Property Q&A in Minneapolis>Question Details

Cat, Renter in Topeka, KS

SHOULD I SELL MY HOUSE OR RENT IT OUT?

Asked by Cat, Topeka, KS Thu Feb 28, 2013

I live in Minneapolis MN and have owned my house for 10 years, and have about $30,000 in equity. I want to move to Portland Oregon this fall (I just can't stand the cold winters anymore). Some friends are saying the housing bust is over and my house will never go up in value again, and might even continue to go down (right now it is valued at what I bought it for, so at least its not upside down). Others are saying I should rent it out and hold onto it because it will go up in value again, and then sell. I know nobody really knows the future but you realtors might have a better idea of what the housing market will do then any of my non-realtor friends. Also, I estimate that i can probably clear $250-$300 a month by renting it. is that worth holding on to it or no? it has a new roof, new siding, and new garage door - but the furnace might go within the next couple of years and ice dams keep forming on the roof. thanks for any and all advice.

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Yikes!!!! Look at all the answers!!!!!! And, some of them have LOTS of info!!

Well, Cat, my answer would be it depends on what you're trying to accomplish. All things being equal, if you have enough money to live in Portland without having to sell this property, then, it might be a good opportunity to rent your property here. The market is turning around, and if it continues, I think you might be quite pleased at the proceeds you might receive in another year or 2!

If you need the money now, though, then it's not a terrible time to sell. Our market is WAAAAAYY low on inventory so houses in some neighborhoods are selling fast. I had a house in South Mpls. that had 2 offers in 4 days of being on the market.

Good luck to you, Cat!
0 votes Thank Flag Link Mon Mar 4, 2013
Hi Susan, thanks for your response. I've rented out the upstairs unit for almost 10 years and haven't had any major problems. My current tenant is a dream and I am hoping he will stay another couple of years. So I am going to rent it all out and hope my luck with tenants continues. My goal at this point is to hold onto it for another couple of years, when hopefully the value goes back up. I am beginning to understand, based on the responses here, that the market is great for selling right now, and may not be in a couple of years. But I will just have to take my chances, it helps knowing what to watch out for and be aware of.
Flag Mon Mar 4, 2013
Haha no you are not ignorant Cat, but boy if you go on forums like biggerpockets or speak to landlords the horror stories are out there. If you want a theoretical horror story here is an example. Lets say your duplex rents out at $750 for each unit. In a 12-month period you have "that 1 tenant from hell" that you have to evict in one of those units. There are people that are much smarter than me, but I have a feeling you will be looking at 4 months start to finish evicting this tenant. I would need to brush up on our eviction laws specifically for a timeline, but I am sure some of the landlords on Trulia can add to this.

For simplicity in this example we can assume that includes the time it takes to get a new tenant qualified and in the unit paying rent.

Ok $750 x 4months = $3,000 in lost rent. Well maybe you are on the ball and start the eviction process ASAP after first mist payment, but I would not blame you if after the first month you have a heart and let the tenant catch up the following month....only to not pay which is why you evict in the first place. Let's tack on another 2 months for you being "nice". 2 months extra = $1500 + $3000 (4 months start to finish eviction) = $4500 bucks total

But wait it gets better because usually an eviction can also be synonymous with the tenant trashing the unit. Maybe you need new carpet and paint along with other minor repairs that gets you to $2,500. Maybe that furnace decides to join in Murphy's law and go out during this eviction. Murphy's law seems to be very attracted to Real Estate let me tell you!

$4500 + $2,500= $7000 bucks lost in only 6 months. You going to do the eviction yourself or get a RE attorney on your team? That costs money. You going to have the property management company handle turnover in your units? That costs money. For simplicity I just used $750 for rent, but today it is pretty common for tenants to cover most, if not all, utilities. That costs money.

You will get your security deposit from the tenant, but I think most of us can agree it does not cover your losses in an eviction. Will this happen right off the bat? I sure am not going to jinx you! But at the same time I see duplex's as twice the amount of work than renting a TH or just single family homes. I got twice the tenants to worry about, and that is potentially twice the problems.

Does any landlord here on Trulia have their own "horror story" to share?

Here is a REAL STORY then for you Cat. You ever here of the term "slumlord?" I sure do because those are the types of people I buy duplexes and rentals from for my investors. Every time the story is the same: rental started out great and then the landlord started losing money. He does not have the money to maintain the rental because he is constantly trying to stay current on mortgage payments. The property becomes less desirable because of this which means less rent. From there it is a snowball effect where the landlord is making less money on the rental while at the same time broke and can not fix anything. Eventually he either has to sell at a discount to my clients or risk foreclosure.

