Keep in mind that as a rental property, the cottage is INCOME as well as mortgage, so it affects your calculations pof affordable. But if the mortgage is $800 you'll barely be breaking even on the rent of $1K - income taxes, permits, repairs and vacancies (where you have zero rent and the expenses don't stop) will eat up a lot - and have the hassle of being a landlord. It's a considerable hassle.

My advice would be to sell, move on and don't look back.

One last option. Have you considered adding on to the cottage?

When my ex and I bought our first house we paid $176k for it back in 1987. Between 87 and 92, we added 2 children to our family and our 2 bedroom/2 bath bungalow became too small. Add to that the schools were not ideal and with my son approaching kindergarten, we decided to move. We had put close to $20k into the house in electrical upgrades and a new kitchen. Well 1993 was a recession. We wound up selling our home for $169k. Yes less than what we had paid for it.

However, we were able to buy a much better and larger house in a much better neighborhood for also a lower cost. Fast forward to 2010 when we sold the new house also in a recession. This time a MAJOR recession. Even with the recession, we almost tripled our money when we sold. (We sold during the recession because the ex and I were divorcing.)

On a whim, I had looked up what our old house was worth around the same time. It was estimated between $275k-$350k. So even with taking a bath on the first house, we wound up way ahead by selling that house and buying the second house.

All this to say I agree with lazy_gardens. Sell, move on and don't look back, or if the neighborhood warrants it, think about adding on.

First, what you paid for the house is a sunk cost, so whether you are breaking even or making thousands in profits needs to be removed from the decision, which is really hard to do. Instead, you have to focus on whether or not keeping the house as rental property will make your life "better" in the future, this includes financially and overall lifestyle.

Second, some of the recent 15 year rates are so low that it makes keeping a starter home as rental property incredibly tempting. I am at 2.675% on my home and I am really debating keeping it. But you need some cash reserves to pull it off, you can get away with a HELOC but you should add the cost of the HELOC payments when looking at the rent. Rental houses are more expensive to maintain than homes you live in, and homes you live in are not cheap to maintain. Suddenly the things that go wrong in your house have to fixed immediately and usually by licensed professionals. Sure you can go unclog a toilet, but you can't replace an outlet. If you have access to cash reserves or have a HELOC in place before you rent it can be a good investment.

Third, I am not sure that you have the income. Together you and your fiance make $65,000, adding in $9,600 for rent (you are typically allowed to count 80% of rental income but you usually need at least a signed rental agreement to qualify, and some banks require 2 months of rent history to allow counting the income). This brings your total income to $74,600, assuming you have good credit and can work out a significant down payment to qualify for the 45% debt to income ratio, you can have total debt of $2,800 per month ($2,440 without the rental income), this includes all car payments, student loans, house payments, credit card bills, etc. Some of those smaller bills start adding up fast.

Edit: Personally, I am not a fan of real estate as an investment for those with decent cash reserves. However, you can leverage real estate much more than other investments and it can be a very good for early investors.

I think the bigger picture view is clear with no numerical analysis. For someone at your income level and transitioning family circumstances, accumulating real estate and squeezing the last pennies of your cash flow to cover it may not be the best choice. I'd sell the existing house and buy something more suitable.

In my experience, the term sunk cost suggests an expense that is incurred, paid for, and unrecoverable. The amount paid for a house is an investment, not a sunk cost. So long as the value doesn't decline, the amount spent is recovered when you sell it. By contrast, if you'd paid an architect to design a remodel and then reconsidered whether to go forward, you would describe the architect's fee as a sunk cost.

I also think you should sell the house.

Then you can move on to a house that you both like, unshackled by the nonsense that comes with being a landlord (and landlady). Your money, energy and thoughts can then be put to better use.

In my experience, the term sunk cost suggests an expense that is incurred, paid for, and unrecoverable. The amount paid for a house is an investment, not a sunk cost. So long as the value doesn't decline, the amount spent is recovered when you sell it. By contrast, if you'd paid an architect to design a remodel and then reconsidered whether to go forward, you would describe the architect's fee as a sunk cost. -

OK. I was going to concede this because I didn't want to argue but... What you paid for something is certainly not relevant and we traditionally think of it as sunk. What trips many people up is the idea that a sunk cost is paid and cannot be "recovered." Many people see recovered and think it means that you "cover your investment," it doesn't, it means get your money back. Deciding whether to continue paying for an item or sell it is actually the example most often given for sunk cost. The fact that you are selling it for a gain or loss isn't a requirement, only that you can't return it.

Snidely if you want to disagree with this - well then lets just agree to disagree. In any case we can agree that what you pay for an item is irrelevant when deciding whether or not to sell it.

I wonder how long you have both been in the 'cottage'. Is it in your name only? How would you take title to another home?

