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1) Will you ever return to Austin and hope to re-occupy the home and regret not keeping it because, by then, you can no longer find/purchase a home in the same area for what you paid for this one? If the odds of that are better than 50/50, keep it and rent it.
2) Do you have the financial and emotional capacities to be a Landlord? Even with a professional property manager, it's too much for some people, especially those who worry about unexpected disruptions in cash flow. If you can't hold back the equivalent of 6 months rent in reserves to cover turnover and/or unexpected big expenses, do NOT become a Landlord.
Another thing to note, even a "negative cash flow" property does not generally "lose" money. There is a difference between the annual in/out of actual cash, and the wealth increase that occurs regardless of cash flow.
You have to back out the equity paydown portion of your monthly mortgage payment because that in fact is not an "expense" even though it's a cash outflow. That cash outflow becomes increased equity in the home on your Net Worth spreadsheet.
Second, the home increases in value. Conservatively, you should assume 4.5% annual appreciation.
So, for example, a home I own in 78749 rents for $1,800/mo. My PITI + HOA fees are $2,605, so it is negative $805 per month before maintenance, vacancy and leasing expenses.
But to that -$805 I add back $1,015/mo (increases slightly each month) of the payment is equity paydown. Also, the home is worth $375K, so it increases in value over $1,400 per month. I'm not "losing" money by owning the house. The cash flow isn't relevant to me. If I cashed out my equity of about $200K and put it into my Schwab Brokerage account, and assume a 5.4% annual return, that's only a $900/mo income. For me, personally, I'll leave the money parked in the house for now and keep renting it, as that adds more to my bottom line Net Worth than the equity could achieve in a mutual fund, based on my assumptions.
Finally, if you sell, the commission is baked into the value of your house. And if you don't give it full exposure to the buyer market through the MLA, you could lose money through a lower sales price. Thinking about it as an "expense" is the wrong way to think about it.
Summary, if you're Nervous Nellie, and financially insecure, sell it. If you might move back and have the financial and emotional capacities required for being a Landlord, hire a Property Manager and turn it over to them.
1) Will you ever return to Austin and hope to re-occupy the home and regret not keeping it because, by then, you can no longer find/purchase a home in the same area for what you paid for this one? If the odds of that are better than 50/50, keep it and rent it.
2) Do you have the financial and emotional capacities to be a Landlord? Even with a professional property manager, it's too much for some people, especially those who worry about unexpected disruptions in cash flow. If you can't hold back the equivalent of 6 months rent in reserves to cover turnover and/or unexpected big expenses, do NOT become a Landlord.
Another thing to note, even a "negative cash flow" property does not generally "lose" money. There is a difference between the annual in/out of actual cash, and the wealth increase that occurs regardless of cash flow.
You have to back out the equity paydown portion of your monthly mortgage payment because that in fact is not an "expense" even though it's a cash outflow. That cash outflow becomes increased equity in the home on your Net Worth spreadsheet.
Second, the home increases in value. Conservatively, you should assume 4.5% annual appreciation.
So, for example, a home I own in 78749 rents for $1,800/mo. My PITI + HOA fees are $2,605, so it is negative $805 per month before maintenance, vacancy and leasing expenses.
But to that -$805 I add back $1,015/mo (increases slightly each month) of the payment is equity paydown. Also, the home is worth $375K, so it increases in value over $1,400 per month. I'm not "losing" money by owning the house. The cash flow isn't relevant to me. If I cashed out my equity of about $200K and put it into my Schwab Brokerage account, and assume a 5.4% annual return, that's only a $900/mo income. For me, personally, I'll leave the money parked in the house for now and keep renting it, as that adds more to my bottom line Net Worth than the equity could achieve in a mutual fund, based on my assumptions.
Finally, if you sell, the commission is baked into the value of your house. And if you don't give it full exposure to the buyer market through the MLA, you could lose money through a lower sales price. Thinking about it as an "expense" is the wrong way to think about it.
Summary, if you're Nervous Nellie, and financially insecure, sell it. If you might move back and have the financial and emotional capacities required for being a Landlord, hire a Property Manager and turn it over to them.
Hi austin-steve,
Thanks for your reply. We read lots of your posts when we decided to buy a home in south Austin. Really appreciate your experience and analysis.
Let me reply those two questions.
1. We are not sure whether we will return to Austin or not. We have not lived in Bay Area before so not sure how tough it is to live there. It seems the housing prices are crazy there. We will never be able to buy a 3000 sft home there(sad). My feeling is the chance of returning to Austin is low. The only reason is the children's education. The competition in Bay area is high and we may want our children to receive education in Austin.
2. We have healthy financial status. That is said, we are able to pay extra $1000 into it if there is no positive cash flow. I agree with you that negative cash flow does not mean "loose money". It is analogous to save some money into your home instead of bank. Currently, we need to pay around $3400 per month including mortgage($2400) and property tax($1000). The loan is 15 years and we have paid it for 3 years. We target to rent it around $2500-$3000.
Based on those numbers, do you think it is fine to keep this home in Austin as an investment asset?
1) Will you ever return to Austin and hope to re-occupy the home and regret not keeping it because, by then, you can no longer find/purchase a home in the same area for what you paid for this one? If the odds of that are better than 50/50, keep it and rent it.