Other people may say slumlords are just greedy and that is why they get the karma, but most of the time they are honest people that just get stuck in the game. I can only reiterate what I have already said. Come up with very conservative numbers for your expenses. If you need help ask! From there be realistic on rent and figure out your positive cash flow. Ideally most investors want $500-$600/month.

Review your cash reserves and use a rule of thumb 6 month's reserves in rent. If your total rent for both units is $1500 ideally have $9,000 liquid reserves in your "landlord account" at any given time. The good news is you don't need the money, so as those rent checks start coming in this will become easier.

Never think about the best case scenarios and you will never be dissapointed. Plan for worst case because eventually IT WILL HAPPEN. My opinion is that landlords go broke because they don't have enough positive cash flow (usually way way underestimate expenses) and they don't have cash reserves. Investing is all about managing risk when you utilize leverage. Those who do it poorly get burned.

There is nothing wrong with selling this duplex if the numbers are not ideal for a rental. You can always buy another one.
0 votes Thank Flag Link Sat Mar 2, 2013
The eviction process. Yike! From what I hear MN favors the renter's rights over the landlords. That is something for me to seriously think about. thanks for your advice.
Flag Mon Mar 4, 2013
Hi Cat, Portland is a wonderful city in which to live.. I have been a Realtor and landlord for many years. I cannot imagine the difficulty of being a long distance landlord. My suggestion is to find a Realtor experienced in selling duplexes in your area. Talk to two or three. Ask about similar deals they have closed. Ask for references and check them. The bottom of the market in Minneapolis was 2011. Prices in most areas have appreciated at an average rate of 11% per year since them. The sale price of your duplex may depend more on cash flow and strength of leases than anything else. Please call me if you have questions. Thank you.
Web Reference: http://www.mywra.net
0 votes Thank Flag Link Sat Mar 2, 2013
If the numbers make sense then go for it. I can only emphasize enough you examine the situation and believe there is enough cash flow there to cover you for unexpected items. $250 a month won't be enough to support both units in the long run.

Use this scenario to start educating yourself if being a landlord is a desire of yours. I really love biggerpockets.com and am on there regularly reading up. Start by always thinking worst case scenario instead of the best case scenario. Understand that things WILL GO WRONG with renters, and the people who do not plan for it are the ones who get stuck financially. It is not that hard to lose $7,000 in a 12-month period can you absorb it? Never underestimate cash reserves.

My opinion is that the successful people plan on worst case scenarios with their expenses so that the cash-flow on the property covers this. They also have ample cash-reserves to get through the bad spurts. It does not mean it is fool proof, but as you get more rental properties the whole portfolio will be able to absorb hits more effectively than relying on only one property.

Good Luck! ~Chris
0 votes Thank Flag Link Sat Mar 2, 2013
Hi Christ, thanks for your post. I must be totally ignorant - how can you lose $7000 in a 12 month period, other then the renters starting a stove fire or something major like that? thanks.
Flag Sat Mar 2, 2013
I am starting to think I should just rent it out for a couple of year. The main problem in selling it is I might sell early and then i'm stuck with no place to live until sept.

but i really liked what some of you said about the housing market going up again. at one point my house was valued at $225,000. now its down to $170,000, which is what i bought it for. it would be great if it went back up in value in a couple of years. i like the idea of someone paying my mortgage for me while i wait for my house to increase in value again.

i have enough money to live on so i don't need the cash, and i want to someday become a rental-property owner. so here's my chance at becoming one the easy way by renting my house out. i think i can get a couple hundred extra out of it per month and put that aside for repairs.

i know i i will need to hire a property manager to take care of it and keep it rented. its a duplex and the upper part is already rented out. its got a huge back yard, is right next to a major bus line, is in a good neighborhood (st. louis park), and has a huge 2 car garage.

i plan on renting in portland for awhile until i can find a job (as i doubt I could get a loan without one). from there i'd probably sell this house and buy a rental property/duplex there, and live in part of it and rent out the rest like i've been doing here. that's the plan now. thanks for all the advice!
0 votes Thank Flag Link Fri Mar 1, 2013
These are the steps of reasoning I would use with you Cat:

1) Do you need to cash out of this home in order to purchase a home in Oregon? Besides the down payment the actual loan amount is probably the most critical. Do you have an idea of what the home will cost in Oregon? I would want to research that.

