House + Finances, WWYD

[imojoebunny]

I would sell your rental, but not pay off your mortgage. Invest the money, with the idea of retaining the principal, and using the interest and gains to subsidize your lifestyle. You can make more than $2k a month off $500k, even if your average return is 5%, paying off the mortgage on your current house will hurt your tax bill! and the rate is likely lower than 5%.

[cjeanette]

If you has 120 applications in less than 48 hours can you raise the rent with the next tennant to cover the cost of daycare?

I would hesitate to sell a permanent income stream to help with a temporary cash flow issue. You won't have daycare forever.

[ssmjlm]

Could you up the rent on your rental property?

[mswax]

My first thought is, if you have so many applicants, your rental rate is probably too low. Can you charge more in rent? How much are you in the red each month?

[toesie]

I'd see if I can raise the rent next time. 2K seems low for a 500K house.

[badgergrl]

Apr 17, 2014 11:45:38 GMT -5 mswax said:

My first thought is, if you have so many applicants, your rental rate is probably too low. Can you charge more in rent? How much are you in the red each month?

I agree.  You should raise the rent.

[ssmjlm]

I would probably go with a 10-15% increase in rent. Especially if people are bidding up the rent to get the property, there is demand.

[badgergrl]

If the tenants aren't leaving 10% is probably ok.

[mswax]

Apr 17, 2014 11:52:19 GMT -5 spunbutterfly said:

So another question, how much of a percentage increase, at this point, is fair? 10%? I think we've tried to do 10% jumps each year since the first.

We're in the red about 150 a month. This might disappear come October, when our kid moves up another class and tuition drops, but tuition also increases every year so, it's not something we're banking on until he's out of the daycare system and into school. Even private grade schools in the area are cheaper than daycare.

It sounds like you could easily get another $200-$250 more/month.  Then you would no longer be in the red.  It sounds like you enjoy being landlords, and this property is easy to rent, so I think I'd up the rent and keep the house.

[cjeanette]

Apr 17, 2014 11:47:03 GMT -5 spunbutterfly said:

Apr 17, 2014 11:42:17 GMT -5 imojoebunny said:

I would sell your rental, but not pay off your mortgage. Invest the money, with the idea of retaining the principal, and using the interest and gains to subsidize your lifestyle. You can make more than $2k a month off $500k, even if your average return is 5%, paying off the mortgage on your current house will hurt your tax bill! and the rate is likely lower than 5%.

I have pretty basic knowledge when it comes to taxes and houses/mortgages. Can you explain how paying off our current house hurt our tax bill? Is it cause of the sudden influx of cash? Isn't selling property exempt from capital gains taxes after two years? Or is this something else?

If it is an investment property there can be tax consequences for selling it.  I could be wrong but I think the exemption from gains is only if you lived in the home for 2 years.

Paying off your current mortgage can eliminate interest deduction if you qualify.

[badgergrl]

Apr 17, 2014 11:52:19 GMT -5 spunbutterfly said:

Apr 17, 2014 11:45:38 GMT -5 mswax said:

My first thought is, if you have so many applicants, your rental rate is probably too low. Can you charge more in rent? How much are you in the red each month?

Apr 17, 2014 11:42:55 GMT -5 cjeanette said:

If you has 120 applications in less than 48 hours can you raise the rent with the next tennant to cover the cost of daycare?

I would hesitate to sell a permanent income stream to help with a temporary cash flow issue. You won't have daycare forever.

Apr 17, 2014 11:44:31 GMT -5 ssmjlm said:

Could you up the rent on your rental property?

We probably should. But when we originally priced this 4 years ago, we priced it to comparables in the area at $1600, people bid it up to 2k in the last 2 renting situations. We're about to start the second year of our 2 year lease.

So another question, how much of a percentage increase, at this point, is fair? 10%? I think we've tried to do 10% jumps each year since the first.

We're in the red about 150 a month. This might disappear come October, when our kid moves up another class and tuition drops, but tuition also increases every year so, it's not something we're banking on until he's out of the daycare system and into school. Even private grade schools in the area are cheaper than daycare.

