Author Topic: Am I missing something?  (Read 1771 times)

Laurak

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Am I missing something?
« on: January 08, 2019, 10:09:29 AM »
 We bought a house in 2004 (bought for $752,000 with $150k down)on 30 year mortgage, 5 year fix. We left the US in 2010 with no plans to return (ever, we're not American) and rented it out, our 3rd tenant is leaving at the end of his lease at the end of March. The house would probably sell in the region of $600k, with $400k left on the mortgage, so not worth selling at this point. Our plan is to rent it out again for around $4k/month which covers the majority of the mortgage and escrow payment (4300 at 5.125%) and then overpay the mortgage to get rid of it in 8 years. It needs some work doing too, no idea on cost of that yet but it sounds expensive as it's structural.

Has anyone got any other ideas?

NonprofitER

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Re: Am I missing something?
« Reply #1 on: January 08, 2019, 10:57:23 AM »
That sounds like a difficult situation. Because all real estate is local, I'd be curious what market the house is located in?

One concern I would have is that its a relatively high-end rental at $4k/mo (I'm assuming, but its hard to know without knowing which city/market the rental is located in). By the math, it doesn't seem like its cashflowing at all - so unless its in a really tight market that is likely to see appreciation no matter what happens (NYC, LA, maybe Hawaii, etc.) its hard to imagine you'd have a lot of benefits to keeping it.

While I'm no fortune teller, those of us reading the tea leaves of the US economy can see that we're due (overdue?) for a market correction/slow down. Depending on when this happens or how significant of a correction this is, and what local market the home is in, etc. - vacancy rates are likely to increase during a recession, esp for a costlier rental. So it might be hard to predict if keeping it rented is a sure strategy. But again, it depends on where the home is located. Some markets don't see big dips in home prices and vacancies during downturns - but stagnation instead.

Personally, I'd sell and cut your losses if that's viable for you. While I don't mind the idea of remote rentals, this one doesn't seem to bring you enough upside to keep it - esp with looming repairs?  Some real estate markets haven't softened (yet), so selling before then would be my goal -- again, not knowing the location...yadda yadda.

Laurak

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Re: Am I missing something?
« Reply #2 on: January 08, 2019, 11:28:02 AM »
It's in CT, just commutable to NYC (if you're a bit insane), excellent schools... While it's not generating any income, the rent is paying the mortgage. Looking at maybe a refi and paying it down then in 8 years when we're ready to retire, sell it then with no mortgage. If we sold it now we'd barely pull out the $150 we put down in 2004. The real estate market there took a hit when GE upped and left to go to MA.

BicycleB

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Re: Am I missing something?
« Reply #3 on: January 08, 2019, 11:49:20 AM »
Hard to know the future in a random case study, but it seems like selling now would be simpler. You have downside risk as well as upside in holding.

How will you feel eight years from now if all you've done is lost another $150,000?

It doesn't sound like a very good rental investment. Do you have other investment alternatives? FTSE? Brookfield Property Partners (BPY), if you're set on being in real estate?

A real answer would compare the risk/reward profile of your current investment in the context of your other investments, your income, spending and goals, comparing the current investment with the best alternatives based on the personal factors I just listed. I'd get more detailed in order to decide wisely.

Laurak

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Re: Am I missing something?
« Reply #4 on: January 08, 2019, 12:55:44 PM »
Agreed. Bottom line is that we can't afford to have it empty while it's on the market costing $4k+/month, it wasn't bought as a rental investment but a family home. It's been on the market a couple of times since 2010 and obviously not sold. One time it was empty from September to April which just about nearly killed us financially. I'm thinking that holding is definitely a gamble... but stuck between a rock and a hard place.

thd7t

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Re: Am I missing something?
« Reply #5 on: January 08, 2019, 01:46:08 PM »
Are you saying you're planning on paying to have someone live there because you can't sell it for enough money now?  You're just continuing to lose money.  There isn't any evidence that it's going to get better and the house already needs repairs. 

You should consider talking to a realtor about what to list the house for so that you can get this albatross from around your neck.

BicycleB

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Re: Am I missing something?
« Reply #6 on: January 08, 2019, 02:48:08 PM »
If a few months' lost rent nearly killed you, you may also need to reduce your spending and increase your savings/investments. Forgive me if this seems intrusive, it just seems like a logical thought without having other information than what you posted.

One factor I include in the above remark is that a $752,000 house seems pretty posh from my view. Without other info, I imagine a high general spend from a Mustachian viewpoint. The lack of cash implied by "nearly killed us financially" goes along with the high-spend assumption.

That's a thought, anyway!

In any case, holding it leaves you subject to another rentless period. Probably SELL!!!!!

sailinlight

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Re: Am I missing something?
« Reply #7 on: January 08, 2019, 02:56:35 PM »
Another idea is to rent it out to someone at very below market rates so you have some income coming in, but with the stipulation that it is always kept at show-ready condition and you can show it at any time, and they have 1 month notice to move out when it sells.

This has worked out well for us in the past, especially with a remote property that you can't check on or keep tidy for showings.