My first step would be to get you in touch with one of my favorite loan officers to run through some scenarios. If it turns out that your DTI will be screwy then I think you have the answer. That is unless you don't mind renting in Oregon for awhile. You will be able to claim rental income on your taxes and that may help. Bottom line I would get a loan officer involved since this is the first step!

2) If you DO NOT NEED TO CASH OUT then you do have some options. As for the market my comrades are right on the market being on fire right now. I have the stats to back it up if you really want to dig, but the bottom line is we have been in a seller's market for just about a full year now. I am expecting this spring & summer to be pretty crazy and will not be surprised to see a 10%+ growth again in 2013. I think until our median gets back into the low 200's we have plenty of room to go.

Not all neighborhoods in Minneapolis are created equal of course. I would want to know more information on the property and do a market analysis property specific (because honestly the metro stats don't matter for you).

3) For renting the $250-$300 can be OK if you have set aside money for other expenses. Some items you may have not considered:

- Vacancy rates I would use 10% even though in most areas it is literally 2%. You have to remember that unless you get lucky with a long-term tenant most will move after the 12 month lease. Lost rent and the cost of obtaining a new tenant need to be factored.

- Property Management is usually 10% of monthly rent. Maybe you are cool being a landlord in Oregan but I sure as heck wouldn't be. Unless this is something you really like doing chances are you will hate it. I would put this number in BECAUSE DOWN THE ROAD YOU MAY WANT TO DO IT.

- Repairs & Maintenance I would put 25% of monthly rent. You have already mentioned furnace that is a big ticket item, and I use 25% for most properties unless they are turn-key 100% rehabbed.

Besides that we are talking taxes, insurance, and utilities mostly that the buyer can cover. If you have $250-$300 bucks AFTER all of what I said it is a good situation. I would hold onto the house as long as possible until the market peaks, because I fully believe real estate is one of the best ways in america to build wealth.

If after my suggestions you are now negative it does not matter how good the market is going there is no point renting a house where you are not making any money. That is a financial risk too great.

4) There is another option that you may not know about called lease options AKA rent-to-own. In my opinion this may be the best option for you compared to renting the house out. My reasons are below:

1) You typically never pay 3% seller concessions towards a buyer

2) You don't pay Realtor fees ranging from 5-7%

3) You will receive a down payment from the buyer that is non-refundable if they don't purchase the home at the end of lease.

4) In the majority of instances you will get a higher price selling on a lease option than on the MLS.

5) The quality of tenant is exponentially increased because they intend to purchase the home by the end of their lease agreement. They have given you a down payment as collateral. They are in charge of repairs & Maintenance thus avoiding you "land-lording" or having to set aside money for these numbers yourself.

To me lease options are a hybrid of selling and renting the house out. you make more money in both scenarios. There is a lot more to discuss on this topics for risks versus rewards, but if you are interested I would be more than happy to help.

The next step moving forward is to get in contact with me and we will set up an appointment at the house to review everything I have outlined in this discussion.

Look forward to hearing from you Cat!
0 votes Thank Flag Link Fri Mar 1, 2013
Some questions I would ask - Do you need the money for your new life? How would renting fit into your overall financial planning goals? How will you manage the property from afar? How will you mitigate the risks of having tenants?

I can tell you that I'm bullish on rental property (I own 8) but that there are lots of issues you need to be prepared for. I highly recommend a website called biggerpockets.com if you want to get lots of advice from real estate investors & landlords.

One other thing you need to look into - the City of Minneapolis charges a licensing fee of $1,000 to convert your owner occupied home to rental property. You should go look at their website as it might be a determining factor for you.

Bill Wallace
RE/MAX Advantage Plus
0 votes Thank Flag Link Fri Mar 1, 2013
Hi Bill, I spoke with someone at the St. Louis Park City Hall today and they only charge $100 per unit to turn it into a rental. They said in the Minneapolis area they are charging $1,000 or more for houses into rental units. So glad I won't have to pay $1000. Thanks for alerting me to those types of issues.
Flag Mon Mar 4, 2013
Hi, Cat,

Claire had some nice advice below for you. Let me toss in my 5 cents worth.

Thank you for offering all the details and asking a great question.

Yes, the rental market is good. And I personally do property management and know the investor/rental market very well. I would not manage properties down in Minneapolis, so I am not wanting that business. Okay? But even though the rental market is good, and you do get extra benefits from renting (i.e. property tax deduction, interest deduction, depreciation, management fees, etc.), sometimes it is better to cut losses and run. But sometimes not.