Wait, your tenants have a signed two year lease?   Can you raise the rent in that situation?   It might be hard to sell with a valid lease.  At least in my state, if you buy a house with a signed lease you cannot evict the tenants, they can stay through the contracted period.  Just something you might want to look into.

[catbus]

Apr 17, 2014 11:42:55 GMT -5 cjeanette said:

If you has 120 applications in less than 48 hours can you raise the rent with the next tennant to cover the cost of daycare?

I would hesitate to sell a permanent income stream to help with a temporary cash flow issue. You won't have daycare forever.

This was my first thought. With location and knowing what I do about the house, spunbutterfly, I would consider increasing rent ~10-20%. Check out rental comps. As you know, the rental market is tight and competitive. You could definitely command more than $2k. 

[kitty]

Another vote for raising the rent!

[barefootcontessa]

If I understood you correctly you are only in the red by $150 each month (or $1800/year). I would not sell a property that rents well for that small of an amount. $2K a month is a great passive revenue stream! Would you be willing to post your budget? You may be about to find that $150 in there.

[bunch]

Apr 17, 2014 11:59:44 GMT -5 spunbutterfly said:

Apr 17, 2014 11:57:34 GMT -5 cjeanette said:

If it is an investment property there can be tax consequences for selling it.  I could be wrong but I think the exemption from gains is only if you lived in the home for 2 years.

Paying off your current mortgage can eliminate interest deduction if you qualify.

I lived in it for 3 years before it turned into an investment property. So I'm not entirely sure how the taxes might work in this situation.

Though, I guess moot point since we, for some stupid reason (can I still blame sleep deprivation at this point), did not think of raising our rent next year.

Unless you lived it for 2 of the last 5 years, you'll pay a hefty tax bill when you sell. I'd raise the rent. Should you want to sell and buy other investment properties, I'd look into a 1031 exchange.

[Deleted]

I'd look at raising the rent a bit. I'd also take a harder look at your expenses. Being $150 in the red is almost certainly something you can change if you want to - but you'd have to honestly look at where your money goes and change something. Reshop your insurances, keep a handle on some disposable spending categories (for us, beer and groceries could be lower if I wanted), never just drop $200 at Costco or Target just because you went.

[leonard131]

One more thing to keep in mind is you will pay 25-30% capital gain taxes if you don't take the money and put it back into an another investment home and haven't lived it in for at least 2 years in the last five.

[imojoebunny]

The tax bill might not be as bad as you think. It depends on what your basis is and what your long term capital gains rate is. You are currently paying income taxes on your rental income, unless you can lower that by the amount of depreciation and have a lot of expense, since you don't have a mortgage, so your not really netting $2k a month. You should look into the rules for your specific situation. It is only capital gains excluded, if you have lived in it 2 out of the last five years. Your basis is increased by some types of repairs and improvements, but reduced by depreciation deductions you have already taken. It's pretty complicated, but worth looking into.

I still say, you can make more money in the market than you can on a paid off rental. Your other option would be to take money out of the house, use the rent to pay the mortgage and invest what you take out. I wouldn't take out 80%, but you could take out 50% without much fear. This would decrease the taxes you pay on the rental income, give you a cushion, and investment money that would produce income, but you wouldn't have to pay capital gains, and you would still have enough equity to pay capital gains, realtor fees, and for your mortgage to be covered by the rent.

[SJ]

Apr 17, 2014 12:09:17 GMT -5 barefootcontessa said:

If I understood you correctly you are only in the red by $150 each month (or $1800/year). I would not sell a property that rents well for that small of an amount. $2K a month is a great passive revenue stream! Would you be willing to post your budget? You may be about to find that $150 in there.

This is exactly what I was going to say.

[imojoebunny]

Apr 17, 2014 12:33:29 GMT -5 leonard131 said:

One more thing to keep in mind is you will pay 25-30% capital gain taxes if you don't take the money and put it back into an another investment home and haven't lived it in for at least 2 years in the last five.

