To Sell or To Rent, That is The Question

by Mark Wellborn

Unexpected situations come up frequently after purchase of a home, and a job offer that takes you to a new city is near the top of the list. A reader who was recently offered a job on the west coast now faces an interesting dilemma: Should he sell his home at a loss or should he try and rent it out in the hopes of recouping some of his down payment? The reader’s full story below. Offer your thoughts in the comments section.


I am on the verge of landing a job on the west coast job, an opportunity that arose in the last month and wasn’t something I had planned for. I’m certain I will take the job if the offer is extended. What I’m very uncertain about is what this means for the condo I bought in DC two years ago. Renting out my place is never something I thought I’d need to do, but selling a property that hasn’t yet appreciated would wipe out most of my 10 percent down payment.

Here are the details of my unit:

  • 1BR/1BA with parking in Mount Vernon Triangle
  • Purchase Price: $375,000 (I estimate the current sales price at between $368-373K)
  • 10 percent down payment (total principal paid after two years is ~$44,000)
  • 7-year ARM (5 years left)
  • 5.25% Interest Rate
  • Property Taxes: ~$3,300/year
  • Mortgage Payments: ~$1,800/mo (of which ~$300/mo going to principal)
  • HOA Fees: ~$400/mo
  • Total Mortage/Taxes/HOA : ~$2,500/mo

I’m not going to be able to be a hands on landlord, so I’d assume I’ll have to pay a property management company $200/mo raising total expenses to $2,700/mo.

If I decide to rent, I will be competing with 425 Mass opening a block away, that has a lot more amenities than my building, so I’ll need to come in under their pricing (maybe $2,200/month). That said, my condo is in an in-demand location, so I shouldn’t have problems finding renters once I have figured out the right rental rate. Also, I think the relocation package I receive from the new employer should cover a month or two of rent while I find a tenant. However, with just 5 years left on the ARM and the long distance, I don’t want to be a landlord for more than a few years.

So, given my relatively short time horizon what are my prospects? I can’t imagine I’ll generate much, if any, rental income during a 3-4 year timeframe. But could renting the property out help me recover more of the principal I’ve invested than selling now would? I would think if I wait it out just a few years, the property should appreciate by $20K or more which could help make the real estate transaction costs more bearable. Selling now seems pretty grim. But I don’t want to take on the aggravation of being a landlord if it’s not likely to improve my financial outlook. I’m clearly not liking a negative $500/mo cashflow, but if the cashflow was positive this wouldn’t be a decision I was so conflicted over. My goal in all of this is to recover as much of my initial $37,500 as I possibly can at sale.

See other articles related to: renting in dc, rent vs buy, dclofts

This article originally published at http://dc.urbanturf.com/articles/blog/to_sell_or_to_rent_that_is_the_question/2041


  1. Emil Ali said at 3:09 pm on Wednesday May 5, 2010:

    Get a friend to manage it for you. New buildings don’t need much work. Offer your friend a little bit of cash as a gesture, but besides that keep some money aside for emergency repairs and buy fire (landlord) insurance.

  1. Cedric said at 3:23 pm on Wednesday May 5, 2010:

    Tough situation, but it looks like you have thought through your options pretty thoroughly. I think Emil has the right idea in getting a friend to watch over it for you while it is being rented (or better yet get one of your friends to actually rent it at a slightly discounted rate). Hopefully you are right in that in 3-4 years you can put it on the market and make your $$ back.

  1. bone said at 4:07 pm on Wednesday May 5, 2010:

    If you’re confident the market has bottomed out and we will see appreciation from here on out you’re better off renting for a few years and then selling. 

    If we assume a yearly appreciation of 3%, in 3 years your condo will be worth a little over $400k.  Subtract 6% for realtor fees and you come away with a little more than what you paid for the place.  Now, this doesn’t mean you’re breaking even since you are in the hole $500/month while you are renting the place out.  $500/month x 3 years = $18,000.  The good news is $300 of that $500 is money you are effectively paying yourself in the form of paying down your principal, so you are really only losing $7200 after all is said and done.  Not great, but much better than selling now and losing around $35k.

    Rent for 4 years and your place will be worth $415k.  You get $390k after realtor fees so you net $15k.  You are putting an extra $9600 into the place over 4 years ($500 shortfall - $300 principal payment) so you can actually walk away with $5400. 

    This doesn’t take into account any maintenance you’d have to do or if there is a special assessment.  On the plus side you may be able to raise your rent a little each year.

    That’s the way I see it at least.  Others may see it differently.

  1. Ed said at 5:23 pm on Wednesday May 5, 2010:

    I’d agree with the commenters above but capital gains tax on a home that you don’t owner-occupy need to be factored in as well.

  1. w said at 5:35 pm on Wednesday May 5, 2010:

    if the carrying costs exceed rental income, can’t the difference be applied to income taxes as a business loss as well?

