Author Topic: Housing Dilemma  (Read 4235 times)

mrssave

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Housing Dilemma
« on: March 21, 2013, 04:32:53 PM »
Hello!
I posted this question on the ERE forum board as well, but I thought that the more insight we got the better! :)

My name is Sam. I'm a 25 year old 6.5 month pregnant woman living in Fort McMurray, Alberta (Canada) with my husband. We have this big looming dilemma that we could really go either way on. So I thought maybe some outside perspective would help me make a decision.

The Dilemma: Our house- to sell and pocket cash, or to keep?

Stats:

Purchased in: July 2011
Price: $545,000
Amount Invested in home beyond down payment (legal basement suite, and upgrades on main floor): $50,000
Estimated current Value: $700,000
Monthly Payment: $2,400 (for mortgage), $3,200 for mortgage, insurance, utilities, maintenance, etc
Monthly rent from Basement suite: $2,300
Net monthly living expense- not including mortgage paydown: $900
Current amount owing on home: $500,000 (approx.)

Other things to note:
- If factoring in mortgage paydown, we're basically living here for free
- We live in Fort McMurray, which is a boom/bust city
- We're planning to live here until 2015, at which point, we are open to moving back to Ontario
- A one bedroom (putting a nursery in our room) apartment in Fort McMurray is usually at least $2,000/month
- We couldn't qualify for another mortgage right now because we got this house at a time when we were both working full time jobs: Now my husband is finishing his teaching degree, and I am self-employed... we couldn't qualify for ANYTHING
- My husband did most of the work on our house
- We really love it, and it has a large backyard
- If our basement is vacant it makes a HUGE difference in our monthly expenses...
- We may have an opportunity to get a GREAT deal on a basement suite in a friend's house (to rent) for $1500/month, but there's no full kitchen

So my thoughts
- I was hoping to sell in April- and cash out on our investment. I don't feel comfortable having so much of our wealth tied up into a house that depends on the Oil Sands industry. I'm not saying that I think that real estate won't appreciate in value over the next few years... I just don't want the whims of the market to determine our net worth (Plus, we already have another $50,000 invested in a rental property here).
- Some people say that the market is only going to get better here, but I'd be more then happy to realize a $100,000 profit (tax-free) in just 2 years- whether the market spikes after we sell or not
- Family and friends have pointed out that we'd be leaving a place that we love, with a large yard, and plenty of space (3 bedrooms- 2 of which we rented out until recently) at a point where we've JUST had a baby... Perhaps biting off more then we can chew.
- Theoretically, we could cash out on our house, and our other investment here, and be left with $200,000 (after lawyer fees, paying off existing debt, etc)- this is amazing for a young family like us, and is equivalent to $667/month indefinitely assuming a 4% withdrawal rate.

Anyways, what do you guys think? Preemptively... I know that $545,000 is a huge price for a house. But we bought it knowing that it was perfect for putting in a basement suite, and as an investment.

Another Reader

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Re: Housing Dilemma
« Reply #1 on: March 21, 2013, 07:59:56 PM »
If I understand what you are saying, you are paying $900 a month net plus any vacancy loss spread out over time to live in this house.  A basement suite with no real kitchen is $1,500.  A one bedroom apartment with no separate space for the baby is $2.000. 

In your shoes, I'm staying in the house that I own and like.  One month's vacancy a year is around $200 a month in extra cost.  You are still only out $1,100.  If I were planning to stay in this location, I would not even consider selling, as long as with the current and expected income I could afford the house.  If you told me you had no savings and would not be able to pay the mortgage if the tenant moved out and it took you a month to find another one, I might give you a different answer.

DoubleDown

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Re: Housing Dilemma
« Reply #2 on: March 22, 2013, 09:59:28 AM »
@ Another Reader: It seems like the concern lies mainly with having so much net worth tied up in the house, and the potential for large drops in housing prices in the future, not necessarily concerns about tenant vacancies and the like? Would your advice change focusing on that, or maybe you did already consider that?

@OP: To me, this is a tough situation. I lean towards Another Reader's advice about staying in a house you love that is also a great financial arrangement. I just don't know enough about housing markets in oil/sand areas, and whether they've been subject to large declines historically. You've said you don't anticipate any big drops in the foreseeable future, so that seems pretty confidence-inspiring, but I'm guessing there's some substantial risk involved if the oil market suddenly goes bust there. Like I said, I'd probably stay knowing there's some, but probably not a lot, of risk to having your house value go down. And it seems just as likely or even more likely the value will go up significantly -- a great way to increase your net worth.

Another Reader

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Re: Housing Dilemma
« Reply #3 on: March 22, 2013, 10:38:17 AM »
My point is the cost to live there is so much lower than other less desirable options that it makes sense to stay, as long as the arrangement is affordable.  The OP originally felt the market was strong enough to put $50,000 down on a second property as a rental.  In her shoes, as long as the reduced income from the current employment did not create a huge financial burden, I would keep the house.

