To sell or not to sell, that is the question... (Austin: wood floors, sale)
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I am having a financial/investment dilemma and since I don't have a personal financial advisor, I thought I'd try getting some advice here
We bought a brand new townhome in the Bay Area (CA) in 2008 for $577k. Very nice place actually, nice upgrades and all. Then the housing market crashed... but we didn't mind much, since we thought we were going to be there for the long run. Less than 9 months after we moved in, the refi appraisal came in at $520k. In 2011 I had the opportunity to move to Austin and jumped on it. We looked into selling it, but the pain would have been too great (realtors suggested listing it for $419 and going DOWN from there). With more than 20% down payment, I simply could not stomach that kind of loss. So we rented it out instead.
We've been in Austin for 10 months now and the lease is coming up soon. The tenant asked me if we were interested in selling it. The rent barely covers my expenses (mortgage + property tax + HOA fees), so it basically pays for itself, but we're constantly stressing out about it, since even one month of vacancy would throw our budget off...
A realtor friend ran some comps in the area and thinks the fair market value is around $450k. I'm hoping that my tenant might be willing to pay a little above the fair market value...
What should I do? Take a loss now, cash out as much as I can and use that cash for (hopefully) better investments or hold on to it and hope that the market will come back? I personally think that might take 5-10 years at least (we're talking San Jose, close to downtown). I'm not comfortable with this "me the landlord" situation, it's not my kind of thing...
Would I be missing a big opportunity here, if I sold it? If I look at "rent or sell" online calculators, they all recommend selling, since the capitalization is so much less than, say, US treasury bonds, but I don't think those calculators are designed for rental properties that are not fully paid for.
Ugly choice to have to make, but I'd pull the plug - particularly since you have a potential buyer.
I'd line up a FSBO to save the 6% and put that money in something that will grow steadily, without all the "what if" moments that renting a place long distance can bring.
You say the rent is covering the mortgage and fees? If it were me, I'd keep it. You are not cash-flow negative, and you've only owned it since 2008. That's not enough of a time frame to let a typical home investment mature, and it would be a relatively safe bet that it's hit it's bottom in value already. So unless there are other factors you know about (like a declining neighborhood), it will probably continue to increase in value... albeit slowly, as you say.
I understand you not wanting to be a landlord, but you paid $577 and you'd be selling right now (sounds like) for no more than $450-470. So you are looking at a loss of over $100K. From my experience being a landlord, yes the headaches can come up, but it's nothing that a couple of phone calls and a credit card can't fix, even from a remote location. Something major, like the townhome burning down would be taken care of by insurance... and you have an HOA, to take care of a lot of things, and probably notify you if something is really amiss. The only real stress is vacancy, but even a couple of months of that should be worth tolerating.
So a few grand (maybe) in unexpected repairs and some headaches vs. a $100K+ loss? I'd put up with the potential headaches.
If you had a bunch of equity tied up that you could free up it might be a different story. But your current situation sounds like a little equity, cash flow neutral, and slow recovery in price. Even if the price stays the same, the renters are building equity for you by covering the mortgage. That's not terrible IMO. I would hold, real estate works best buy and hold investment for most people.
Interesting. I am from San Jose and my parents have owned a condo in South San Jose twice in the last decade -- just sold the last one three months ago.
The difference, I suspect, (since you say yours is close to downtown) is that theirs was in one of the best school districts - Campbell Union -- zoned to the best schools in SJ. Additionally, it had hardly any updates, other than wood floors downstairs -- all baths, kitchen and mechanicals needed to be updated/replaced, and unit was 25 years old. Two bed, 2 1/2 bath. Definitely a condo, not a townhome -- looks like a glorified apartment from the exterior but nice inside. They bought and sold the place twice within 10 years (no kidding) and at the highest sold it for $582K in 2007. Bought it again for 467K in 2010 but sold it for 460K a few months ago.
They said the market was turing around and though they certainly lost money because they bought and sold it twice during high and low points in the market, agents in that area seemed to think the market was on the upswing. My parents sold their place quickly with multiple offers and could have sold it for more but didin't have a great relationship with their agent and the sale suffered as a result.
Honestly, I think they should have hung on to it and rented it out as the area in which it's located is highly desirable when it comes to young families who want the best public schooling but don't have 700K for a house, thus, need to look at condos — that fact won't change. Also, my parents could have updated everything and likely sold it in another year or two for considerably more money... having an older place in a desirable area affords many options as far ROI. I think they were short-sighted but they're also in their 70s with different priorities. During the agent open house, a few agents mentioned they could likely get 30k-40K more in six months with the way the market was turing in that area but they didn't want to wait.
Is your condo fairly new? I assume, since you say it has nice upgrades, that there's really no improving it? If so, and you're not in a desirable school area then you are really looking at only singles and married without kids who want to be close to downtown as potential buyers. If so, you have a fairly black and white scenario in which there's nothing you can do to make your money back other than wait out the market. That said, the market WILL improve there eventually and SJ is a desirable place to live on the whole.