It seems as though the cart is before the horse here. Your fiancee is 36 and has another four years of school? Do you plan to marry? Have children? Will both of you be working in this same area in the foreseeable future?

Might you rent the small cottage and rent another home for yourselves until your circumstances are more certain? (Sorry if that sounds like a Magic 8 Ball answer!)

"we can agree that what you pay for an item is irrelevant when deciding whether or not to sell it."

No, I don't think so. I think whether a potential sale produces a gain or a loss has a strong influence on a decision and timing for selling a house, absent other factors (like when moving to take a job in a new location or needing to sell with some urgency to get a larger/smaller home). Human nature being what it is, there's pleasure and incentive to sell at a gain and reluctance to sell at a loss and, instead, wait until the market is better, when circumstances permit.

Personally, I would sell it. I have a townhouse that I rent. It lost so much value during the crash that I couldnt sell it when I wanted and so I rented it out (at a loss). I am constantly paying to fix things. The latest is a leak into the house (the first estimate came back at 3k). The new ss dishwasher I put in broke the day after the warranty. The ac unit cost $700 to repair this summer. I paid $1100 on exterior work a yr. ago. I can afford to absorb the costs but I am tired of it. The condo has regained value and the area is rapidly redeveloping. When my tenant is ready to leave (I will continue to rent it to them as long as they will renew the lease), I will look at selling it. Also, in my town additional taxes are applied to "rental income." I also pay a property management firm because I was tired of the phone calls (100/mo). I dont think you stand to make enough off this house to make it worth the hassle of renting.

Relevant costs are costs that differ between alternatives. The amount that you paid is a sunk cost and even if it wasn't, it wouldn't be relevant, because whether you keep the house or sell the house, the amount you paid for the house is in the past and doesn't change.

Human nature being what it is, there's pleasure and incentive to sell at a gain and reluctance to sell at a loss and, instead, wait until the market is better, when circumstances permit. - this is called the sunk cost fallacy and yes we do it all the time, which is why I am trying to get the OP to avoid it.

Sometimes an example works best so here we go - skip the italicized part if you don't need, or want an example.

Person A and B have access to the following reliable stock information: the stock began at $100, is now worth $80, will drop to $65, and finally rebound up to $150.

Person A bought 1,000 shares in the beginning for $100,000, should they sell them now and take the $20,000 loss or hang on to the stock? While most people say hang on to them to avoid the loss, the correct answer is, of course, sell them, which we can see with person B.

Person B has the same information but hasn't bought the stock yet. He has $80,000 in cash ready and wants to buy 1,000 shares. Should he buy the 1,000 shares now at $80, or wait until they drop to $65? Most people get this one right, and say wait and only spend $65,000 on the shares.

If you would wait when you have $80,000 in cash, then you should turn the stock into cash of $80,000 (taking the $20,000 loss) and wait until the shares drop and rebuy them for $65,000, thereby making more money.

When deciding between two alternatives, the past only matters to help you set an expectation for the future. The past costs should never be considered, and you can't find any time when doing so helps. For the OP's decision, it doesn't matter if he paid $2,000 or $200,000 for the house. The only relevant question is, will the reward from struggling with two house payments and all the trouble of being a landlord, be greater than the peace of mind and financial stability of selling the home, or are both options inferior to keeping the home for a while longer.

You've repeated essentially the same comment. In my view, the term you seem to want to use and the insight you suggest are as inapplicable when repeated as they were the first time.

I am sorry, that again, you want to argue semantics with me in a post where I try to offer help in which the debated point is of no issue. If you really want to win it is simple.

(1) Name one time that a non-refundable previous amount paid is useful for anything other than setting future expectations.

(2) Name one way that the OP is helped by considering what he paid for the house in this decision.

(3) Describe how this discussion between you and I, helped the OP.

I know you can't do these things, because two of these things are virtually impossible, and may actually be impossible, so I fully expect you to attempt to divert the conversation, with some attack on my being an academic.

Edit: from wikipedia - The sunk cost is distinct from economic loss. For example, when a new car is purchased, it can subsequently be resold; however, it will probably not be resold for the original purchase price. The economic loss is the difference (including transaction costs). The sum originally paid should not affect any rational future decision-making about the car, regardless of the resale value: if the owner can derive more value from selling the car than not selling it, then it should be sold, regardless of the price paid. In this sense, the sunk cost is not a precise quantity, but an economic term for a sum paid, in the past, which is no longer relevant to decisions about the future; it may be used inconsistently in quantitative terms as the original cost or the expected economic loss. It may also be used as shorthand for an error in analysis due to the sunk cost fallacy, irrational decision-making or, most simply, as irrelevant data.

There are plenty of other sources available if you don't trust wikipedia.

