# Sell or Keep and Rent Out?



## Spalding (May 11, 2014)

I recently purchased a great house for around $600k and have put my current house up for sale for $500k. If my current house languishes on the market for a long time, I was thinking of just keeping and and renting it out for $1700/month rather than sacrifice it to a lowball offer. I still have around $220k on the current house's mortgage. I have already been approved to carry mortgages on both houses, would be very comfortable to sell it in order to have a cash cushion. Keeping both would only leave about $100k in savings. Being aware of some of the pitfalls of being a landlord, which choice would be the most beneficial to my long term net worth?


----------



## Just a Guy (Mar 27, 2012)

The return on investment for a $500k house has to be a lot higher than $1700 to make it worthwhile. You should sell it and buy rental properties which are different than homes.


----------



## Spalding (May 11, 2014)

Thanks for the food for thought. My thinking was that since the house only costs me $1000/month for the mortgage and only has $220k left it is more like a $250k house than a $500k house from a cost point of view. I would save the sales commission on the property and have already paid the transfer tax, closing costs, and all major maintenance updates years ago.


----------



## Just a Guy (Mar 27, 2012)

Yes, or you could sell it and buy five $100k doors that generate $1000/month. thats the difference between owning and investing.

With 250+k, you could actually buy a $1,000,000 apartment and put down 25%. That could easily be 10+ doors generating $10k/month.


----------



## Mortgage u/w (Feb 6, 2014)

If you rent it, you will have to consider the consequences: 
1- tenants will not keep your home in the same condition you do. Expect to invest a good portion of your profit back once they leave and you wish to sell
2- you will owe CRA some capital gains when you do sell it since the profit will become taxable for the time you had it rented.

In theory, renting may seem like a great idea....but the reality is that it won't be as profitable as you think it will. I would hold on to the property without renting until it sells at your price. Rather leave it empty then have a tenant depreciate its value. 

Bottom line, a $500k single dwelling is not the ideal rental property to have - with or without a mortgage on it.


----------



## Spalding (May 11, 2014)

@ Just A Guy, Good point, that is a lot to manage but way better cash flow. @ Mortgage, also a good point, probably easier to sell in the spring.


----------



## Jagt Mirage (Sep 29, 2014)

Spalding said:


> I recently purchased a great house for around $600k and have put my current house up for sale for $500k. If my current house languishes on the market for a long time, I was thinking of just keeping and and renting it out for $1700/month rather than sacrifice it to a lowball offer. I still have around $220k on the current house's mortgage. I have already been approved to carry mortgages on both houses, would be very comfortable to sell it in order to have a cash cushion. Keeping both would only leave about $100k in savings. Being aware of some of the pitfalls of being a landlord, which choice would be the most beneficial to my long term net worth?


I think it depends on a couple of things. One, how is the rental market in this area? is it relatively easy for you to find tenants? Two, what kind of appreciation are you getting in this area? This is an important part of the equation in addition to just the rental income. If you're in one of those hot areas with 10% appreciation or higher, I'd suggest keeping your existing house and buying the new one considering you'll be making 50K in capital gains a year, which is taxed at only 50% compared to 100% for rental income. You can refinance your old house to 400K mortgage, and use the equity towards your new house. This way the interest on the old house is tax deductible. Ofcourse if you're purely interested in rental income, then Just a Guy's method will probably maximize your earnings but you have to be willing to deal with some headaches. The more tenants you have the more headaches, also more liability risk. It's up to you how much time and effort you want to invest into it.


----------



## Just a Guy (Mar 27, 2012)

Personally, I find one rental more risky than several. If one is vacant, you're on the hook for 100% of the expences...if you have multiple doors, they tend to offset the costs. Of course, you can have all your door empty at once...it does happen, but it's rare.

Make no mistake though, being a landlord is work. Less work than you'd have to do to earn the same amount via a paycheque I've found, but it's still work. You have to treat it like a business.


----------



## OurBigFatWallet (Jan 20, 2014)

What are the cash flows like? If you keep it are you able to put a 20% down payment on the new place (avoiding the CMHC insurance costs)? If the property is cash positive as a rental and you can still put 20% down on the new one, and also don't mind being a landlord, I'd rent it out. I wouldn't sell for a large discount just for the sake of getting rid of it.