If you hadn't said you weren't cut out to be a landlord and the role is weighing on you, I would have recommended you stay the course. Being a landlord is not a hassle for me and, as others have stated, a few unexpected repaires and headaches is usually worth it. But since you say you don't like being a landlord AND your condo has a limited pool of potential buyers and is already new-ish, you may have a scenario in which it's better for you to sell.
If it were me, I might spilt the difference and wait it out another year and see what happens with the market in that specific area.
Last edited by Idlewile; 08-12-2012 at 08:00 AM..
Reason: added more info
Have exactly the same problem, just on the opposite coast. We are keeping it, even though we have slightly more of a monthly alligator than you do. Why? Because I hate losing money, and I know that time heals all RE wounds. Why? Look at your place. You are $120K upside down, assuming the tenant will buy at what you think is a fair price. Guess what? He might not share your opinion, and simply be looking for a deal from amount of state owner. National stats say the RE market has turned back up. Much of the distressed market has been moved. Rents will now do nothing but go,up, as demand remains strong, whole tough lending standards keeps people renting.
Also, leverage helps you. You want to not lose the $120K you have in the game now. The good news is, all the upside is yours. Just a 3% appreciation each year cuts your loss by 10%. Personally, I think once it turns, the appreciation will be neck snapping. I had a house here that I was 30% upside down in during the bust of the 80s. That got wiped out in about three years, and kept appreciating until we sold it for a nice gain in '95.
An excellent discussion about CA real estate has been carried on by doctor housing bubble. Should find it in a Google search with those terms. Might look into another search term as well...shadow inventory.
If it was me, I'd unload it, and move on. Post-bubble, real estate prices will have to fall in line with falling incomes and the generations behind the baby boomers are riddled with education debt and limited job opportunities. Rotsa ruck.
Quote:
Originally Posted by Florinator
I am having a financial/investment dilemma and since I don't have a personal financial advisor, I thought I'd try getting some advice here
We bought a brand new townhome in the Bay Area (CA) in 2008 for $577k. Very nice place actually, nice upgrades and all. Then the housing market crashed... but we didn't mind much, since we thought we were going to be there for the long run. Less than 9 months after we moved in, the refi appraisal came in at $520k. In 2011 I had the opportunity to move to Austin and jumped on it. We looked into selling it, but the pain would have been too great (realtors suggested listing it for $419 and going DOWN from there). With more than 20% down payment, I simply could not stomach that kind of loss. So we rented it out instead.
We've been in Austin for 10 months now and the lease is coming up soon. The tenant asked me if we were interested in selling it. The rent barely covers my expenses (mortgage + property tax + HOA fees), so it basically pays for itself, but we're constantly stressing out about it, since even one month of vacancy would throw our budget off...
A realtor friend ran some comps in the area and thinks the fair market value is around $450k. I'm hoping that my tenant might be willing to pay a little above the fair market value...
What should I do? Take a loss now, cash out as much as I can and use that cash for (hopefully) better investments or hold on to it and hope that the market will come back? I personally think that might take 5-10 years at least (we're talking San Jose, close to downtown). I'm not comfortable with this "me the landlord" situation, it's not my kind of thing...
Would I be missing a big opportunity here, if I sold it? If I look at "rent or sell" online calculators, they all recommend selling, since the capitalization is so much less than, say, US treasury bonds, but I don't think those calculators are designed for rental properties that are not fully paid for.
I am having a financial/investment dilemma and since I don't have a personal financial advisor, I thought I'd try getting some advice here
We bought a brand new townhome in the Bay Area (CA) in 2008 for $577k. Very nice place actually, nice upgrades and all. Then the housing market crashed... but we didn't mind much, since we thought we were going to be there for the long run. Less than 9 months after we moved in, the refi appraisal came in at $520k. In 2011 I had the opportunity to move to Austin and jumped on it. We looked into selling it, but the pain would have been too great (realtors suggested listing it for $419 and going DOWN from there). With more than 20% down payment, I simply could not stomach that kind of loss. So we rented it out instead.
We've been in Austin for 10 months now and the lease is coming up soon. The tenant asked me if we were interested in selling it. The rent barely covers my expenses (mortgage + property tax + HOA fees), so it basically pays for itself, but we're constantly stressing out about it, since even one month of vacancy would throw our budget off...
A realtor friend ran some comps in the area and thinks the fair market value is around $450k. I'm hoping that my tenant might be willing to pay a little above the fair market value...
What should I do? Take a loss now, cash out as much as I can and use that cash for (hopefully) better investments or hold on to it and hope that the market will come back? I personally think that might take 5-10 years at least (we're talking San Jose, close to downtown). I'm not comfortable with this "me the landlord" situation, it's not my kind of thing...
Would I be missing a big opportunity here, if I sold it? If I look at "rent or sell" online calculators, they all recommend selling, since the capitalization is so much less than, say, US treasury bonds, but I don't think those calculators are designed for rental properties that are not fully paid for.
You didnt say how much you put down, but assuming you put down 20% you have effectively lost all your equity. The good thing about real estate is the leverage you get (1 to 4 with 20% down) but the bad thing about real estate is the leverage.