My understanding is that the long term capital gains rate can range from 0-20%, with 25% only for that portion of the basis taken as depreciation for 2014.  Most people will be at 15%.  Where is the 25-30% coming from?  I know some states also have capital gains taxes.  

[gibbinator]

Yeah I'd definitely raise the rent to cover your loss before selling a good rental property. $150 isn't much in the scheme of things.

[ginkgoleaf]

Another vote for raising the rent. We get $1600 from our rental house (house we used to live in) and it's only worth about 180k now. We have high taxes (about 6k a year on that house), but still, seems like you could get a lot more per month than you are.

[Deleted]

I'm confused why you would have to pay capital gains- is it different than the 200k gains that you don't have to pay when you live in a property?

[Deleted]

Also, we rent our 300k house for 2k a month, so I think you are undercharging.

[catbus]

Apr 17, 2014 13:57:50 GMT -5 spunbutterfly said:

Apr 17, 2014 13:38:32 GMT -5 @envinoveritas said:

Also, we rent our 300k house for 2k a month, so I think you are undercharging.

I'm interested, a lot of people are tying in the home value to how much rent we can charge.

Disclosure:

1000 sqft home (1520, but half the basement is unfinished)

2 bedrooms/1 bath in a jack/jill sort of set up (each bedroom has a door to the bathroom and a door out)

half finished basement with 7ft ceilings. The first floor has 12ft ceilings.

71 point walk score.

Its tax value is significantly lower than its market value.

Do you allow pets? I'm researching.
Edit: I don't think $2000 is undercharging, but I do think you could get up to $2200 given the interest you've experienced. I guess it would also depend on how many of those applicants you had last time were actually qualified. But assuming most were, a 10% increase would be reasonable, IMO. 

[ryry]

Definitely raise the rent, if you can. We pay more in rent than you're currently charging a month for a house that would probably sell for maybe $330k. Stupid HCOL crazy rental market...

[catbus]

Apr 17, 2014 14:04:21 GMT -5 spunbutterfly said:

Apr 17, 2014 14:00:14 GMT -5 catbus said:

Do you allow pets? I'm researching.
Edit: I don't think $2000 is undercharging, but I do think you could get up to $2200 given the interest you've experienced. I guess it would also depend on how many of those applicants you had last time were actually qualified. But assuming most were, a 10% increase would be reasonable, IMO. 

No pets is preferred. We have soft fir floors that we just refinished.

But it would also depend on the renter.

All the renters who applied could pay. But 80 of them were an automatic no due to personality (what we could glean from the application/email exchanges and meeting in person during open houses).

Oh, and no doubt I think 2200 would be fair next year, but I'm also curious as to how/why people are equating 'cost of home' to how much rent should be. How much of a home's value should be rent?

And to that I agree that home value has little bearing on rental price. In Seattle and many other HCOL (LOL) cities, buying a home almost always costs more than renting. In much (most?) of the country, though, renting can cost more than buying. 

[IrishBelle]

I would keep the rental but consider a rent increase. I would also look at our areas of my budget to see what could be cut so that I wasn't in the red every month.

[niq]

Seattle's price-to-rent ratio is high, which means rent for a given home value is low, which is probably throwing a lot of people off in terms of what you could rent it for.

money.cnn.com/real_estate/storysupplement/price_to_rent/

$550K/25/12 is $1833 per month. But, knowing the neighborhood, I'm sure you could get $2200/month, if you think it's worth the hassle of possibly losing your current tenants, hoping that the new ones are just as stable, etc.

[Deleted]

Well, for us, when our landlords jacked the rent on our fairly shitty basement suite to $1200/month and we could buy a house for $1400/month mortgage, they got too greedy and we went and bought.

Really, I'd look around a bit for comps and make sure you're pricing your rental competitively. And then if you still feel a bit short, I'd trim some budget fat before I'd think about selling the rental. Or look at ways to make that much more money in a month, if that's plausible.