----------



## Jagt Mirage (Sep 29, 2014)

Just a Guy said:


> Personally, I find one rental more risky than several. If one is vacant, you're on the hook for 100% of the expences...if you have multiple doors, they tend to offset the costs. Of course, you can have all your door empty at once...it does happen, but it's rare.
> 
> Make no mistake though, being a landlord is work. Less work than you'd have to do to earn the same amount via a paycheque I've found, but it's still work. You have to treat it like a business.


It depends on your situation. Primarily, are you doing real estate investing as your day job? or do you already have a day job and wants to do it on the side for some extra income and long term investment. Personally, I don't have the time or inclination to spend a lot of time on being a landlord having two young kids to take care of as well as good day job. For me, having 3 good tenants occupying one triplex long term is infinitely easier than having to manage 10+ different tenants and the turnovers and hassles of dealing with vacancies. I'd rather have less hassle and rely on capital gain than managing lots of tenants for more rental income, which I'll have to pay lots of taxes for due to my tax bracket. But that's just me, everyone is different.


----------



## Rusty O'Toole (Feb 1, 2012)

Renting is as much a business as an investment. I would suggest you sell the house for the best price you can get, even if it is not as much as you wish.

As to your net worth it would probably be best to sell the house and deploy the money elsewhere. After being involved in RE investing since the seventies, I wish I had done this years ago.

RE is an excellent investment for young people without much money because of the leverage mortgages offer, and the opportunity to create wealth through sweat equity or forced appreciation. But if you have serious money to invest there are better opportunities that are less time consuming.


----------



## Just a Guy (Mar 27, 2012)

Rusty, if you started in the seventies then you made a killing in real estate, way more than you could have in stocks. Then again, there were scary times, the 80's come to mind, and I'm sure you had your fair share of crazy tenants...

But you also probably had a lot of tenants you don't remember because they never caused an issue, your real estate holdings were started to be paid off decades ago, yet still created cash flow, your capital gains were huge in the past 20 years and, unless you bought apple, Intel, Microsoft, etc in the early 80's made you far wealthier with some minimal work than anything else you did.


----------



## Rusty O'Toole (Feb 1, 2012)

Ha ha ha wouldn't it be nice. I started off with a small amount of savings and borrowed money. In the seventies and eighties I paid 9, 10, 11, 12 percent and higher on mortgages. Maintained my properties well, and made a living. I wouldn't call it minimal work either. 

Today I have sold my properties, own my home free and clear, car paid for, RVs etc and don't owe anybody a dime and have enough invested to make a modest living if I work at it.

A lot of money went out in paying high interest, now I have money to invest, the bank offers 2%. Also, real estate investing was my full time job and of course, I had to take out money to live on. 

If I knew 40 years ago what I know now, I could have made more money in 10 years than I did in 40 years.

Shuffling paper is way easier and more profitable than actually providing a useful product or service. I'm not happy about that but I don't make the rules. As I said I would have been better off if I had learned to finagle the stocks, bonds, options, etc and left real estate alone.


----------



## Rusty O'Toole (Feb 1, 2012)

I wouldn't call capital gains huge either. A double in 10 or 20 years is about par for the course in small town real estate. Lots of stocks do that in less than a year. But, you can't buy stocks for 10% down and collect enough dividends (rent) to make the payments.


----------



## carverman (Nov 8, 2010)

Mortgage u/w said:


> If you rent it, you will have to consider the consequences:
> 1- tenants will not keep your home in the same condition you do. Expect to invest a good portion of your profit back once they leave and you wish to sell
> 2- you will owe CRA some capital gains when you do sell it since the profit will become taxable for the time you had it rented.
> 
> ...


Yes I agree that it's a bad idea, IMO. 
There are also *other expenses, besides property maintenance issues*,
(usually tenants will not fix anything that is broken or needs repair)

- the property taxes on a $500k house that is meant to be a primary residence, 

- as a landlord he has to pay water and sewer, since the city account for those is against the property

- the fire and liability insurance that he still needs to have on the property, which is going to be a lot more expensive because it's used as a rental.

