Table of Contents:
The Backstory
Buying our first home was an unintentional series of events that ultimately led us to an opportunity to make passive income. We were happily renting a 700-square-foot apartment in a high-rise filled with amenities in Chicago, our intention was to live there for a few years before moving to the suburbs.
A few months into our life in the Chicago apartment, a headhunter reached out to Nick about a procurement role at Amazon in Seattle. After eight rounds of interviews, much deliberation, and final negotiations, we found ourselves on our way to Seattle! We didn't plan on staying in Seattle long-term, so our initial plan was to rent in another high-rise in the SLU area. However, Amazon paired Nick with a real estate agent to assist in our search. We figured it couldn't hurt to see what was available; that moment marked the beginning of our homeownership journey.
We had planned to see five places, but it only took two stops for us to fall in love and put in an offer for a two-bedroom townhouse. With the 3% mortgage rate and our love for the place, it felt like a no-brainer. We happily lived in our townhouse for a little over two years until another headhunter approached Nick with a dream job offer that led us to relocate to San Francisco.
This is a very abbreviated version of our journey from renting to homeownership to starting our short term rental property. Follow along as we delve into the decision making process, financial implications and outcomes, and lessons we’ve learned along the way.
The Pros & Cons of Selling v. Renting
We were elated to be moving to San Francisco as Amanda’s family currently lives there, but the big question: “What do we do with our Seattle home?” loomed over us.
You’ll come to see that we love writing down our thoughts (get ready for a ton of photos of our chicken scratch writing); to start we outlined the qualitative pros and cons of our three options - in our next post we’ll dive deeper into our quantitative financial analysis.
Option 1: Sell Now
Rather than holding on to the home you bought, putting your home up for sale to liquidate your property asset, offering an immediate cash return.
Pros:
More liquidity, enabling us to either buy a house in San Francisco, invest in the stock market, or do something else with the money
Reduced financial risk as we wouldn’t have to pay for two houses if we didn’t have a tenant
Limited risk that the house would sit on the market as we lived in a high-demand area with a good school system
Less work, we could leverage a real estate agent to help us with the sales process
Cons:
Lack of future gains as we would lose an appreciating asset (the house) and the opportunity for a passive income source (renting out)
Financial cost of having to pay capital gains tax and closing costs & fees
Loss of our 3% mortgage rate, rates which we may never see again
Option 2: Long-Term Rental (LTR)
Becoming a “traditional” landlord where you have a rental agreement for someone to stay in your unfurnished home. We define a long-term rental to be greater than 30 days, but typically a rental agreement lasts for 6 months, 12 months, or 24 months (see what you could make).
Pros:
More stable revenue stream compared to short-term renting as there would be less tenant turnover
Less maintenance/oversight needed and less wear and tear on the house as there would be less tenant turnover
Rents for similar homes in our area are increasing due to the close proximity to the University of Washington and UW hospital
Continue building equity in a property that will likely continue to appreciate
Potential tax benefits (deductions) that we could apply to our personal taxes (e.g., house depreciation, expenses, etc.)
Option to move back to Seattle
Cons:
Less flexibility, if we wanted to move back or visit, we could only do that outside of a lease
Generates less revenue than a short-term rental as prices are consistent month-over-month
Strict tenant laws in Seattle that may lead to some headaches; for example, in Seattle there have been horror stories of tenants that don’t pay rent and refuse to leave and the landlord needs to follow a lengthy and convoluted process to evict the tenant
Potential risk of paying for two houses (our place in San Francisco and the Seattle home) if we don’t have a tenant in the house
Unexpected expenses as we knew that no one would take care of the house like we would (e.g,. refrigerator stopped working, water leak, etc.)
We would be overseeing this property from a different state, so if something went wrong we wouldn’t be able to stop over on the way home from work
Option 3: Short-Term Rental (STR)
Similar to a hotel, keeping your home furnished and allowing guests to stay in your home for short periods of time (typically less than 30 days). Popular short term rental sites include: VRBO, Airbnb, etc.
Pros:
Higher earning potential than a long-term rental, after a year of running our STR, this was in fact true as we made $75k in revenue
Flexibility to block dates and fluctuate prices so we can visit Seattle anytime
Ease of reaching a large market of guests through platforms such as Airbnb and VRBO
Similar to long-term rental:
Continue building equity in a property that will likely continue to appreciate
Potential tax benefits (deductions) that we could apply to our personal taxes (e.g., house depreciation, expenses, etc.)
Option to move back to Seattle
Cons:
Increased turnover would likely result in more wear and tear and unexpected costs (e.g., frequently painting walls, new linens, etc.)
Less stable revenue as short-term rentals don’t have fixed rents; we would need to make up low occupancy months (winter) with higher occupancy months (summer)
Potential for regulatory challenges (e.g., STR zoning, HOA restrictions, state licenses & fees)
Uncharted territory, it felt risker to try to figure out STR along the way (hopefully by following along and reading our posts, you won’t have this issue)
High initial investment as we would have to pay for furnishings, utilities, and amenities for guests
We would be overseeing this property from a different state, so if something went wrong we wouldn’t be able to stop over on the way home from work
Our Thoughts
Putting all of the thoughts swirling around in our heads onto paper helped us achieve two things: first, it grounded us. Secondly, it challenged us to see if we were willing to put the necessary work into renting out our place or if we would take the less risky route and sell our property. With our qualitative analysis complete, we were leaning towards putting in the work to start a short-term rental (STR), but we weren’t comfortable doing that without looking at the financials. In our next post (1.2 The Financials Behind Selling & Renting With Our Property Analysis Tool), see how we weighed the three decisions financially.
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