Sell the house and rent??

[kwike]

My husband and I live in a market/area that is very hot right now, and recently had a realtor give us a valuation of our house around $60k more than what we purchased it for 3 years ago.

We are strongly considering selling and renting for a year or two to get the equity out while we can, and then buy again once the market cools back down.

From our viewpoint, there aren't a lot of real financial disadvantages, but would love to get the perspective of others.

We do love our house, but don't want to miss out on the opportunity.

[slappy]

That seems like a lot of work for $60k, unless you were planning to it anyway.

[honeybbq]

Market timing is difficult with stocks; it's even more difficult with a house. Buying and selling 2 houses in 3 years sounds like a good way to make your realtor rich - not you.

My house is 400k more than I paid for it 4 years ago. I'm not going anywhere.

[kwike]

I should have clarified in my original post, it is a 2-bedroom starter house and we will only be here for another 3-4 years maximum if we don't sell now, so this is not a long-term investment for us nor something we will pay off anytime soon. We could rent in the same area for around the same price as our current mortgage.

[jtraggie99]

Just curious but where do you live?  And why are you set on selling regardless in 3-4 years max?

[ysette9]

It sounds like a massive pain in the butt for not a ton of money. Do you think the market will dump in the next 3-4 years? If you are planning on selling in the future anyway I would just stick with that plan and save yourself the headache, unless there are other compelling reasons to move like commute or maintenance.

[kwike]

We live in the Kansas City area, and are planning on selling in 3-4 years when we start a family. Our second bedroom is more of a closet than a room :)

Not necessarily planning on the market tanking, but I don't think it will stay this hot forever and were just wanting to capitalize now while we know we can without changing our lifestyle significantly.

The market in KC right now is one where almost everything is going above list price without negotiations, so I don't think we would have to worry about repairs, closing costs, etc. I think it would be very close to the 6% commission (that we would of course have to pay when we sell in a few years regardless).

[kwike]

I'm surprised at the amount of people who don't think it would be worth it.

$60k might not seem like a lot of money, but our original home price was only $140k, so it has appreciated nearly 50% in just a few years time. We don't want to miss out on the opportunity.

However, we live in an up and coming area, and I do think that will help to combat some of the drop in the market when the time comes.

[surfhb]

Stay put and buy another property when the market cools down.   Why cash out on an appreciating asset ? 

Think bigger


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[Scortius]

That's probably because you're not thinking about it correctly.  You're operating under the assumption that you want to 'lock in' $60k.  The error is the idea that if you don't sell now, you will lose that $60k when the market drops.  That's entirely inaccurate.  In the worst possible case, you choose not to sell, the market immediately tanks, and you end up having to sell at the bottom 3-4 years from now when you go to buy your next house.  There are some very big assumptions you are making here.

1) It's very likely that housing prices continue to increase for a while, if not for the foreseeable future.

2) If and when there is a market 'correction', it's very likely that the market either stagnates or only drops a small amount.

3) If you end up buying a larger house in KC in a few years, any change in your sale price will be mirrored somewhat in your expected purchase price.

4) If you sell now and buy later, there's no guarantee you will time both the top and bottom of the market.  You will likely sell too low, and you will likely buy higher than the bottom.  Thus, you probably won't gain much from the whole ordeal.

5) Selling a house carries a huge cost, but you can discount this if you know you're going to sell eventually.

6) Generally, renting doesn't mean throwing your money away, but if you're going to sell and you're going to pay living expenses, why not build up some more equity with your payments?

In summary, this whole decision is a form of market timing, which never goes well.  Just like with stocks, you don't have to sell to lock in gains if you take a long term view regarding your investments.  If at some point you transfer your ownership from one house to the next, you'll be doing it at a single market point so you'll receive similar value regardless of whether the market is 'up' or 'down'.  You seem to be thinking about things as if this transaction will give you $60k.  It won't.  Even if things play out as you expect, you'll probably gain less than half that in either cash or RE equity, and it's no sure thing you'll come out ahead at all.  Selling your house is a lot of work to make a bet with such poor odds.

[jtraggie99]

Why don't you think it will stay that hot?  Is that just your gut or is there a logical reason?  What's the reason behind the growth?  I ask because where I am, in Dallas, the housing market is going through the roof.  This is in large part due to a huge influx of people.  There have been a ton of businesses relocate here in the past few years and people are coming here in droves.  We are talking about something in the neighborhood of 140,000 new people just last year.  The huge demand for housing coupled with people coming from the east and west coast (where houses are more expensive and a lot of people are use to paying more) are causing housing prices to explode.  And this growth does not appear to be slowing down anytime soon. 

So, my point is, what's driving the increase in houses in KC and is it something that could legitimately slow down in a few years?  Or, could it continue to grow?  If you are selling in 3 to 4 years regardless, by selling now you could miss out on additional profit, only to turn around and look to buy in an even more expensive market than it is now.  You could be shooting yourself in the foot.

[Vindicated]

Either way, whether your home increases in value, or decreases in value, the home you buy in 3-4 years is going to have a similar value swing.

So, let's try an exercise of a 50% swing, just for an extreme example.  Also, I'll assume your future home purchase (Home B) will be targeting $300k in today's value.  Your current home (Home A) is valued at $200k in today's value, and I'll assume you owe $110k on it now, and will owe $100k on it in 3 years. (No idea how right these are, but it doesn't matter)

Sell Option:
You get $200k now.  What would you do with the $60k windfall?  Invest it all to grow for a larger down-payment! (Worth $73.5k in 3 years with 7% market growth)
3-4 years later:
Your previously $300k target home...
RE Market tanks 50% prior to your buy, you could buy for $150k ($150k - $73.5k invested = Mortgage of -$76.5k)
RE Market balloons 50% prior to your buy, you would buy for $450k ($450k - $73.5k invested = Mortgage of -$376.5k).

Hold Option:
You stay where you are, and keep paying down the mortgage.
3-4 years later:
RE Market tanks, you sell Home A for $100k, owing $100k, netting $0k, and buy Home B for $150k (-$150k - $0k = Mortgage of -$150k).
RE Market balloons, you sell Home A for $300k, owing $100k, netting $200k, and buy Home B for $450k (-450k + $200k = Mortgage of -$250k).

Someone double check my logic.

Anyway, it looks like selling now gives you the wild chance of a lower mortgage later, but holding gives you more stability.

[Scortius]

Here are some quick threads other people started that you may want to review.  Each person had significant equity in a hot market that was likely to crash.  They didn't want to miss out on their opportunity to get their equity out while they could so they could reenter the market after things cooled down.

https://forum.mrmoneymustache.com/investor-alley/why-i-am-reducing-mkt-exposurehave-been-since-2015/

https://forum.mrmoneymustache.com/investor-alley/a-crash-is-coming/

https://forum.mrmoneymustache.com/investor-alley/here-it-comes-red-dow/

Just like you, they didn't see any real financial disadvantages.

[kwike]

Thank you very much for the responses! Much appreciated.

We don't have any real reason to believe that the KC market will tank, it is also a growing city and we are in an area that is getting more and more "trendy". It's more the idea that it's so hot right now it will eventually go down. Maybe that is too basic of logic.

Selling costs are pretty much a non-factor since we do plan on moving from this house eventually, so the risk comes in that the market either continues to get hotter after we sell.