- and any other expenses, snow removal/grass cutting contracts?


At $1700 a month rental income with $1000 going to the bank, $400 or more for property taxes?, $100 a month (or more) for fire insurance because you are renting out your home instead of living in it, and the amount of rental income you have to declare to CRA and then pay taxes on after expenses, doesn't leave you too much left over. 

I'm not sure how capital gains applies to a rental property...I suppose it depends on how long the property is rented out..and during that time, the interior may need the floors/carpets redone and repainted....another big maintenance expense.

However, he can't leave the house empty for any length of time, unless he is in the process of selling it
for fire insurance purposes..most fire insurance companies don't like to hear that the house is empty.
Especially winter months where the heating could fail and pipes freeze.

Then there is the heating and electricity bills, you still have to pay even if the house is empty,
especially during the winter months and even in warmer weather, you would still get minimum billing,
and still have to pay property taxes, insurance, and of course.. the mortgage payment.


----------



## Just a Guy (Mar 27, 2012)

Carver, most of those expences can be passed on to the tenant, and insurance is actually quite a bit cheaper because the tenant needs their own tenant insurance which covers the contents and some liability.

Capital gains are calculated from the price of the property the year the owner moves out...but to prove that, he should get an appraisal done now.

As for insurance if he sold, you're right, it can go through the roof pretty quick...the way around that, if you're married, is to leave a bit of furniture behind and have one of the owners continue to "live" in the old place...

Yes, you also need to maintain the utilities, but that is a minor expense. Remember to, CRA expects you to sell your principle residence within 1 year (or it may be 18 months) of purchasing your new one or you may be liable for capital gains.

I just went through this exact scenario with my last house, it took me nearly two years to move/sell it for the price I wanted. I considered renting it, but quickly dismissed the idea.

Another big issue is walking into a place where you used to live, where your kids grew up, and seeing it trashed...harder to keep the emotions out of it.


----------



## carverman (Nov 8, 2010)

Just a Guy said:


> Carver, most of those expences can be passed on to the tenant, and insurance is actually quite a bit cheaper because the tenant needs their own tenant insurance which covers the contents and some liability.


Tenant insurance only covers the renters contents, not the house or property or any liability outside the interior walls, I believe, so the fire insurance on the house itself still has to be paid by the landlord. 



> As for insurance if he sold, you're right, it can go through the roof pretty quick...the way around that, if you're married, is to leave a bit of furniture behind and have one of the owners continue to "live" in the old place...


For insurance purposes, yes. Some one has to check on the heating in the winter at least every few days. Also the mail
for the owner (at least the fire insurance policy) has to be the same address as the "old house".



> Yes, you also need to maintain the utilities, but that is a minor expense. Remember to, CRA expects you to sell your principle residence within 1 year (or it may be 18 months) of purchasing your new one or you may be liable for capital gains.


A year is a long time. If the house is put up for sale, the owner can prove to CRA that it took longer than 12 months or 18 months..whatever the case may be to CRA to avoid capital gains. All you would need to include in your tax filing is the copy of the real estate contract when the house went up for sale and a copy of the sales contract when the house sold.

This would be an extenuating circumstance, and CRA would be fair with the claim that the house was being listed as that would also be it's FMV. When it is finally sold, amount would be less than the actual listing and the paper work would confirm the amount of the sale as long as it was his principle residence...and he can't have two of these. 

Now if he rents it out as an income property and claims depreciation while renting..that is an entirely different scenario.


----------



## Cal (Jun 17, 2009)

Spalding said:


> Thanks for the food for thought. My thinking was that since the house only costs me $1000/month for the mortgage and only has $220k left it is more like a $250k house than a $500k house from a cost point of view. I would save the sales commission on the property and have already paid the transfer tax, closing costs, and all major maintenance updates years ago.


If you sold for 500, paid mortgage 220, approx 20 in RE fees, leaving 260,000 invested at 4%, would get you approx 10400 annually, or 866 a month, a better and more tax efficient return than the 700 profit of rental income (although it appears that may be less than 700, as you haven't mentioned property taxes).