2) Do you have the financial and emotional capacities to be a Landlord? Even with a professional property manager, it's too much for some people, especially those who worry about unexpected disruptions in cash flow. If you can't hold back the equivalent of 6 months rent in reserves to cover turnover and/or unexpected big expenses, do NOT become a Landlord.
Another thing to note, even a "negative cash flow" property does not generally "lose" money. There is a difference between the annual in/out of actual cash, and the wealth increase that occurs regardless of cash flow.
You have to back out the equity paydown portion of your monthly mortgage payment because that in fact is not an "expense" even though it's a cash outflow. That cash outflow becomes increased equity in the home on your Net Worth spreadsheet.
Second, the home increases in value. Conservatively, you should assume 4.5% annual appreciation.
So, for example, a home I own in 78749 rents for $1,800/mo. My PITI + HOA fees are $2,605, so it is negative $805 per month before maintenance, vacancy and leasing expenses.
But to that -$805 I add back $1,015/mo (increases slightly each month) of the payment is equity paydown. Also, the home is worth $375K, so it increases in value over $1,400 per month. I'm not "losing" money by owning the house. The cash flow isn't relevant to me. If I cashed out my equity of about $200K and put it into my Schwab Brokerage account, and assume a 5.4% annual return, that's only a $900/mo income. For me, personally, I'll leave the money parked in the house for now and keep renting it, as that adds more to my bottom line Net Worth than the equity could achieve in a mutual fund, based on my assumptions.
Finally, if you sell, the commission is baked into the value of your house. And if you don't give it full exposure to the buyer market through the MLA, you could lose money through a lower sales price. Thinking about it as an "expense" is the wrong way to think about it.
Summary, if you're Nervous Nellie, and financially insecure, sell it. If you might move back and have the financial and emotional capacities required for being a Landlord, hire a Property Manager and turn it over to them.
One reason why real estate can beat the stock market is because of leverage. You can put 20% down, so a 3% increase in value translates to a 15% return on your equity.
However from a historical return point of view, on average the market beats even average austin real estate. The historical market increase is about 10% (which includes dividends of about 1.85%). The return over the last 10 years has been about 8% (not sure if that included dividends)
Owning a single house is like owning a single stock. You can get much larger returns than the S&P 500 if you buy a single stock. The better equivalent would be owning a REIT in the austin area which is like owning many homes simultaneously to spread out your risk. Comparing owning a single house to the S&P500 is not a good comparison. Instead you should compare owning a single house to owning a good growth stock (google, amazon, facebook etc)
As you reduce your risk you reduce your return.
Some of the risks of owning a home
1) liability issues due to someone getting injured
2) significant damage to the home from renters
3) lack of liquidity
4) market downturns
5) change in the value of the area due to a downward spiral
6) increase in property taxes
7) headaches from renters
etc etc
We were absent landlords to a condo in corpus and it made great money, but wasnt worth the headaches.
One reason why real estate can beat the stock market is because of leverage. You can put 20% down, so a 3% increase in value translates to a 15% return on your equity.
However from a historical return point of view, on average the market beats even average austin real estate. The historical market increase is about 10% (which includes dividends of about 1.85%). The return over the last 10 years has been about 8% (not sure if that included dividends)
Owning a single house is like owning a single stock. You can get much larger returns than the S&P 500 if you buy a single stock. The better equivalent would be owning a REIT in the austin area which is like owning many homes simultaneously to spread out your risk. Comparing owning a single house to the S&P500 is not a good comparison. Instead you should compare owning a single house to owning a good growth stock (google, amazon, facebook etc)
As you reduce your risk you reduce your return.
Some of the risks of owning a home
1) liability issues due to someone getting injured
2) significant damage to the home from renters
3) lack of liquidity
4) market downturns
5) change in the value of the area due to a downward spiral
6) increase in property taxes
7) headaches from renters
etc etc
We were absent landlords to a condo in corpus and it made great money, but wasnt worth the headaches.
That's what we think about approaching retirement with roughly half of our entire net worth invested in Austin real estate.
An investment advisor would say we are way "over weighted" in one sector. But Darrell Royal would say "Dance With Who Brung Ya", and it's real estate that got us here.
I'm actually getting ready to turn over our personal rental properties to another property manager so we can go on extended travel without worrying about it. But we are going to cash out on a duplex and put into Vanguard mutual "set it and forget it" funds that auto-rebalance based on age, market conditions, etc.
But for a single property owner such as the OP, owning one single family home, especially one with the added utility of serving as a possible "come back to" home, it can make sense to hold on to it.
I say sell, for all of the reasons above. Except one thing...
I think that the Bay Area is an expensive open sewer. I can't imagine living there. If I was fool enough to move there, I would hope that I would sober up and move back ASAP...
Thanks for all your helpful comments. After reading all of your comments, we decide to keep our house and turn it into a investment property in Austin. We invest heavily in stock market. Almost all of our investments go into SP500 and some high dividend ETF. It may be a good idea to keep a portion of investments in Austin real estate. Austin still has its potential as more and more tech companies are moving here.
We are searching for apartments/houses in bay area. I totally agree with Lakeway Man. Bay area is too expensive. Those small and old homes could easily cost more than 1.5 million. I would possibly rent homes for several years in bay area and return to Austin when our child needs to attend school. I believe if we sell our home in Austin now, we will pay much more in future to buy it back.
Thank you all again for your insights!
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