Author Topic: In light of Houston, thinking of selling  (Read 902 times)

hendlefe

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In light of Houston, thinking of selling
« on: August 31, 2017, 01:21:34 PM »
Hello Everyone!

Thank you in advanced for reading this.

I help my mom with her finances and we are considering selling one of her properties to reduce our risk since we have significant assets all in Southern California. My mother has nearly zero balance in the stock market. All of her retirement funds are tied into her real estate.

Quick Asset Rundown:
Primary residence: Worth $950k, Owe $580k
Investment property 1 (IP1): Worth 1.2 mil, Owe $500k. Gross annual income $86k, Expenses $30k, NOI $56k, Cashflow minus mortgage $27k ($35k/yr total return including equity accrual)
Investment property 2: Worth 1.2 mil, owe $0. Same numbers as above minus the mortgage cost.

I am considering selling IP1 (original purchase price $750k). I'm estimating cost of sale to be $30k FSBO. Depreciated about $225k in 15 years, so I believe capital gains tax will be somewhere around $156k. This results in after-tax equity of $515k, which invested in mutual funds yielding 6% equals about $30k/year.

I will, of course, consult a CPA before moving forward but I wanted you guy's opinion. I know it's hard to quantify the actual worth of risk. I am worried of my mom having all her eggs in one basket. Would you sell, if you were in my position?

Another Reader

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Re: In light of Houston, thinking of selling
« Reply #1 on: August 31, 2017, 02:14:26 PM »
Too little information about the properties or your mother's other income and assets to have an opinion.  Where in SoCal, property types, employment income, Social Security, pensions, etc. needed.

Four percent SWR on $515k (if your math is right) is only $20,600.  Not a good trade on that basis.

jviska89

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Re: In light of Houston, thinking of selling
« Reply #2 on: August 31, 2017, 02:18:20 PM »
Are the properties properly insured against the natural disasters you are thinking about? If so I would not worry too much. Does she have other non-stock market assets of any kind? I guess the main question is, what position would she be in if an earthquake hit tomorrow? If the answer is she would need to make an insurance claim then she could be just fine. If the answer is she would be SOL, then maybe it's time to diversify.
Forget the five year plan and retire instead

tralfamadorian

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Re: In light of Houston, thinking of selling
« Reply #3 on: August 31, 2017, 02:36:51 PM »
I agree that diversification would be prudent particularly considering the point of the real estate cycle that southern California is in and my presumption that your mother is at a stage in life when a partial diversification into stable assets would be wise.

hendlefe

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Re: In light of Houston, thinking of selling
« Reply #4 on: August 31, 2017, 02:44:49 PM »
Property located in Orange County. The two investment properties are each 4-unit residential rental properties (8 units total). She has about $30k in a Vanguard mutual fund and another $20k in cash. We have a $500k HELOC we can draw from if needed for emergencies. She will get social security in about 7 years (maybe $1.5k/mo). No pension.

Perhaps this would , indeed, be a bad trade. Instead, we could risk mitigate by looking at flood and earthquake insurance.

Thank you everyone!

Another Reader

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Re: In light of Houston, thinking of selling
« Reply #5 on: August 31, 2017, 03:19:10 PM »
Is she working now?  Seven years is a decent amount of time to ratchet down the spending and accumulate some cash and stock funds if she is.  Does she have a 401 (k)?  Is she eligible for an IRA?  Some diversification would be something I would consider with any new money, including net income from the properties.

Earthquake insurance, including loss of income on the quads, is a good idea.  Flood insurance might be needed if the properties are in an area prone to flooding.

In her shoes, I would not sell at this point.  The mortgage on the one would be a concern.  Not enough income there to pay it down significantly.  What are the rate and terms?

SwordGuy

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Re: In light of Houston, thinking of selling
« Reply #6 on: August 31, 2017, 04:23:18 PM »
What can she invest per year in Vanguard funds?

If she doesn't need the rental income to live on yet, that would give her a great nest egg in a five years.   Add in selling off her current home and moving to somewhere LCOL and she'll have another fine addition to her nest egg.   I don't expect that flood and earthquake insurance are that expensive.

hendlefe

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Re: In light of Houston, thinking of selling
« Reply #7 on: August 31, 2017, 07:03:47 PM »
She is working, the income is pretty low (she cuts hair and does nails). She's self employed so we've been putting money into a Roth. Was considering a solo 401k but haven't started.

Loan rate is in the mid 4%'s. She cash flows pretty well. Right now, it seems as if we use all of it.

I think we will add earthquake insurance (since CA is prone to it). Additionally, I will continue to contribute to retirement funds to help diversify her assets.

rbuck

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Re: In light of Houston, thinking of selling
« Reply #8 on: August 31, 2017, 10:05:57 PM »
She probably needs some more liquid assets in her portfolio if she intends to ever rebuild in the event of an earthquake. The deductibles on those policies are a percentage of the homes value and I have seen some as high as 25%.