----------



## Jagt Mirage (Sep 29, 2014)

carverman said:


> Yes I agree that it's a bad idea, IMO.
> I'm not sure how capital gains applies to a rental property...I suppose it depends on how long the property is rented out..and during that time, the interior may need the floors/carpets redone and repainted....another big maintenance expense.
> 
> However, he can't leave the house empty for any length of time, unless he is in the process of selling it
> ...


Capital gains work just like your principle residence, except 50% of it you have to pay tax on once it stops being your primary residence. However, maintenance cost is irrelevant for capital gain. Maintenance cost factors into the debit side of the yearly rental income equation. If you have lots of maintenance in a year, it reduces your income for that year, and consequently the tax for that year. eg: You have a 500K house and you've got 5% appreciation. Using the OP's rent of 1700/mo that's about 20K in income a year. Now after you subtract interest from mortgage, property tax, insurance and everything say you're down to 8K. Now you spent 10K to maintain the house eg: floor/carpet that year, that means you have a net loss of 2K for that year. That means your income for that year will be reduced by 2K and consequently you'll pay less income tax. But this has no bearing on the 25K in capital gain you're still going to get that year.


----------



## Just a Guy (Mar 27, 2012)

Of course, the capital gain isn't realized until you sell. And, if real estate corrects, you could be liable for a capital loss.


----------



## carverman (Nov 8, 2010)

Jagt Mirage said:


> Using the OP's rent of 1700/mo that's about 20K in income a year. Now after you subtract interest from mortgage, property tax, insurance and everything say you're down to 8K. N*ow you spent 10K to maintain the house eg: floor/carpet that year, that means you have a net loss of 2K for that year. That means your income for that year will be reduced by 2K and consequently you'll pay less income tax.* But this has no bearing on the 25K in capital gain you're still going to get that year.


Ok leaving the capital gain (loss) and income tax adjustments aside; 
What is the point of keeping it for a year, if you have to spend that much on it ,and end up with a $2K income loss that has to come out of your own pocket? 

Sure, you are still the owner and there may be 5% appreciation in property values by then, but in real estate everything is negotiable. Just because you the property values appreciate doesn't mean you will get that 5% increase when you go to sell..unless you hold out a lot longer. 

If the rental lease is up, and you want to sell, the house has to be empty again..which that doesn't always bring you the best offers..neither selling or showing a house with tenants still in it where real estate arranging for a showing
can be a hassle and if the tenants are not the best housekeepers, that could work against you.


----------



## Jagt Mirage (Sep 29, 2014)

carverman said:


> Ok leaving the capital gain (loss) and income tax adjustments aside;
> What is the point of keeping it for a year, if you have to spend that much on it ,and end up with a $2K income loss that has to come out of your own pocket?
> 
> Sure, you are still the owner and there may be 5% appreciation in property values by then, but in real estate everything is negotiable. Just because you the property values appreciate doesn't mean you will get that 5% increase when you go to sell..unless you hold out a lot longer.
> ...


oh I agree RE investment shouldn't be a short-term investment option. If you're doing it short term you should stick to mutual funds or equity market. Why would you mind taking a 2K loss when you're making 20K in capital gains that year? At the end of the year it comes down to how much your equity is growing. Also, if you're getting loss every year there's something fundamentally wrong with the house.

Also, if you don't like long term rental agreements you can do month to month arrangements. That way you can vacate the premise with 2 months notice anytime you want. 

BTW.. you don't need to sell vacant. It's perfectly acceptable to sell house with tenants. The buyer may actually want that if the tenants have been living there a long time and are good tenants.


----------



## Berubeland (Sep 6, 2009)

If the house is vacant you will have a lot of difficulty with insurance. I've been paid $30 per trip every other day to go look at a vacant house. 

Also for many people mortgage breaking fees are considerable. If you have to choose with paying 26K penalty for the mortgage or renting it out, you'd probably rent it out too.


