas and some rents aren’t covering the mortgage payments. But even at a loss they are still providing benefits through tax write-offs and available equity. If we were to lease it, we could write-off a large portion of the $8K we put into fixing it up and we could grow our equity using the tenant’s money until we are ready to sell in a better market.

I will say this though - Eric and I aren’t exactly keen on being landlords. Neither one of us has the kind of personality that would enjoy it. So, if we leased the home we would want to drop our profit margin slightly (by $50 a month) and have it managed by our realtor’s company. That means he does all the advertising, screening of tenants, contracts, rent collection, repair management, and even the evicting if it comes down to it. If the A/C goes out, he is the one that fields the phone calls and uses his connections to get a repair guy out there. Our responsibility at that point is to cash the rent checks and fund major repairs if needed.

So - it comes down to this:

Do we sell the home to take the equity and invest it? OR
Do we lease the home for a small profit (as much as $200 a month) and sell it a year or two later when the housing market has rebounded?

I don’t think we will be disappointed either way since both scenarios exceed our expectations. Right now, Eric and I are thinking it might be better to lease it and become the reluctant landlords. Tonight we are going to sit down and work through the numbers to be sure. I’ll report back on what we discover!

If you're new here, you may want to subscribe to our RSS feed, get the posts via email, read more about the blog in our about page, or browse our archives. Thanks for visiting!

Comments

8 Responses to “The Reluctant Landlords?”

Jennifer on January 9th, 2008 6:53 pm

Whether you decide to sell or rent, remember that your house is *only* worth what someone will pay for it. Get additional opinions from other Realtor’s market analyses! On our last house, one Realtor quoted us a price that sounded too low. Our first offer ended up being higher than what that Realtor thought was the highest possible, and ended up being over 10K less than what it eventually appraised for. On the flip side, if you price your home too high (and some Realtors are really bad about that) it could sit on the market, become a worn out listing and eventually sell for much less than if you’d listed it more competitively to begin with.

If I were a buyer, I’d be really hard pressed to pay $10000 more for a house with the same stuff, (albeit newer) and repairs usually do not bring back the cash you put into them. You have a new roof, but are the 159K houses (which are hoping to sell for 155 most likely) in bad need of a new roof?

Repairs & upgrades may make your home more sale able, but may not necessarily increase the price they will bring, especially in a buyers market like we are in right now. I guess the cliche’ I’m thinking of here is don’t count your chickens before they hatch-especially since our economy is in a huge slump.
Caryn Verell on January 9th, 2008 7:46 pm

also, consider the type of folks that are looking to rent…most renters cannot afford to buy and if a person cannot afford to buy they also cannot afford upkeep and maintenance. more and more people are looking for rentals because they are being foreclosed on. if you choose to rent the best advise is to be wary and careful in the extreme. good luck, caryn
Make Friends, Earn Money on January 10th, 2008 8:02 am

Tough decision really. Personally I think the US and European Markets are in for an even tougher ride in the next few years. China and India are still churning out huge quantieis of cheap consumer goods and in the process buying up incredible quantities of raw materials (including Oil). I think this is likely to see Oil prices stay quite high and the price of oil, as we know, effects every aspect of our economy. I think this combined with the credit crunch caused by the sub prime mortgage market and a general downturn in western economies (which means less consumers buying american goods) could make matters worse. Poperty is always a good long term investment and if you can lease it for 3-5 years, why not. However if you want a good return on your investment selling it now might still be a good option as you may be cashing in on it before a further slump. This is only a pesonal view, i’m not a financial adviser and you are best placed to make the decision. Hope it works out well
plonkee on January 10th, 2008 2:06 pm

I’d probably assume that the $158k is the more accurate figure. A good rule of thumb is to get at least 3 estimates from different agents, it gives you more confidence.

I’d take a look at what is currently being rented out in your area for $1295 a month, as that will be your rental competition.
Stephanie on January 10th, 2008 9:27 pm

We are reluctant out of state landlords.

Our first home purchase was a duplex, and we anticipated using it as a rental. We didn’t anticipate moving out of state. After a year on the market with it only half rented we gave up. We couldn’t afford to lower our price. We do make a small profit, but I’d just as soon sell it with us being so far removed.

We managed apartments in our early years of marriage. It isn’t always fun. My advice is to carefully screen your tenants if you decide to lease it.

Another route to perhaps consider, and one we’ve thought about, is a rent to own type situation. If you expect the area to appreciate that might not be a good choice though.
Val on January 11th, 2008 7:20 am

I think you should go with leasing since you will have a rental company to manage the majority of it for a pretty good price. It sounds like you won’t have to really be “landlords”, except for the financial aspect. If you can’t get that amount of rent out of it, think about selling at that point.
carnival of personal finance: photo quiz edition : plonkee money on January 14th, 2008 4:07 am

[...] from A Penny Closer presents The Reluctant Landlords? .Should they rent out their property, or try to sell [...]
alice on January 14th, 2008 4:02 pm

We’ve thought about renting out our small condo when it comes time to sell but, honestly, I’m not sure if I want to deal with tenents. I’ve heard so many stories about people not paying their rent on time or at all.