Intro

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Welcome to the 5 Minute Prime Podcast. Quick actionable tips to master personal finance and real estate investing. In just five minutes a day, we'll help you build wealth and achieve financial freedom. Hey Prime Investors, Martin Maxwell here. Welcome back to the 5-Minute Prime Podcast. Here's

The number

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a number out of Houston this week. Of all the single-family homes listed for rent there, 4.3% were listed for sale sometime in the past three months. The owners tried to sell, couldn't, and turned landlord instead. That's Zillow's data, reported by the Houston Chronicle. The share has tripled in three years. It's more than double the 2% national rate and the highest of any metro in Zillow's data. Zillow's own economist thinks it undercounts, because some owners skip the sale and go straight to a rental listing. There's a name for these owners. And if you own a house you'd rather sell right now, in Houston, or anywhere prices peaked in 2022, this one's for you. Sell at a loss or rent it out and wait? Let's price both in dollars.

01 · Why it won't sell

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First, why the houses aren't selling? Two reasons. The rate. Freddie Mac's 30-year average hit 7.4% last week, up more than half a point in a month. And the price. Our Metro Home Value Index puts Houston's typical home at about $305,000. That's down almost 5% from the peak in August 2022, and down 1.9% from a year ago. Meanwhile, the rental side got crowded. John Byrne's research counted about 16,600 houses, townhomes, and condos for lease in Houston in September. That's up 80% in three years. And rents haven't moved in a year.

02 · Selling today

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So let's make it concrete. Picture an owner who bought a typical Houston house in August 2022, right at the peak. $320,000. 5% down, $16,000. A 30-year fixed at about 5.2%, that month's average. Principal and interest, about $1,673 a month. Four years later, they've moved, and they won out. The loan balance is about $284,000. The house is worth about $305,000. Take off 7% for commission, closing costs, and concessions, and they walk away with about $283,600. Not quite enough to pay off the loan. They'd bring about $800 to closing, and the $16,000 they put down is gone. And that's a good outcome. The Chronicle quoted an agent in spring, just north of Houston, whose client would have had to bring $15,000 to $20,000 to closing just to

03 · Rent and wait

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sell. So plenty of owners decide don't sell. Rent it out and wait for prices to come back. Fair enough. Let's count what the waiting costs. Say the house rents for $2,000 a month. Houston's single family rents average a little over $2,000, and they're flat. Use the 50% rule. About half the rent goes to taxes, insurance, repairs, vacancy, and management. That leaves $1,000. The mortgage payment is $1,673. So you're feeding the house about $670 a month, $8,000 a year, and that's before mortgage insurance on a 5% down loan. And in Texas, half is optimistic. In the book, I say that in high-tax, high insurance states, you should model operating costs at 55 to 65% of the rent, not 50%. Around Houston, property tax on a rental runs about 2% of value a year. Use 60%, and the monthly gap is about 870. Then there's the first leaseup. A Houston broker told The Chronicle that a house that leased in under a month during the pandemic can now take up to two months. That first empty stretch isn't inside the 50%. Two months of mortgage, tax, and insurance with no tenant is about $5,000, out of pocket before the first rent check. Now here's the catch in that number. That $670 a month isn't all lost. About $440 of it is principal. It's paying down your own loan, and it stays in the house. So you're out $670 in cash each month, but only about $230 of it is truly gone. What you're really betting on is the price. On these numbers, before taxes, renting beats selling today only if the house gains about 1% a year at the 50% rule. At 60%, it needs 1.5% to 2% a year. And that's before those two empty months, which push the bar higher. So what did Houston do last year? It fell 1.9%. If that holds for one more year, waiting costs you $8,000 to $10,000 more than selling

The verdict

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today. But Houston isn't one market. Our zip code level data shows the split. In Sugarland's main zip code, values are up almost 1% over the year and sitting near their peak. In one of Katie's main zip codes, values are down almost 2%, and rents are down 2% too. Same metro. In Sugarland, prices are still moving up. In Katie, they have to stop falling first. So here's how I'd think about it. Renting out a house you couldn't sell is a bet. That prices rise 1 to 2% a year, and that you can pay for the wait. Before you make that bet, run three numbers. 1. The rent you'd actually collect, minus at least half for operating costs, minus principal and interest. That's your monthly gap. 2. Can you carry that gap plus two empty months for as long as it takes? 3. What has your own zip code done over the past year? Your price, your rate, and your down payment will change the answer. So put your own numbers into the calculator on reiprime.com. If all three hold up, renting it out is a plan. If the real reason is that you don't want to take the loss, that's not investing. That's waiting. One more thing before you decide. Turning your home into a rental changes your taxes too. In Texas, once it's a rental and you've moved out, you lose the homestead exemption and the cap on how fast your appraisal can rise. And if the house lost value before you converted it, that drop generally isn't deductible when you sell. Price both before you list it for rent. This is general information, not tax or legal advice, so check your own situation with your CPA. And remember the number from Houston. 4.3% of the houses listed for rent there were listed for sale first. If yours becomes one of them, make it a decision, not a default. I'm Martin Maxwell. This has been the 5 Minute Prime Podcast. I'll see you next episode.