Wikipedia is a good starting point for information on topics a person otherwise has no knowledge or understanding of. I'm not going to comment further, you're in over your head on this very basic question.

You remind me of an work incident many years ago when I assigned a research project to one of my younger staff members. This was pre-computerized search days, but the person dutifully (and mechanically) produced a stack of results wherein several of the key words (contained in the question) appeared. Unfortunately, the correct context of these words' usage and the essence of the question weren't at all addressed in the "findings". It was a good lesson for him, namely, if you don't understand a question and its context, finding the right answer in a look up or research effort is unlikely. And understanding the relevance or non-relevance of peripheral findings is also unlikely.

It doesn't matter what you paid for it then, or what you might get for it in the future. What it costs you per month now and it's potential as income are the most important variables in the decision to sell. If it cannot show a positive cash flow per month as a rental, then it is not worth holding on to for some mythical future date when you might sell it for more than you paid for it.

If it can cover the mortgage, maintenance, taxes, rental management, down periods between tenants, and big headache costs without impacting your ability to afford a new home, then it still doesn't matter what it would sell for in the future, even if it's a ''loss''.

In rentals, income is ''made'' when the property is purchased at a low enough price so as to not allow the monthly carrying cost to outstrip the market price of comparable rentals. Many homes purchased as a primary residence don't meet those income potential parameters because emotion rules more strongly at the negotiating table and the home was purchased at too high of a price to be able to be market competitive as a rental.

I'm not going to comment further, you're in over your head on this very basic question. -

Hansen and Mowen (Oklahoma State) - sunk cost - a past cost; a cost already incurred.

Kinney (Texas A&M) & Raiborn (Texas State) - sunk cost - a cost incurred in the past and not relevant to any future courses of action; the historical or past cost associated with the acquisition of an asset or a resource.

Garrison (Brigham Young), Noreen (University of Washington) & Brewer (Miami University) - A sunk cost is a cost that has already been incurred and that cannot be changed by any decision made now or in the future.

Brigham (University of Florida) & Ehrhardt (University of Tennessee) - sunk cost - A cost that has already occurred and is not affected by the capital project decision.

Did you mean to say - I'm not going to comment further, I'm in over my head on this very basic question.

Edit: In anticipation of your next comment - I know we are only academics but how many academics specializing in cost and managerial accounting are required to overcome one tax partner in a big four firm? I think we should get some leeway since academics invented the term.

Oh, just drop it Bry, you've already admitted to enjoying trolling,

I also like sex and chocolate but this thread doesn't have those things either. I gave a thoughtful answer to the question. When the veracity of answer was challenged I provided a rebuttal with a polite offer to put aside the argument to aid the OP. When that was rebuked I gave a more thorough explanation with an example, when that was challenged I gave specific evidence and asked how this semantics discussion helped the OP, for which I was basically called ignorant, at that point, I got a little snobbish and decided to thoroughly end the argument with the weight of significant evidence and a healthy dose of condescension.

The funny thing is...I know what Snidely did, no one who has been taught, has worked with, or has the slightest understanding of sunk costs would make the mistake he did. The confusion lies in a couple of badly worded and easily misunderstood definitions. No one would teach it that way, no one uses it that way, and anyone familiar with the concept wouldn't make the mistake he made. He looked up the definition and never bothered to try understanding it before posting. Call any high school economics teacher, sociologist or psychologist and they will easily confirm this.

Edit: Just to be clear - I post for the same reason that most other people do, to help people. I have significantly more knowledge and education than most people do about accounting, finance, economics and a bit about contracts. My posts are typically advice centered around these things and I am very rarely challenged on the advice I give, instead most of my challenges are tangential issues meant to make me look less knowledgeable. I don't consider myself special, everyone on this forum has areas that they are much more knowledgeable in than I am. My areas happen to be things people post on, because buying and selling a house or investing, are a couple of times in life that my knowledge is of interest or import to people. For the rest of your life, your hairdersser is probably more knowledgeable than I am. Whether I am a smart guy or a dumb guy is of little importance, whether I am an academic or not is of no importance, I gave solid information in this thread to let the OP arrive at his own decision, I feel confident that he will be able to make the choice that is correct for him, without my having to say, "you should do X."

Consider yourself lucky if you can sell and break even. I have a sister that lost money on almost every house she sold except for her last one.

It comes down to what is important to you. You say, "we both want out." End of story. Sell and move on.

Hello, it's me again.

Sorry about the wait, been busy.

I find it interesting that an argument broke out, because, well, it's the internet.

Some more details that might help, tho:

1. We are engaged and due to marry this upcoming June

2. House is only in my name

3. Although we only combine for $65k (wanna point out that the average household salary is 56k, just sayin...), I'm due for a yearly raise until I cap at 75k (if I teach in Mass - which I plan to - I cap at 85k).