NonprofitER

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Re: Am I missing something?
« Reply #8 on: January 08, 2019, 03:42:27 PM »
I definitely understand your conundrum, but if the rental payment of $4k/mo is barely or just covering the mortgage/escrow expenses, then its not really a good rental. I completely understand it wasn't bought with the intention of being a rental, so I'm not at all criticizing you for having it. But if you're trying to evaluate it objectively as a financial investment, its a poor one.

A good long term rental property that's intended to cashflow (and not just bought on speculation/appreciation) *should* rent for enough monthly to not only cover the mortgage, but also allow you a % to save for capital expenses/repairs, maintenance, property management, periods of vacancy, etc. and then have some profit leftover to pocket. Have you read about the 1% rule?  While not hard and fast for every RE market, its a sensible back-of-the-napkin calculation to help you know if your rental is likely cashflow positive or not. If your property can't command 1% of the purchase price in monthly rent, it likely can't cover itself in terms of expenses like repairs, management and have positive cashflow.  If you purchased at $750,000 and its getting $4,000/mo in rent, its not even close to meeting 1%. While the mortgage will be covered in the best of times when its rented, periods of vacancy or costly repairs will put the investment underwater in terms of it making you any money.

I'd sell it to be rid of the headache and the risk, esp before vacancy rates begin going up.  If there's a depression/downturn in the next 24 months, it'll be hard to find a renter at $4k/mo, AND your selling price would be even lower than you're being quoted now. I guess it depends on your risk tolerance, but I suspect you might sleep better at night if you got rid of it.

FINate

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Re: Am I missing something?
« Reply #9 on: January 08, 2019, 04:33:57 PM »
What you paid for the house compared what it's worth now is irrelevant (unless you're underwater on the loan, which you aren't). This is the fast path to Sunk Cost Fallacy where you end up in a downward cycle of ever increasing losses.

The question you need to ask yourself: If you didn't already own this house, would you buy it as an investment now?


waltworks

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Re: Am I missing something?
« Reply #10 on: January 08, 2019, 05:05:17 PM »
Needs to be sold immediately. What happens when the upcoming repairs become urgent or some problem rears it's head? You've said having it unrented nearly killed you financially - so you're really one bit of bad luck from having to walk away from the house and losing it completely.

Take your $200k in equity and invest in something else.

-W

maizeman

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Re: Am I missing something?
« Reply #11 on: January 08, 2019, 07:16:45 PM »
What you paid for the house compared what it's worth now is irrelevant (unless you're underwater on the loan, which you aren't). This is the fast path to Sunk Cost Fallacy where you end up in a downward cycle of ever increasing losses.

The question you need to ask yourself: If you didn't already own this house, would you buy it as an investment now?

Came here to post about the Sunk Cost Fallacy, found someone else had already made the same point. Please do listen to this poster.

What you're feeling is a very natural human response, but it leads to people all over the world losing a lot of money they don't have to because losses (or the absence of past gains) they've already experienced causes their emotions to push them towards bad decisions they otherwise never would make.

Cassie

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Re: Am I missing something?
« Reply #12 on: January 08, 2019, 08:01:47 PM »
We did something similar when young and lost more money 8 years later than we would have if sold at a loss. So by renting we lost even more money.  Sell it!

Laurak

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Re: Am I missing something?
« Reply #13 on: January 09, 2019, 03:30:08 AM »
Another idea is to rent it out to someone at very below market rates so you have some income coming in, but with the stipulation that it is always kept at show-ready condition and you can show it at any time, and they have 1 month notice to move out when it sells.

This has worked out well for us in the past, especially with a remote property that you can't check on or keep tidy for showings.

That's a good idea!

Laurak

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Re: Am I missing something?
« Reply #14 on: January 09, 2019, 03:33:17 AM »
If a few months' lost rent nearly killed you, you may also need to reduce your spending and increase your savings/investments. Forgive me if this seems intrusive, it just seems like a logical thought without having other information than what you posted.

One factor I include in the above remark is that a $752,000 house seems pretty posh from my view. Without other info, I imagine a high general spend from a Mustachian viewpoint.

Agreed! We're in the process of reforming... I can't even think about some of the stuff that we've done in the past, and some stuff that we're still sorting out now.

Laurak

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Re: Am I missing something?
« Reply #15 on: January 09, 2019, 03:37:45 AM »
What you paid for the house compared what it's worth now is irrelevant (unless you're underwater on the loan, which you aren't). This is the fast path to Sunk Cost Fallacy where you end up in a downward cycle of ever increasing losses.

The question you need to ask yourself: If you didn't already own this house, would you buy it as an investment now?

Nope, absolutely wouldn't buy it now. Not to mention the hassle of having to file US tax returns which is a complete pain too.  Let me check out Sunk Cost Fallacy, which is clearly an answer to my question of am I missing something.

mjb

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Re: Am I missing something?
« Reply #16 on: January 09, 2019, 08:32:16 AM »
We bought a house in 2004 (bought for $752,000 with $150k down)on 30 year mortgage, 5 year fix. We left the US in 2010 with no plans to return (ever, we're not American) and rented it out, our 3rd tenant is leaving at the end of his lease at the end of March. The house would probably sell in the region of $600k, with $400k left on the mortgage, so not worth selling at this point. Our plan is to rent it out again for around $4k/month which covers the majority of the mortgage and escrow payment (4300 at 5.125%) and then overpay the mortgage to get rid of it in 8 years. It needs some work doing too, no idea on cost of that yet but it sounds expensive as it's structural.