Let's talk about your "friends". Remember Job in the Bible? He went through hell. Why? Because he listened to his friends and not someone much wiser who was trying to tell him what to do. No, I am not God and you are not Job. But I am an expert in this. The housing market is very healthy. We, in this area, were the first market to get into all those bad loans, and the first market OUT of the mess. We hit rock bottom over a year and a half ago. Last January the big annual report came in that we all wait for and the big national report stated that of all the top 100 real estate markets in the entire U.S., that the Twin Cities metro market was the number one healthiest market in the country. They also projected that in 2012 we would have a 8-10% increase in the average sales price. They were wrong, Cat.

In 2012 we had an average sales price across the board of just shy of 15%! Our experts are projecting something close again this year, but maybe closer to 10%. Over the past 50 years we have averaged around 5% (except for the previous 4 years of crap). So expect that next year, yes, your property will go up in value. Will it go down? Well, like you said, we don’t have crystal balls. But I say hogwash! There is no way it is going to go down again. Real estate is very predictable and it will under normal circumstances always get better. The foreclosures and short sales are down about 40% across the board and everything is improving. My humble opinion is it will get much better.

Should you rent and sell later? Sure you can do that. But let’s discuss that in simple fashion. I will make up figures to make a simple point. If you have a $50,000 home and the price increases 5%, it goes up $2500. If you have a more “normal” or average priced home of let’s say $200,000, and it goes up 5%, it now goes up $10,000. I don’t have time to walk you through a 5 year scenario, you can do the math. But the bottom line is that the $50,000 house may go up $10-12k, but the $200,000 home will go up $50,000. Remember the phrase “it takes money to make money”? It applies here. You get a higher ROI the higher the value on your basis. And you never stated the value of your home, so I cannot be exact here. But if you have a $50-60k home in Minneapolis (not a $900,000 home on Lake Harriet), you can wait 2-3 years, and try to get another $10k out of it. But if you took that $30,000 of yours out to Oregon, you will get a better return if that is added to the value of your home there. ON top of that, as a property manager, with all my experience, let’s try to be real. How much are you going to have to pay a property manager each month? Not a lot, but it adds up. More important, what are the chances that at the end of the first year’s lease the tenants leave you with a gorgeous, spotless well-maintained home….in Minneapolis? Not. You will be replacing carpeting, appliances and re-finishing HW floors.

My humble opinion: get a good realtor and sell it now. Because right NOW we have a severe shortage of inventory. We are 40-50% lower on inventory than we should be. These inventory levels are down to 1999 levels. And already this year the buyer traffic is up about 35-40%. Combine these two together and here is what we have. I list a home…..if it is priced according to the market….they scramble…sometimes there are multiple offers…..and the seller usually gets what they are asking for and often more.

If you have any questions or want to chat, just click on my website below and give me a call.

Mark
0 votes Thank Flag Link Thu Feb 28, 2013
Hello Cat,

If you can afford to hang on to your Mpls home and rent it out, you may see a steady increase in housing values over the years. Home prices rose over 13% in January the highest rise in prices since 2005. There has been a steady but slow climb in values. I don't think we'll see prices skyrocketing up quickly but a steady growth over the next 5 years based on all the indicators remaining stable. By renting out your home you could see steady growth in the home's value over the next few years.

That said, if you don't wish to worry about renting out the home yourself, you may wish to use a rental management company, at least to vet the renters and do the showings. If you wanted to meet with the rental management companies they can give you an idea of what you could get for rent for your home. They would want to see the home and get an idea of the rental value.

It's a great market for rental property now as rents are up and rental property is scarce. So that may be a way to make good on your original investment by hanging onto it a while longer. You will pay a portion of the rent to the management company but, you may be able to rent it for more than you thought, and, the peace of mind you will have by having someone else handle this when you're in another state is probably worth it. If you want information on rental management companies please let me know.

I would imagine that now is a great time to purchase in Portland. I know a wonderful Exclusive Buyer Agent who would protect your interests as buyer in Portland and would be happy to refer you to her. She has lived in Portland for years and is a great Advocate for Buyers! Please contact me if you wish to speak to her and I will provide her details.

It is a smart buyer who uses an exclusive buyers agent. Check out my website to read why. Be aware that this is still a shifting market, and all markets are not created equal. What is true in the twin cities is probably not the same in another market. One neighborhood can be very different from another as well. You are wise to consult a professional before you make a move on this.

I hope you found this helpful. Please feel free to contact me for further information.

Claire@breg-tc.com
http://www.FindYourMinnesotaHome.com
0 votes Thank Flag Link Thu Feb 28, 2013
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