Is a rental property in NoVA worth the pain? (fit in, mortgage)

[michgc]

Originally Posted by jillybean720

Equity? We have negative equity. Owing more than the house is worth = no equity.

But each month you pay the mortgage, you will owe less on the house overall. Assuming the value of the home does not fall more, you will have less negative equity as time goes by.

ETA: I'm making the assumption that you don't have an interest-only mortgage.

[vauser]

Thanks folks, valid points. I ran some numbers, several permutations and combinations of it, and clearly, if the property doesn't appreciate, we don't stand to gain a lot.

We just about break even on the property on a monthly basis, considering tax benefits and other things (so, it ain't a clear "yeah, the rent pays everything super comfortably" type of situation), and yes, the payment does take care of some part of the loan, but the way I see it, based on my calculations -

I would have paid about 50% of the price of the condo before we own it (assuming, we have decent tenant occupancy) in 20 years. So, if we were ready to deal with the tenants, issues, condo fees, insurance payments, repairs et al, we would own the property for half its price (since the other half would have been paid off by the tenants).

Now, taking our equity out of it now, and putting it in a savings account (@ 1% interest or lesser) would be much lesser than the 50% paid off by the tenants. This is assuming we don't find a better place to invest that equity. That's basically it. Not sure if this additional detail changes the equation in any way.

[NovaOne]

Real estate is local, and so real estate investment must also consider local factors. the 1% rule works elsewhere, but not in the DC/MD/VA area unless you want to be a slumlord. The main investment potential for real estate in this area is from appreciation, and the homes are priced accordingly. This means the closer in to DC, the more relatively expensive it is to buy vs rent. Also, the larger the home, the more relatively expensive it is to buy vs rent. What this means is that in the DC/MD/VA, only condos and sometimes smaller townhomes in the outer perimeters of the area make good rental properties to hold. But even this didn't work out for the OP since he bought at the peak and the property is now under water.

Also, don't fall into the trap of comparing what you bought the home for, vs what it gets in rent. For example, I know someone bought a property at a particular good time (in 2010), and paid $210k for a property that rents for $1800 a month - which is stunning for this area. To him, he believes he is pretty close to that sweet 1% rule. But the property is now worth about $280k with the recovery in full swing. If the recovery continues for a couple of more years, it would make sense for him to sell the property, capture the gain, and put his investment elsewhere for a higher rate of return.

Increasingly, I am finding that operating non-multifamily rental properties in this area is basically a good way to mitigate the cost of holding property during the natural price cycles of real estate: buy during down-turn, hold and rent out, then sell-off during good market, hold the cash until the next market down-turn.

To the OP - you already bought in at the peak. The best thing to do now is to let the current up-market take its course, and sell it after you've recovered some of your equity.

[vauser]

Originally Posted by NovaOne

Real estate is local, and so real estate investment must also consider local factors. the 1% rule works elsewhere, but not in the DC/MD/VA area unless you want to be a slumlord. The main investment potential for real estate in this area is from appreciation, and the homes are priced accordingly. This means the closer in to DC, the more relatively expensive it is to buy vs rent. Also, the larger the home, the more relatively expensive it is to buy vs rent. What this means is that in the DC/MD/VA, only condos and sometimes smaller townhomes in the outer perimeters of the area make good rental properties to hold. But even this didn't work out for the OP since he bought at the peak and the property is now under water.

Also, don't fall into the trap of comparing what you bought the home for, vs what it gets in rent. For example, I know someone bought a property at a particular good time (in 2010), and paid $210k for a property that rents for $1800 a month - which is stunning for this area. To him, he believes he is pretty close to that sweet 1% rule. But the property is now worth about $280k with the recovery in full swing. If the recovery continues for a couple of more years, it would make sense for him to sell the property, capture the gain, and put his investment elsewhere for a higher rate of return.

Increasingly, I am finding that operating non-multifamily rental properties in this area is basically a good way to mitigate the cost of holding property during the natural price cycles of real estate: buy during down-turn, hold and rent out, then sell-off during good market, hold the cash until the next market down-turn.

To the OP - you already bought in at the peak. The best thing to do now is to let the current up-market take its course, and sell it after you've recovered some of your equity.

You mention "up-market". My condo is in Loudoun county, and is about 20 years old. The property is worth about 20% less than what we paid for it, and our equity at this point would be about 25% (tops). Is there a realistic chance for the properties to go back to their near-peak values (we bought it at about 20% below its peak price).

[NovaOne]

I don't know if it will get back to peak levels in this cycle, but any gains you get will certainly be worth your while. Traditionally, the cycles build front the top down. The higher end properties go up in value first, followed by standard single family, then townhomes, then condos. This also works for geographical regions too: first McLean and other such desirable areas, then places like Fairfax, then Sterling, Ashburn, etc. So my recommendation would be to be patient. When you start seeing apartments being converted into condos and sold, that's when you know to start selling your property.

[vauser]

Originally Posted by NovaOne

I don't know if it will get back to peak levels in this cycle, but any gains you get will certainly be worth your while. Traditionally, the cycles build front the top down. The higher end properties go up in value first, followed by standard single family, then townhomes, then condos. This also works for geographical regions too: first McLean and other such desirable areas, then places like Fairfax, then Sterling, Ashburn, etc. So my recommendation would be to be patient. When you start seeing apartments being converted into condos and sold, that's when you know to start selling your property.

So, apartments being converted into condos - is it a good sign? Meaning, things are picking up?

[jillybean720]

Originally Posted by vauser

So, apartments being converted into condos - is it a good sign? Meaning, things are picking up?

Meaning selling a unit is more profitable than renting one out. Why else would they convert from apartment to condo? Always follow the $$.

[Fredesch]

If you become a landlord and rent, will you sell within 3 years, so you can take profits out tax free? After that you won't meet the 2 out of the last 5 rule.

Also you will have to depreciate the property on your taxes and when you sell and your basis is reduced by the amount you have depreciated. So if you are cash flow neutral while depreciating a property, you are really building up a future tax bill at no gain to yourself.

[vauser]

Originally Posted by Fredesch

If you become a landlord and rent, will you sell within 3 years, so you can take profits out tax free? After that you won't meet the 2 out of the last 5 rule.

Also you will have to depreciate the property on your taxes and when you sell and your basis is reduced by the amount you have depreciated. So if you are cash flow neutral while depreciating a property, you are really building up a future tax bill at no gain to yourself.

Just to be clear - does depreciation only play a role if the property value actually increased? In other words, if I sold for the same price that I bought for (or lesser), would the depreciation factored into earlier tax returns make any difference?

[FromGA]

Originally Posted by vauser

Just to be clear - does depreciation only play a role if the property value actually increased? In other words, if I sold for the same price that I bought for (or lesser), would the depreciation factored into earlier tax returns make any difference?

I am a newbie to this topic myself. My understanding of what he is saying:
(a) When you do your taxes on rental property, TurboTax for instance will depreciate the value of the property, and let you deduct that depreciation from the rental income

(b) Looks like based on what the other poster was saying: when you sell, the property will depreciate significantly from a tax point of view for the basis (that is the cost of the property). So say it depreciates from 300K to 200K over 30 years. All along you have taken advantage of 3K or whatever annual depreciation in your taxes

(c) When you sell at say 250K 30 years later, you have to pay capital gains tax on 250-200 = 50K profit. You will have to pay may be 10K in capital gains tax. If you sell at 400K, you will pay taxes on 200K, or 40K tax at 20% tax rate.

I think this is what he is saying. Apologies if I confused things further, and request the other poster to explain. (And if I am right, I had no idea this happens!)