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PaperclipPerfector  6mo ago (text post)   3496 thread views

Small-Scale Question Sunday for May 12, 2024

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I have effectively made the decision to move out of my home in the middle-class Dallas, TX, suburbs into an apartment in the fun part of town. I am debating whether I should rent the home out or sell it and would like advice and/or experiences from my fellow Mottizens. I am leaning 75/25 in favor of selling given the thoughts below.

Background:

  • 26 year-old male in committed relationship that I expect to result in marriage. We would not move into this house together if we got married.
  • Home is appraised at $380k and has a 30-year mortgage with 3% rate. Monthly payment all-in is $2200 and expected to go up due to property values increasing.
  • Home is in a socially "meh" area with meh schools and stroads galore

Pro-sell thoughts:

  • I do not have the time to manage tenants unless they are truly very quiet nor am I willing to risk getting shitty tenants and having to deal with them
  • I can simply pocket the cash and have peace of mind about not having to worry about the house and its illiquidity, tenants, etc.
  • I am moderately risk-adverse when it comes to money and investments and it can cause me stress. If I were to move to an apartment and have a vacant home, my combined mortgage and rent would be about 80% of my post-tax income. (I have plenty in a brokerage account that could cover me, but I don't want to sell that.)

Pro-rent thoughts:

  • More equity: I do not care about making a large monthly profit off of the house (maybe $100-200/mo to pay for emergencies), but rather building equity so I can get more money when I eventually sell
  • Property management companies can, but not always, do a good job of not letting anything make it to the homeowner (from what I've read)
  • If I get lucky and find excellent tenants, I can treat them very well to increase the likelihood of them staying (but this is still risking it)
  • My area's real estate market is relatively in-demand with little sign of slowing down (not including reasons that affect all U.S. cities), which may allow me to sell a bit quicker than other markets, especially if I sold for below market value (which I'm fine doing if absolutely needed)
  • 3% interest rate is very good and I suspect we won't see that for a long time

I'm going to buck the trend and say you should sell. In my opinion, administrative overhead is greatly under-estimated. Simply not having to think about X is worth a lot.

To me, it feels like you aren't going to care about the house. At best, it's a source of small income. Cut it free, take the capital gains and the mortgage payment and do something else more relevant to you with the money.

It would be foolish to give up that 3% rate. That is free money dude! What are the rental comps looking like. You're also locked in except for tax increases/insurance, the rent rise a lot over the next 30 years but the mortgage will be the same in 2045 as it is today! Tenants aren't that bad if you vet properly. Just self manage and tell the tenants you're just the property manager. Saves a lot of headaches.

This is Dallas, self-management is a bad idea unless you’re plugged into a network that pre-vets people and have a lot of free time.

Can you explain what makes Dallas such a different and difficult rental market from a self management perspective?

3% interest rate is very good and I suspect we won't see that for a long time

One important addendum to this is considering that this is already leveraged money. In a counterfactual scenario where you didn't currently own a rental property, but could purchase one with a 3% interest rate, this would be an excellent purchase at the moment.

You're correct that dealing with tenants can suck, but a huge amount of the suck is brought on by softhearted landlords. One of the big things to consider here is whether you're willing to treat any potential tenant in a strictly transactional fashion. If not, this is a bad business for you to be in.

Fair point. I think this a benefit of a property management company—they are consistently transactional by nature and requirement, whereas my softheartedness would probably vary by tenant.

Let’s say you have 50 dollars. Let’s say investor X has 30 dollars but can borrow 70 at 5% interest rate.

You both invest and get a twenty percent return over two years.

You end up with 60 dollars. X ends up after paying off the debt 43 dollars. That’s over a 40% return on X’s 30 dollars.

Now of course X took on much more risk. The question in your fact pattern is how much risk are you taking on. if there is decent equity cushion in your home and given that the rate so low, the answer is “probably not that much risk.”

Monthly payment all-in is $2200 and expected to go up due to property values increasing.

I'm guessing you mean from taxes? That's a factor for sure, but it's going to be so minuscule that it isn't even worth talking about. The assessed value of my home went up by like 75% in the past year, and it's going to mean an extra couple hundred dollars on our monthly payment. Compared to the value you will get from selling the house later on, that's nothing imo.

Yes, taxes. It went up by $400/mo last year, and I expect another $100/mo again this year. That’s not minuscule to me. But you’re right—long-term it mostly washes out.

If it's about money, how about staying in the house and getting housemates? (I assume the house if big enough for that - I don't know DFW market but $380k sounds like it should buy some decent space?) Once you marry and ready to start that adventure in a new house, you can sell this one, or keep renting it out - by then you'd know if it works for you.

I do have housemates now which has substantially helped with paying the mortgage (and I’d recommend to any single person with a home!).

I want to move to area X because a) I like the environment, and b) that’s where I spend a lot of my time, allowing me to save an estimated 100 hours per year of driving (one-hour round trip twice per week). Housemates don’t help this much, even if I save a bunch of money.

If you currently have housemates (presumably already vetted), why not just continue to rent to them? Increase their rent as necessary to cover your expenses, and then rest easy knowing you’re renting to responsible people.

It’s only one right now. He’s an old friend who is living there for the cheap rent (which I’ve promised not to raise) and to spend more time with me. If I moved he would too, and even if he stayed and I increased rent, it wouldn’t be enough to cover what I need.

Fellow DFWite- you should rent it out. The DFW real estate market is absolutely brutal to transition from renting to owning in; I’m assuming this is a northwest Dallas location in Dallas ISD based on what you told me, which means your home should increase in value a lot if you hold on to it, giving you a massive head start when you and your future wife buy your forever home. A good property management company is a must, but your house is unlikely to sit vacant.

I’m not sure why you’re moving into an apartment when rents are absolutely insane right now. I will also caution you that the fun part of town(if you’re young I assume this is deep Ellum or maybe uptown) is much less fun to actually live in. I would advise you that living in your house is the best move, renting it out while living elsewhere is a distant second, and selling is a bad idea unless you’re moving out of town or buying another house immediately.

I’m in north Garland, so Garland ISD, which isn’t the highest value school district, but still a not-so-bad area. Open to your predictions.

Uptown is where I want to live for a few reasons:

  • I’d save ~100 hours per year of driving (any further south is too far of a commute)
  • the environment is ambitious in various ways, a vibe I’m looking for to boost a few aspects of my life and one my current place doesn’t have at all
  • people I know who live in Uptown enjoy it and I mostly trust their takes
  • I want to live with my girlfriend and Uptown is as far north as she’s willing to move

I think I’ll talk with a property management company and see what they have to say.

North garland is probably going to continue to increase in value, but I wouldn’t guess anything about school quality in Texas until after we see what the legislature does about school choice- garland ISD could well wind up not mattering very much.

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