Howdy y'all. Cross posting this in real estate too for the most traction. A little back story here, I bought my first home in March 2024 for $300k with $15k down (5% down). At the time, it appraised for $315k. I was house hacking it and renting out the other 2 rooms to buddies. Planned to be there for a while, but life happened and recently got married and moved 3 hours away. My monthly payment is currently $2,588 (PITI, PMI). I am now renting all 3 rooms bringing in $2,600 a month, so barely cash flow positive. The leases all end at the end of July 2026. I will owe $278k on the house by then. Zillow currently shows a zestimate of $296k. Additionally, if I rented the entire house, not by the room, rental comps would have it right around $2,000 a month.

I am beginning to contemplate what to do with the house come July/August. Do we list it on the market and sell it? Given the current real estate market, I'm afraid it would sit for a while and/or sell for less than I bought it for, and after closing costs, I would be in the red or at best walk away with no money. I don't feel like I could rent the entire house for anywhere close to the monthly payment. Do I keep trying to rent by the room and up the rent for each room to build in some more cash flow? The downside to this is navigating the dynamics of 2-3 random people living together. Do I try to furnish it more and turn it into a mid term rental? I don't think it's in an ideal location for this.

All in all, just wanted to paint the picture of the situation and get some older Ags' advice on options or what they would do. Appreciate any thoughts and help, and happy to answer other questions if I'm forgetting any info. Thanks!

sell unless STR is option and that cash flows

permabull said:

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Its wild how the mood on real estate has shifted so fast. 4 years ago I was constantly getting pitched real estate deals

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Interest rates have most investors sitting on the sidelines. It destroyed rental numbers. I used a lot of my cash and equity to pay off all my variable rate loans but now all I can do is just sit with that equity tied up rather than being used as down payments on new loans. Any movement is pretty much halted. There's been a ton of money made in the stock market in the meantime.
If rates come down again we're going to see rental buying like we've never seen before.

OP needs to figure out what the house will actually sell for before he can make a good decision.

First order of business is to get a true and accurate understanding of what a fair market value would be for it.

CS78 said:

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permabull said:

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Its wild how the mood on real estate has shifted so fast. 4 years ago I was constantly getting pitched real estate deals

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Interest rates have most investors sitting on the sidelines. It destroyed rental numbers. I used a lot of my cash and equity to pay off all my variable rate loans but now all I can do is just sit with that equity tied up rather than being used as down payments on new loans. Any movement is pretty much halted. There's been a ton of money made in the stock market in the meantime.
If rates come down again we're going to see rental buying like we've never seen before.

OP needs to figure out what the house will actually sell for before he can make a good decision.

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Maybe if FEDFUNDS drops to zero. But sorry, the long bonds aren't coming anywhere close to where they were in 2020. That was an ALL TIME bottom.

If rates come down.. say 10YR to 3%, you will definitely see some money flow in. But it will be nothing like the home buying, investment buying, and REFI market we say from 2020-2022. It won't even be close.

On the flip side, I can almost guarantee you long bonds will be at new highs by 2028, if not sooner. Anyone holding and hoping for a 2021-2022 like appreciation is playing a dangerous game.

I was in this situation in the 1990s. I figured out I am not cut out to be a long-distance landlord. I recommended selling.

If it's in a good school district (and paces to continue as a good district), I would keep it and rent it out as a STR (one tenant). If it's not, I would sell it and move on. But be prepared to take a loss on it.

I would also reshop insurance if you haven't done that recently and choose to keep. Raise deductibles and do what you can to combat cost. Fight property taxes too if you haven't already.

As you say, it is barely cash flow positive currently, and at some point you will not have a renter for one or more rooms for some period of time. Could be a week, could be four months. You will wind up with negative cash flow on an annual basis, and that is not considering any maintenance items that might happen.

Given dealing with three people, and being 3 hours away, I would want to sell it. Of course, the fly in the ointment is what is it really worth.

Reminder to make sure you have an accurate and professional understanding of what it would most likely sell at and what it most likely rent for. Understanding those numbers is what allows you to determine what the best option is. Not worth guessing and assuming those numbers.

And, if you decide to sell, the time to put it on the market is quickly approaching which is why I asked about condition. If you wait until the tenants move out, then it will be too late. You want some one to be able to close and move into the home before the Academic school year starts in August.

How old is the home and where is it located?

Sell. If you convert to a rental, you will owe capital gains on any appreciation, and ordinary income tax rates on depreciation. In addition, your PMI is just money down the drain. Finally, even if your tenants treat it well, you will have a minimum of $5000 in make ready costs.

appreciation doesn't appear to be an issue in this case.

Diggity said:

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appreciation doesn't appear to be an issue in this case.

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No, I was assuming he holds it for 5 years, it goes up some amount, he makes too much to deduct operating losses (or breaks even), and would have about $50K extra income to pay recapture taxes.

While an unlikely scenario, that wouldn't be the worst problem in the world.

Diggity said:

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While an unlikely scenario, that wouldn't be the worst problem in the world.

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No, but still a bigger headache than just selling. Those recapture taxes are a beast. Better to cut bait if possible. The equity is just building too slowly.