Has anyone got any other ideas?

There's lots of good advice in this thread, so I'm really just adding to the chorus of "sell the mf'er already". But to reiterate that advice, and (hopefully) add a couple of points of perspective:

  • As others have said, it is a money-loser as a rental. (Rental payments don't cover your immediate costs, never mind maintenance, vacancy, and profit.) All signs point to "sell" in this case.
  • Continuing to rent it out and paying down the mortgage, in hopes of one day "getting even" is 100% gambling on what is already shown to be a poor investment.
  • Over-paying the mortgage is just a form of forced savings. You could put those savings into either 1) this money-losing investment property or 2) index funds. Which option do you think will pay off better in 8 years?

The sunk-cost fallacy is a very real thing. I struggled with it myself in a similar situation (though on a much smaller scale), but finally pulled myself out and I'm so much better off now.

Be rid of it and move on with your life.

Laurak

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Re: Am I missing something?
« Reply #17 on: January 09, 2019, 02:10:17 PM »

It seems like you want to hold on the investment here, but I feel like it could only be because you feel like selling means you made a mistake.  That's not a good reason to hold onto the investment.  Sell the thing and move on with you life already.

Yep, and compounded by the fact that we sold an apartment that we should have held, so that's certainly on my mind.

SwordGuy

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Re: Am I missing something?
« Reply #18 on: January 09, 2019, 02:11:41 PM »
Here's a non-financial explanation of sunk cost fallacy.   Many of us know someone like this.

A woman who has discovered that the man she's been dating is a cheater, violent, a drunk, a bum who can't keep a job and doesn't try to get one, but doesn't want to leave him because "she's invested 5 years in the relationship and, besides, maybe he'll change for the better."

The other party in a relationship doesn't need to be that horrible, or even horrible at all, if they aren't the kind of person who will likely meet your needs now or in the future.    Sometimes it's time to let go even if things aren't "bad."





beekayworld

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Re: Am I missing something?
« Reply #19 on: January 12, 2019, 11:31:13 AM »
You bought the house in 2004 with a 30 year mortgage, so without throwing extra money at the mortgage, and just using rent to pay it off over the original term, it would be paid for in 15 more years.

Whereas if you sold it now and invested the $200k equity into an index fund, moneychimp shows that at 8% after 15 years you'd have $634k.

That's without any house repair costs or covering the mortgage when the house is vacant.  The stress of house repairs and vacancies would bother me a lot more than the stress of worrying whether the index fund will go up or down over the next 15 years (which can be hedged by having 3 to 5 years of living expenses in other investments).

I'd just sell it and invest the money.


BicycleB

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Re: Am I missing something?
« Reply #20 on: January 14, 2019, 10:10:38 AM »

Yep, and compounded by the fact that we sold an apartment that we should have held, so that's certainly on my mind.

To be fair, hindsight is 20/20.

It's important to remember that "should have held" is only true if the facts known at the time really truly made it clear to hold it. Even more important, just the fact that something went up after you sold it is different from the idea something else will go up after you sell it. Maybe there are differences in the cases - different continents, different market eras, different property specifics, etc - that will create very different results.

It's really common to see one or two cases and generalize, but sometimes that's a very costly mistake. Don't beat yourself up. Do whatever is right in this case for your financial safety, and move on.
« Last Edit: January 15, 2019, 10:33:46 AM by BicycleB »

matchewed

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Re: Am I missing something?
« Reply #21 on: January 15, 2019, 08:07:30 AM »
Sell

Laurak

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Re: Am I missing something?
« Reply #22 on: January 15, 2019, 02:09:56 PM »
It's being listed. I can't wait to get this monkey off my back.

NonprofitER

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Re: Am I missing something?
« Reply #23 on: January 17, 2019, 10:58:39 AM »
Yay!

Keep us posted. Fingers crossed for an excellent buyer.

Laurak

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Re: Am I missing something?
« Reply #24 on: April 28, 2019, 01:36:07 PM »
We are closing in 2 days! I cannot tell you how happy I am about this. Yes, we're selling at a loss, but not having to deal with a property that's 3000 miles away is a result. Had to do quite a lot of work on it to sell it.

SwordGuy

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Re: Am I missing something?
« Reply #25 on: April 28, 2019, 01:40:55 PM »
We are closing in 2 days! I cannot tell you how happy I am about this. Yes, we're selling at a loss, but not having to deal with a property that's 3000 miles away is a result. Had to do quite a lot of work on it to sell it.


I felt the same way in 2005 when I sold the 10% stake in a consulting business (purchased for $50,000) for $1.   

I walked away free and clear.   Rather than quit while they were ahead, my former partners kept going until they had lots of debt and then sued each other over the remaining assets.