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Q. I own a townhouse that I bought 20 years ago that now has $65,000 10-year loan on it. I am deciding if I want to sell it and pay down my mortgage on my newly purchased home or keep it as a rental. I could sell for $210,000. As a rental I should clear about $400 per month (will be $1,100 per month when paid off in 10 years) after all expenses. In the long term, the rent could be used as retirement income or to pay down my current home. Denise P., Gaithersburg, Md.
A. If you sold for $210,000 – less let’s say $15,000 for sales, escrow, clean up, and preparation for sale expenses and less $65,000 mortgage – that leaves you with $130,000. This is assuming you lived it the property for two of the past five years and will use the personal residence gain exclusion. Check with your tax advisor to confirm there are no taxes on the sale.
Let’s say you pay down your current home’s mortgage by $130,000. If the loan is at 4.5 percent, that saves you $487 per month in interest. Not bad.
Alternatively, the property as a rental – and rental properties are hard work and time consuming, unlike paying down your new mortgage which would be no work and not time consuming – would clear about $400 per month you note. But, you are also paying down the principal on your mortgage by about $430 per month. That’s really $830 per month in cash flow plus guaranteed equity build up! And in 10 years when your loan is paid off, that jumps (in today’s dollars) to $1,100 per month, or $13,000 per year – which is nothing to sneeze at!
Financially speaking, it seems like it might be better to keep it as a rental. But consider your tolerance for handling a rental property. Have you been a landlord before? Are you handy? Is the property in decent shape so it won’t need extraordinary repairs in the next 5 to10 years?
What about the financial condition of the HOA? Is the property within an hour or so from your current home, so it’s easier to manage? These are all things you should consider. You could also try being a landlord for a while and if it ends up not suiting your fancy you could then sell the property.
I’d suggest try being a landlord as that $13,000 per year down the road is pretty appealing. But you’ll have to work hard to get good tenants, keep them and treat them with respect. Hopefully by doing those things your landlord experience should be much less of a hassle and you’ll make more money. And if over time you find it doesn’t make sense to keep it as a rental, sell it!
Helping a Friend in Mortgage Trouble
Q. A friend is behind on their mortgage and wants to keep the property. I am considering helping them with money and taking an ownership interest in the property which does have some equity they’d lose if they lost the house. Any suggestions? Y.W., Torrance, Calif.
A. There are two things in real estate and in life that occur more often than not.
First, people behind on their mortgages usually lose their properties. And second, private investment partnerships, particularly when one partner is saving the other from financial distress, are rarely successful for the financially healthy partner.
I understand that it is a friend of yours, but the road of helping friends in distress is littered with ruined credit scores and lost friendships and money. If they are a lifelong friend, a family member or otherwise highly-valued friendship, that might cause one to consider helping. But you are putting your money on a pretty high-risk investment.
Alternatively, you might consider buying the property and taking title so you have complete control, subject to a written agreement between the parties. If there are profits above what you should earn for taking the risk, you could share them with the other party. Regardless, have a legal written agreement between all the parties so everyone knows the arrangement. Good luck.
Leonard Baron, MBA, is America’s Real Estate Professor®. His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University lecturer, blogs at Zillow, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com. Email your questions to: Leonard@ProfessorBaron.com