----------



## carverman (Nov 8, 2010)

Berubeland said:


> If the house is vacant you will have a lot of difficulty with insurance. I've been paid $30 per trip every other day to go look at a vacant house.


Leaving an empty home is an interesting topic. In most cases, if the house is left empty for more than 30 days, the insurance
company has to be notified and a separate rider might be necessary until it's sold.

http://www.foxbusiness.com/personal-finance/2011/04/27/home-kill-insurance/

OTOH..renting it out month by month can also be a detriment to selling it..depending on how clean the tenants keep it.

I know a case of a neighbour that bought another house, and rented out his town house to a family on welfare/mothers allowance (whatever); without thoroughly checking her previous background from other landlords.

She and a 'few kids' and 2-3 pets lived there for a year, lots of noise, teenage "friend" drop ins in the night(possible drug dealing), cops were called on occasion, and eventually his clean place required several thousand dollars in renovation,(carpets had to be replaced, new paint all around, damages to drywall, garage door broken, lots of
garbage left behind in basement and garage.. etc; ). 

He had a hard time kicking them out, but finally managed, and it cost him plenty to fix up the place in order to sell it. 
I believe he had changed the insurance on the house from owner occupied to rental, so his insurance may have picked up some of the cost for the damage directly caused by the rental.


----------



## Just a Guy (Mar 27, 2012)

Insurance generally doesn't cover damage caused by tenants.

Better thought of as the price of a real estate education.


----------



## carverman (Nov 8, 2010)

Just a Guy said:


> Insurance generally doesn't cover damage caused by tenants.
> 
> Better thought of as the price of a real estate education.


Yes, a real rental horror story. He was naive in thinking that everyone out there would take care of his place while he was trying to decide whether to sell it, or keep it for the father-in-law, from out of town, who was interested in moving closer to him and his wife in Ottawa.

In the end, there was a fair amount of damage done inside as some of the kids were ..had anger management
"issues" and kept banging on the walls and screaming. I'm sure that the neighbours were not pleased and glad to see them go. For a while there was even a wrecked car due to an accident caused by one of the teenage sons racing at night, left parked on the driveway..and either drunken or on drugs behaviour ..car tracks made late at night across a neighbour's lawn by his friends. As luck may have it, they didn't set fire to it..but the smell of the
pot was quite apparent when the teenagers congregated in the garage. 

He made a big mistake by not checking more into the background more thoroughly of this "tenant-from-hell" with the previous landlords.

If he did, I'm sure he wouldn't have rented it out to her. Now whether his insurance covered anything, don't know, but he had a lot of workmen coming in to fix up the place, and clean out the junk/doggydo left in the back yard before he finally sold it.... to his relief, as the the father-in-law was no longer interested in living in it.

If the insurance didn't pay for the damages, whatever rent the tenant paid probably didn't cover the repairs required.


----------



## hboy43 (May 10, 2009)

Hi:

I don't hang out in the RE forum much so late to comment.

All I needed to see was $1700/month giving a top line of 4% on $500K to reach a sell conclusion. I used to rent a $250K house for $1200 and figure even that is inadequate. Thus "used to rent".

Too many people are in the "assume RE goes up in price forever business". Sure they have been right for the last 10 years, but personally I like investment plans that are not luck based - buy high and sell higher doesn't work for me.

Maybe check out oil for part of the proceeds if you sell. There is a class of investment that is currently out of favour and thus very likely to give a very nice positive number some time in the next decade without all the worry and risk of being a landlord.

hboy43


----------



## CharlesF.Donahue (Jan 7, 2015)

Spalding said:


> I recently purchased a great house for around $600k and have put my current house up for sale for $500k. If my current house languishes on the market for a long time, I was thinking of just keeping and and renting it out for $1700/month rather than sacrifice it to a lowball offer. I still have around $220k on the current house's mortgage. I have already been approved to carry mortgages on both houses, would be very comfortable to sell it in order to have a cash cushion. Keeping both would only leave about $100k in savings. Being aware of some of the pitfalls of being a landlord, which choice would be the most beneficial to my long term net worth?


Selling it is good idea and it will be profitable for you as well, You can buy another investment properties after selling it.


----------