  1. w said at 5:37 pm on Wednesday May 5, 2010:

    That’s right, but only if it’s rented longer than 3 years.  He needs to live in it for 2 out of 5 years prior to sale to be exempt from cap gains on sale.

  1. Richard said at 5:40 pm on Wednesday May 5, 2010:

    Um, equity that you have already lost due to depreciation is a sunk cost and should not figure into your decision. 

    So assume a five year time period.  Your options are:

    1) Sell now:  370 sale price - 331 mortgage balance - 22 realtor comission = You walk with 17k.  You invest that money and earn a 5% return.  To account for inflation and the time value of money, you discount future cast flows by 2% per year.  At the end of the 5 years you have about $20k. 

    2. Rent now: Each month you pay $2400, ignoring the principal payment (if you include it, then to be fair you need to include the effect of $300 in savings put in investment in the alternative scenario above).  You earn $2200.  Assume that your costs rise one for one with your ability to increase rent to make things simplier.  Since you aren’t making any money on this investment, you don’t have to worry about taxes.  At the end of year five, you sell.  So you loose $2400 a year the first four years, and then in year 5 you loose $2400 and earn $17k (as above, remember we are keeping equity constant to compare apples to apples) + 0.94 * nominal appreciation (the realtor gets 6% of the appreciation too).  If you work out the discounted cash flows using a 2% discount rate, you break even vs selling at a meager 2% rate of appreciation.  An example of the miracle of leverage.

    while it is very possible to make more money out of renting out your apartment, the bigger question is do you want to deal with the hassle of being a (long-distance) landlord and will you want your apartment’s equity for other purposes.

  1. E said at 6:30 pm on Wednesday May 5, 2010:

    You could also consider using a more modern realtor like Redfin to sell your condo and not pay nearly as much as you would to a traditional realtor.  I used them to buy my condo and was quite impressed.

  1. Mony said at 7:44 pm on Wednesday May 5, 2010:

    At the rent level you probably won’t have a problem when you goto sell, but there’s a lot of hoops to jump when you sell tenant-occupied properties (90 day notice to tenant, plus give them opportunity to purchase, some tenants have supposedly thrown a wrench in the works to get money). So be aware of those laws too

  1. Jason said at 9:16 am on Thursday May 6, 2010:

    I’m the guy who sent in my scenario to Urban Turf.

    @Richard: You’re forgetting that the exorbitant realtor commissions are not the only costs I’d be paying out at closing. The District is going to dip their hands in and take recordation fees. I doubt I walk away with more than $7000 if I use a traditional realtor and sell at $370K.

    @E: I will say that I am considering selling using Redfin to shave 1.5% off the real estate commissions.

  1. Ben said at 12:35 pm on Thursday May 6, 2010:

    Great article and discussion. Well thought out, so I actually don’t have much to add. I agree with Richard that the non-monetary costs/benefits may be the deciding factor here.

  1. J said at 1:23 pm on Thursday May 6, 2010:

    Look into whether or not you can write of the loss on your income taxes too.  I believe you start to lose these deductions when your income exceeds a certain limit.  I had friends that purchased a condo at the peak of the market and were then relocated to California.  They decided to rent and have a $500 / month negative cash flow.  This would have been acceptable to them, but they started making too much money and now can’t write off any of the losses.  There may be some tax loophole, but nothing their accountant has pointed out. If they sold now they’d have to bring a lot of money to the table. Sucks.

  1. MIS said at 2:06 pm on Thursday May 6, 2010:

    I’ve been in your shoes and was a long distance landlord for 4 years.  In order to make it easy for myself, I bought a home warranty (about $500/year) and the tenant was reponsible for paying the $75 service fee when something needed to be repaired.  The tenant was able to call in the repair requests directly to the home warranty company and set up a time that worked with their schedule for the repair to be made.  Having them pay for the $75 service fee kept them from bothering me about little stuff and made them accountable to keep the place up.  It worked out wonderfully for both of us with little hassle.

  1. former Georgetowner said at 4:36 pm on Thursday May 6, 2010:

    to MIS

    wow. didn’t know you could do that.  Did you have a hard time finding a tenant that had a problem with that?  how exactly did you do it?  lower rent?

    was the unit generally brand new?

    Looking back at my renting days, I would have been extremely annoyed if things broke down and I had to pay $75 per handyman visit or whatever.

  1. MIS said at 2:33 pm on Monday May 10, 2010:

    Everything is the house was less than 4 years old so we didn’t foresee there being many problems from normal wear and tear, unless the tenant was just being destructive or careless.  I did not get any pushback from the tenants having to pay the service fee, I made it a part of the lease and they readily agreed.  The rent itself was fair market value.  Overall, it was a win-win.

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