4. She'll be done with school in about 3 years.

5. The house at the bubble was worth 150k - the one next door (same style) actually sold for $158k....but after the crash, the guy next door foreclosed and left. It JUST sold for $84k, but I think there was some copper missing.

6. Although I only owe 73k, I only have about 13 years left on the mortgage.

7. We want to start a family about a year from now.

Maybe those variables make it more interesting...the way I see it, I'm leaning on just selling it...but...if I could keep it...for any reason...it would be an amazing retirement investment (even if I just got 80k and nothing else). If we did buy another house, we would look at something along the lines of $140k. If we didn't have anything else, we'd go near the 200k mark.

Or you could keep it for now, rent it out, sell it later and when it's worth way more. Not even wait until retirement. You could sell it at a high point when you owe less and you've held it long enough to recoup+make money, and then hold onto the money until a downturn, pocketing the rest or buying an even bigger home, renting it for more... loads of options.

Wants and Needs. You want a larger home, but you will not have significantly more income until your fiancee is working full time. While I wouldn't postpone having a child when the mother-to-be is already 36, a child will add to your expenses -- while also decreasing what its mother can earn.

Can you afford to invest in the cottage as a rental property in the hopes its value will increase? It appears that you'd net about $15K from the sale, while you'd probably break even renting it. Would sale proceeds become downpayment on a better home?

Let's say Baby arrives in a year and your income increases somewhat. Your spouse's income drops; you have Baby-related expenses. It will be another two years before new mama can capitalize on her degree. Do you wait to buy for two years, until spouse has significant income and Baby is in pre-K/daycare all day? (There may also be Baby #2 -- more expense and mama-care is less than daycare.)

I'm not sure you have much choice beyond selling the cottage. You (all) have to live *somewhere*. These should be *Happy Years* -- not only make 'financial sense'.

It doesn't change anything. Just sell it and be done with it and buy something else that will better suit your needs. In 5-10 years when you are both working full time and the child or children are in school, if you feel you need more then, you can sell and buy again.

Here comes another argument...

First, there are some very good reasons to own rental property as an investment but they may not be the things you are thinking. Some of the reasons that come to mind are (this is not an exhaustive list, others will have different advice and experiences, this one is mine):

• Rental property takes advantage of leverage better than most other investments. You can finance 80% of a rental investment which you can't do with a stock market investment. With $20,000 you can get a $100,000 capital assets with a 3% interest rate right now, that is really pretty good.
• Rental property lets you get a second job working for yourself. Rental property makes money the same way a job does, it lets you convert your time, effort and know-how into revenue. It is important to remember that rental property is a second job, and just like any job some people are naturally good at it, others are naturally bad at it, and just like other jobs experience matters. When you start you are going to make mistakes, as you learn you will make less mistakes, be sure that you are financially capable of absorbing those mistakes.
• It is an incredibly valuable experience. I believe (my opinion here) that people who are responsible rental property owners develop better spending and investing habits as a whole. I personally think it is hard not to, and prize it as one of my most valuable life lessons.

However, there are some things that are also bad about it.

• Rental property is a job. It requires a lot more attention than traditional investing.
• It is not a good choice on a shoestring budget. A poor rental property owner is soon to be a very poor ex rental property owner. Houses require upkeep, houses you own and don't live in require more upkeep, houses you own and someone else lives in require even more upkeep...Upkeep is expensive.
• Bad houses can make great rentals, and great houses can make bad rentals. Renting is about attracting the right tenant for your price point. A lovely inexpensive home can easily turn into a not so lovely cheap home. The best tenants are typically people who can or soon will be able to afford homes but aren't buying for some reason. For less expensive rental homes they are pretty hard to find.

Finally, some of the things you are saying really make me think that it isn't for you. It is not an amazing retirement investment. Assuming you have $20,000 equity in the home, taking that same $20k at your age and investing in a broad market mutual fund has averaged about $320,000 at age 67. Rental property can become an amazing retirement investment when you do smart things with the income. In and of itself, property is a rather lousy investment (here comes the argument). To clarify this, buying property in hopes that the appreciation will be an amazing investment hasn't worked very many places (there are times it has in California but that is the exception).

Edit: A great thought experiment for you: First, think of the position you will be in if you buy another house without selling this one. Next, think of the position you will be in if you sold this house and bought another one. Now, if you didn't own any house at all which option would you pick? This is a way to remove the sunk cost fallacy from your decision making.

Don't forget, the cottage has provided five years of accommodation. You are not losing if you sell in order to buy something a little better. I think it would be a mistake to over-do the 'something better'. This is a nice time of life for you both. It would be a pity to add so much financial pressure that you cannot enjoy it.