The rental property needs closer examination.  Is it profitable?  Is the risk of it being vacant or needing expensive repairs intolerable because of their current income?  In her shoes, that's the property I would look at selling.  Selling that property would reduce the portion of their net worth tied up in real estate.

kdms

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Re: Housing Dilemma
« Reply #4 on: March 22, 2013, 11:00:24 AM »

- Family and friends have pointed out that we'd be leaving a place that we love, with a large yard, and plenty of space (3 bedrooms- 2 of which we rented out until recently) at a point where we've JUST had a baby... Perhaps biting off more then we can chew.


I have zippo to contribute about the number crunching....but having been relocated at the same stage of pregnancy that you're in from Vancouver to Ottawa, and taking another three months to close on the deal...I wouldn't do it again.  We were still unpacking boxes when the little one arrived.  Learning how to be a mom was a full-time job, and it would have been a lot easier in a well-established, familiar environment.  :)  But that was only my experience.  A lot of people do just fine moving either right before or after a baby arrives.

mrssave

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Re: Housing Dilemma
« Reply #5 on: March 22, 2013, 12:10:46 PM »
@ Another Reader- The $50,000 that we have invested here is profitable, but pretty pitifully so... we are bringing in about $300/month for this property, and have to maintain it deal with ongoing maintenance issues. Unfortunately 1) we are invested in this property with a partnership, so all of our decisions have to be agreeable to both of sets of partners, and 2) The property is a bit of a lemon- we had it inspected, and everything looked fine before we bought it, but we've had a series of problems with it that have made it a big hassle to maintain since then. Our insurance will be taking care of some repairs in the spring (which will actually hopefully add value), after which we would want to list the property and hopefully realize a little bit of value appreciation (our current tenant's lease is up at the end of August). In short- I wish we never invested in this property... we probably wouldn't be considering leaving our house because we would have a much more emotionally acceptable cushion of funds for emergences/worst case.

@ Double Down- Thanks for your input- I read an article yesterday that actually placed Fort McMurray as Canada's best long term performer over the past 10 years in property value appreciation. This actually made me feel quite a bit better about our prospects

@kdms- Ya, it's true- I really have no idea how difficult being a mama will be... and stress is not a negligible factor when considering how much my life will already be changing at that time.

DoubleDown

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Re: Housing Dilemma
« Reply #6 on: March 22, 2013, 12:12:59 PM »

The rental property needs closer examination.  Is it profitable?  Is the risk of it being vacant or needing expensive repairs intolerable because of their current income?  In her shoes, that's the property I would look at selling.  Selling that property would reduce the portion of their net worth tied up in real estate.

If I read the OP correctly, the rental and primary residence are one and the same -- they rent out their basement to offset costs.  That's what goes to the too-many-eggs-in-one-basket fear, that a decline in housing values due to it being an oil boom/bust town could wipe out a significant part of their net worth if things go south.

@OP: Having thought a little more about this, I think I know what I would do in your shoes: Information can definitely be your friend here. I would investigate a bit to find out the prospects for the oil industry in your town. For example, are there large contracts in place that last for a stated number of years? How long do oil fields like these normally produce, a couple of years or decades? How dependent is the local economy on this industry? If it fell out would the entire town go the way of Rust Belt towns in the U.S., or are there other industries to pick up the slack? If the outlook is good for at least another couple of years of oil production and employment, then it sounds quite safe to stay put knowing your wealth will only be increasing, and you can reevaluate over the years as needed.
« Last Edit: March 22, 2013, 12:22:38 PM by DoubleDown »

Kazimieras

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Re: Housing Dilemma
« Reply #7 on: March 22, 2013, 02:46:33 PM »
My vote is sell.

The area is hugely dependent on the oil sands performing well, and oil lately has been steady or dropping. In the past when a bust cycle happened, it happened very fast and took decades to fully recover. Since you aren't expecting to be there long-term, you cannot afford to "wait it out". The provincial government has already been forced to dip into reserves since oil royalties were less than expected, you can also suspect this is hitting the oil companies as well. The area will not run out of oil anytime soon, but it is so tied to its future anything in that town is either inflated or deflated in priced based on how well the oil market is doing. Normally you could mitigate the risk by renting out the place long-term. However as the area is so dependent on oil, if it collapses, all the people leave too resulting in lots of properties and lower rental rates. One key I keep for investing is to keep diversified and know what effects what. You are right now taking a huge bet on oil. You may win big if you keep, you may lose big, but know that it is a bet.

Also good for your husband on his teaching degree. By 2015 the demographics in high school should be picking up, making it easier to land him something.

Self-employed-swami

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Re: Housing Dilemma
« Reply #8 on: March 22, 2013, 03:09:06 PM »
As inconvenient as it would be at this point, I'd cash out!  If the the Northern Gateway or Keystone pipelines get delayed again, things could start to drop off in Fort Mac, but I'm also a much more conservative investor.

As an aside, what do you do?  Are you going to go back to work once you have the kiddo?  I'm also an oilfield consultant, so I was curious what you do (I'm a well site geologist), but I haven't worked up there in 2 years.


Another Reader

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Re: Housing Dilemma
« Reply #9 on: March 22, 2013, 06:54:34 PM »
In your shoes I would prevail upon the partners to sell the lemon investment and invest the proceeds as your cushion.  You are happy in your current house and the basement is producing a nice rent.  Have your baby, wait a few months after having the baby and selling the investment property, and revisit the subject then.