Getting a divorce - selling vs refinancing our house to rent out

The Something Awful Forums > Discussion > Ask/Tell > Business, Finance, and Careers > Getting a divorce - selling vs refinancing our house to rent out

Bhaal: Jul 13, 2001; I ain't going down alone; Dr. Infant, MD

Sorry to hear about your divorce. Even when it's mutual and amicable I know it is still stressful and complex (I haven't gone through it personally, thankfully, but I've seen it up close with some people close to me). Anyway, for this here's the factors I'd consider, roughly in order of importance:

Market for renters in your area (sounds like you already have a pulse on this and it seems reliable)
How the property is doing repair-wise. Obviously hard to predict but I assume it hasn't had an assessment since you bought it 3 years ago. What is the time to live for major appliances/HVAC/foundation/windows/roof/walls/plumbing/trees/etc? An inspection is usually $400-500 in my area but you might be able to narrow the scope of what you have them look at to bring the price down. That, or pull up the docs from when you bought it and review what they found. Get an idea of what big costs are looming in the next few years to factor in.
Real estate market in your area. I know you mentioned it's on the rise but it might be worth investigating more deeply and/or asking around to see how confident the prediction is that prices should steadily rise around where the house is. If it's got a good trajectory then there's a chance for the dream where you offset the mortgage with rent, then years from now sell for a higher price and more equity. If, however, the market is lukewarm or showing signs of declining, it might be better to get out now and put the cash towards other debt or more reliable investments.
How long would you see yourself doing this before wanting/needing to sell that property? Do you plan on moving away geographically? How stable are your other finances/income? Given all the changes in your life right now these are unfair questions to ask, but what I mean is this tends to pay out better over more years (of stable renters / appreciating real estate market / etc) and until then can easily end up as a cost, and depending on circumstances it could take some time for it to have a favorable yield.
How quickly is the loan being paid down? I threw your numbers into an amort table (guessing at down payment and interest) and it sounds like right now your payments are in the ballpark of paying $2 to interest for every $1 to principle. The further along in the loan the more this seems like a better idea. Or to put it another way I personally find it less palatable to carry a mortgage and the risks/costs of homeowning just for the rent money to mostly pay someone else. As a thought experiment, consider the outlay of buying a house today with a brand spanking new mortgage, renting it for 3-4 years with typical bumps along the way (gaps in renters, repairs, etc) and then selling. Assuming the sale price only appreciates modestly in those years you probably would not come out ahead very much compared to what you could have made your down payment do in an index fund, knocking out other debts, etc for that same length of time. For a mortgage 3 years in you are not too far ahead of that scenario, but I am really napkin math'ing your loan and of course there are lot of other factors ie. the ones listed above.

If it were me, I would spreadsheet this out a bit. Start with the student/car loans you could pay off with selling the house today, and add up month to month how much interest accrues in those if you pay them down at the rate you have been. See how much it adds up to, month by month, for the next 5 years. That's the "dividends" you get for the option of selling and putting the cash towards your debts (negative interest or whatever), and what's nice is these numbers are pretty firm. Next, in a column alongside those months, put the sale price of your home and have it appreciate by some factor (start with using whatever rate you've been experiencing for the home). Next a column of how much rent you expect to get per month, and next a column of how much is left over after mortgage, and next how much principle is left at the end of that month. With this you get a very coarse formula for seeing how much you get out of renting, and can compare it to the "dividends" you would have had if you had instead sold and wiped out debt. You can also include a column for "what if I sold in this month?" that looks at sale price minus loan principle (don't forget commissions/taxes/etc!) to see what you can exit with after you're done renting it.

It will probably look really favorable, because the numbers for selling and wiping out debt are pretty solid but the numbers for renting have a lot of what-if's that we haven't added in yet. Market swings, tenant reliability, and house maintenance should be worked in to the sheet to pepper it with some doses of reality. Then you can work out things like "how does it look if over time the price rises 5%/year, I get 85% of expected renter money, and maintenance costs average to $200/mo?". You can then play it out with those different factors to see what it would take for a good return, a lukewarm scenario, a disaster, etc.

To paraphrase the saying in business that goes something like "sales can make up for a lot of sins", to me renter income is your biggest driver (or killer) of this idea. If you can reliably get 133% of the mortgage every month--over years--then a lot else has to start going wrong for it to not be worth it. Not to mention you can use the excess to overpay the mortgage, or pool for repairs, etc to compound the gains for when you finally sell. If however the rent is less reliable (rent price lowers, time with no renters, renters who fall behind, etc) then everything else might need to go really smoothly for this not to end up a costly investment.

Bhaal fucked around with this message at 00:34 on Aug 20, 2019

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The Something Awful Forums > Discussion > Ask/Tell > Business, Finance, and Careers > Getting a divorce - selling vs refinancing our house to rent out