Author Topic: Case study: sell or rent in HCOL area. Is it about mkt timing?  (Read 377 times)

LAstache

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Case study: sell or rent in HCOL area. Is it about mkt timing?
« on: September 05, 2017, 02:44:59 PM »
Hi everyone, I'm a longtime reader here, and after educating myself on this forum I realize that my ridiculous luck with one rental property is finally pushing me to ask your opinions.

I bought this SFR nearly 20 years ago and after living in it a few years I needed to relocate so I rented it. Meanwhile, the area has gentrified. The old 1600 sq ft houses are being replaced with 4000 sq ft houses that sell for $3.5M and up. I've collected rent every month since 2006, but I haven't raised the rent enough over the years. The long-term tenants probably realize the deal they're getting, as they haven't asked for major updating, and the kitchen and baths need it after 15 years as a rental.

Since the property's value has tripled, the rental profit can't match what the proceeds invested in an index fund could bring. But I'm concerned that the stock market is more likely to be at a peak than the LA housing market is. I guess that's the main thing that keeps me from selling (developers are swarming with all-cash offers), especially in light of how fortunate I've been with appreciation of this property.

Market Value: $1.6M
Original Purchase price: $500k
Original Mortgage Amount: $216k
Interest Rate: 3.5
Mortgage Term: 120 mo
Term remaining: 56 mo
Amount remaining on mortgage: $99k
Gross Rents: $4500
Principal and Interest (the P&I of your PITI - should match with the above info): $2100
Taxes and Insurance (the T&I of your PITI): $800
HOA costs: 0
Deferred maintenance notes: If current tenants leave, will need about $100k of updates, then could rent for $6500.

So:
1) sell now and put the proceeds in the market?
2) keep rented till LA real estate appreciation seems to slow? (might need to invest 100k and raise rent to $6500)
3) partner with a developer or act as project manager myself (invest $1M in building a new house on the property and if I do everything right sell it for over $3M so I'd walk away with at least $1.8M)? Not sure I have time or expertise to do this right.

This property is a major part of my assets, but the result of this decision won't drive major changes elsewhere in my life. I'm in my mid 50's and am situated well enough to FIRE, but I've stumbled into a start-up business that I love, so I'm doing that at least part time for a few more years. I'm in a HCOL area and have been lucky with real estate appreciation, stock market growth and frugal living.

I appreciate your perspective!

waltworks

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Re: Case study: sell or rent in HCOL area. Is it about mkt timing?
« Reply #1 on: September 05, 2017, 08:10:39 PM »
If you are essentially FIRE (and working a job you like on top of that) I would make the decision based on your personal life satisfaction and non-monetary goals. Do you want to get involved with a scrape/develop/build process? Do you want to keep being a landlord? If the answer is no, then sell it and stick the money somewhere boring (ie, index fund) and forget about optimizing your return on the transaction.

-W

Lazy_Spartan

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Re: Case study: sell or rent in HCOL area. Is it about mkt timing?
« Reply #2 on: September 05, 2017, 11:39:57 PM »
If you are essentially FIRE (and working a job you like on top of that) I would make the decision based on your personal life satisfaction and non-monetary goals. Do you want to get involved with a scrape/develop/build process? Do you want to keep being a landlord? If the answer is no, then sell it and stick the money somewhere boring (ie, index fund) and forget about optimizing your return on the transaction.

-W
This^. I am/was in the same situation as OP with an older (1950s) smaller house in coastal SoCal needing updating in a "raze and build a mcmansion" area. I choose to sell  rather than invest $$ into something that wouldn't sell for more than the land value no matter how much it was fixed up. And wouldn't rent for enough to off set costs of updating due to small size 1000 sf) plus 2 car garage.  It was my primary home but had considered updating and renting but the cost benefit would have been negative. Sell and invest that would be my advice.
« Last Edit: September 05, 2017, 11:45:35 PM by spartana »
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Dave1442397

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