Gabriel Ask

Dong, I am debating whether to sell my house or rent it. I purchased my house late 1999. Then, two years later I refinanced my house to obtain a lower interest rate thinking that this would be my last house. I owned 109,000 and my house is currently valued at approx. 147,500 with an equity of aprrox 35,000. I have 13 more years to paid off the house./
Should I see the house or rent it?
Thanks.

Gabriel

Gabriel, I had similar decision to make about 3 years ago when I decided to move from my old Condo. I quickly decided that I wanted to rent it out. That was the right decision for me, but not necessarily the right one for you. I made the following considerations.

  • The property was in area that is very easy to rent out. It’s in the city, and there many many renters every year looking for a place in the area I owned my condo.
  • I was able to cover most of my costs through rent. My conservative rule of thumb is that annual rents should be at least 10% more than annual expenses. To be honest this is not true for me.
  • I had decided long ago that I wouldn’t mind the burden of being a landlord. I don’t mind answering calls, and making arrangements for repairs as they come up. This last point is the most important one to consider. I have had great tenant, and the apartment has been mostly trouble free. Yet, at the same time I have to acknowledge the mental burden of being a landlord has been greater than I thought. Because it’s not my full time job, the added stress of knowing that something can come up is actually more acute. And, I have a great tenant. I can’t imagine what it would’ve been like had the condo had major problems or if I had a tenant that was unreasonably demanding.
  • Part of my long term investment strategy is owning property. I knew from 1st day I purchased my condo that I would someday convert it into a rental property. That’s what I did after 4 years.

Was it the right choice financially? If I were evaluating the decision right now, the answer would be no. Had I sold three year ago I would’ve sold into a better housing markett. However these decisions should not be evaluated purely on the basis of investment timing. Timing is always a game better played in hindsight. The more important question financially is how it fits in one’s overall investment strategy, and cash situation.

  • Do You Need the Money? If you need the money to finance another home purchase, then you should sell. It’s not a good idea to put yourself under more financial duress than you can handle.
  • What else are you invested In? Are you already well invested in the stock market? I’m not believer that Real Estate is the only place to make money. I think it’s great place to do so, but so is the stock market. It’s best to have eggs in different baskets.
  • What’s the current Interest Rate Environment vs. your Mortgage? If you’ve been able to lock in a great rate that is well under current market rates, this is when renting can make a great deal of sense. Let’s say for example Gabriele locked in a 5% 15 year Loan, and current rates are over 6.5%. By selling, Gabriel would give up that rate. If Gabriele can rent out his place, and earn a healthy amount over 5% then that’s “free” money Garbriele would be leaving on the table. Unlike companies, individuals are generally not in a position to borrow money at competitive rates except when it comes to property, especially property originally purchased as a residence. This borrowed money gives leverage which magnifies both losses and gains.

Rent Example

Crunch the numbers. Make sure you’re ROE (return on equity) is more than acceptable. Above is simple example of s such a calculation. Play with different scenarios. I also can’t stress this enough, if you do want to rent out the property make sure you want to be landlord. While it’s possible to hire a professional property manager, this is likely to eat most of the profits associated with having a rental property. Landlording isn’t for everyone. Hope this helps.