At this point the money is gone, so you should be thinking about your choices today to make 100K. In 5 years it would not surprise me at all for your townhome to be worth 570K in san jose. What other investments can you make that would make that kind of money?
Even if you lose some $ in rent, in the grand scheme of things you will probably make a lot of $ compared to where you are at today. The challenge today is that getting a mortgage is really tough. This means buyers will have a hard time qualifying which holds down prices. The upside though is that the rents should go up.
Also consider you are making money in the sense that some of the mortgage payments go to principal. Even though it feels like an expense, some of it is equity.
I would
1) refi if possible to get down to a 3% rate
2) look at prevailing rental rates to see if I could do better. A $100 increase in rent isnt going to kill people as it typically costs about $1K to move, but could give you the extra room you need to build up a cash reserve if the utilization of the property drops below 100% (you should calculate your needed revenue based on 80-90%)
3) make sure your tax value reflects the actual value of the property. You might be able to decrease your tax bill by 20%
I would
1) refi if possible to get down to a 3% rate
2) look at prevailing rental rates to see if I could do better. A $100 increase in rent isnt going to kill people as it typically costs about $1K to move, but could give you the extra room you need to build up a cash reserve if the utilization of the property drops below 100% (you should calculate your needed revenue based on 80-90%)
3) make sure your tax value reflects the actual value of the property. You might be able to decrease your tax bill by 20%
I tried to refi right before we moved (October 2011), and the appraisal came back at $395k I'm not an expert obviously, but 2 of the 5 comps were 2 bedroom 2 baths, while our townhome is 3 bedroom 3 baths. I thought one extra bedroom + bath must be worth more than $5k... anyways, needless to say I didn't have the desired LTV ratio to make the refi worthwhile.
The mortgage for the townhome is a 30-year fixed at 5% and my loan balance is $356k.
The property tax bill has pretty much followed the market downwards, I think the last assessment was $420k.
Another thing that was going through my mind. If, hypothetically, I could cash out, say, $150k, I was thinking about buying a property here in Austin and renting it out. No mortgage, no worries, just steady monthly income. And being closer, I could manage it myself (I'm currently paying a friend $100 a month to look after the townhome in San Jose and since it's almost new, there haven't been any issues with it thus far).
I think the prospects for growth and real estate appreciation are better in Austin than anywhere in California...
Another thing that was going through my mind. If, hypothetically, I could cash out, say, $150k, I was thinking about buying a property here in Austin and renting it out. No mortgage, no worries, just steady monthly income. And being closer, I could manage it myself (I'm currently paying a friend $100 a month to look after the townhome in San Jose and since it's almost new, there haven't been any issues with it thus far).
I think the prospects for growth and real estate appreciation are better in Austin than anywhere in California...
If you are willing to be a landlord, then do it for the San Jose property. Cashing out then paying another set of real estate commissions and all that goes with purchasing a new home and finding a new (good) tenant only to do the job you really don't want to do.. because it would be easier locally... makes zero sense to me.
1) You'd be resetting your time horizon, meaning you can't sell without taking a loss unless you wait another few years. Even in Austin. As it is, your San Jose property, if you can keep it rented, is giving you back more and more equity each month as the renters cover the payment. The percentage of your payment which is interest is decreasing, has been since 2008. That's how mortgages are structured. It's smarter to keep that investment going. Plus, you are able to deduct your losses including the mortgage interest.
2) There are different downsides to owning a rental property in Austin. For one thing, property taxes will seriously impact your bottom line. Much more so than in CA. You will really start to feel it looking at your balance sheet, trust me. And, although Austin might be a healthier overall market right now, there isn't much upside IMO. Appreciation can't go up as fast because property taxes are part of a typical home's mortgage payment, so people can't afford bigger loans. Upswings will be mild. And the market here as been pretty good for years - so you very well might be buying another "peak".
3) If you can get $150K, the last thing you'd want to do with it right now is tie it all up in real estate when interest rates are so low. No good investor would do that. Money available at 3% and you want to pay for a house in full? No way, don't make that mistake. If you want to do something worthwhile with that money, put it in your retirement account and forget about it. Or pay off non-real estate loans/credit cards so you can be in a prime position next time you want to buy a home or auto. Or if you don't want to play it safe, and want to use it to potentially make some money, use it for something you DO want to do. Like open a shop or something. Invest in a business. Just don't throw good money after bad and put yourself in a similar situation in Austin. You might have to move again and find yourself in the exact same scenario.
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Take a loss now, cash out as much as I can and use that cash for (hopefully) better investments or hold on to it and hope that the market will come back? I personally think that might take 5-10 years at least (we're talking San Jose, close to downtown). I'm not comfortable with this "me the landlord" situation, it's not my kind of thing...
I'm not an expert obviously, but 2 of the 5 comps were 2 bedroom 2 baths, while our townhome is 3 bedroom 3 baths. I thought one extra bedroom + bath must be worth more than $5k... anyways, needless to say I didn't have the desired LTV ratio to make the refi worthwhile.
