What should I do with my house?

[seattleite]

I need some help thinking through what I should do with my house. I moved out two years ago with the assumption that I was going to move back but that is looking very unlikely. We have renters but the rent - maintenance - taxes doesn't cover our mortgage. Here are the numbers:

According to Zillow the property is worth $735,000

I have a 20 year mortgage at 4.125% with $345,222 left to pay.

We currently pay $3,054 per month for our mortgage payment. It's currently split between $1,277 for principal, $1,191 for interest and $586 for escrow. We receive $2,725 per month in rental income ($2,950 - $225 management fee). On which we pay a 48% marginal tax rate, therefore our net income on the house is $17,002. We pay on average $145 per month for the gardner.

Per year we pay $38,391 to keep our house and receive $17,002 in net income while the mortgage principal is paid down by $15,325, therefore it costs us $6,063 per year to keep the house. Zillow expects our house to increase in value by $35,000 during that year so assuming they are correct (which is a big assumption, I know), if we keep our house another year we should increase our net worth by an estimated $29,000.

The house is in a great neighborhood. Amazon HQ is 5 minutes to the south, a big Google office is 5 minutes to the north, and Expedia's 1000+ employees are just about to move into a new building 5 minutes to the west. I expect the value of the property to continue increase in the next few years.

Option 1: Keep as is

It's a drain on my current cash flow but something I can handle. The only thing I'm worried about is post-FIRE it won't be so easy to handle.

Option 2: Sell

If I see I will need to pay the 6% stupid real estate agent fees + 1.78% city fees which means it will cost me $57,000 and I will net $333,000 from the sale.

Option 3: Refinance to reduce cash flow drain

At 30 year at 3.92% will mean a $505.18 towards the principal, $1,129.18 for interest, and $586 for escrow = $2220. Therefore our yearly expenses will be $28,380. With the same yearly net income of $17,002 it will cost us $11,378 in negative cash flow while paying down our mortgage by $6,062. Therefore it costs us $5,316 per year to keep the house.

Option 3 gives me an extra $10,000 a year to invest in other stuff but it costs me an extra 15 years of paying for the house.

Here's where I'm not sure how to do a comparison calculation. I think what I'm comparing is 30 years of an extra $10,000 to invest vs investing nothing extra for the first 15 years but then being able to invest my whole mortgage payment of $2,468 each month after that.

If  that's what  I'm comparing  I get  very similar  numbers: At  a 5% return I get $693,275 vs $659,671.

So it appears that if what I care about is 30 years from now, both choices are essentially equal.

But I would like to retire some time in the next 5-10 years, so that time horizon is more important. How should I think about this problem with that perspective?

[KCM5]

Are you charging market rent? I'm assuming rents will go up next year?

[Bearded Man]

Nothing wrong with keeping it for now living that close to the campuses of the big wigs. It should appreciate nicely for the time being. Unless the tech bubble implodes again like it did 15 years ago.

I see you factored in city fees (really, SF proper has fees for selling your house? Yuck.), did you factor in state excise tax?

[FrugalFan]

Since I assume you can deduct all your expenses (maintenance, interest, property management, insurance, property taxes), you probably are not paying your marginal tax rate on the net income. See if these calculations affect your thoughts.

If FIRE is on the horizon, I would want the extra cash flow now, and then sell when you FIRE (that way you never have to pay the extra mortgage even if you refinance). It's a bit risky if house prices drop, but based on your description of location that seems unlikely.

[ShoulderThingThatGoesUp]

So if you make 4% annually on your $333,000, that's $13,320 a year. And you're putting in $5,316 a year. So it would take you 3 years to make back the $55,000 in selling costs you mention. At the end of that you have most likely a good deal more than $20,000 in extra investment growth and lack of expenses per year.

[norabird]

Can you raise the rent? Also, is the gardener necessary?

[Brilliantine]

Do you not depreciate the dwelling?

[Malum Prohibitum]

Do you not depreciate the dwelling?

Very important question for taxes upon closing.

[Frugal D]

I'm guessing the house is in Queen Anne - if so, congrats on a great location with huge long term upside.

I'd hold on to it for the appreciation and the chance that you move back one day. It is likely that will move back one day because all Seattleites do and rational people don't FIRE in California.

[Malum Prohibitum]

Option 1: Keep as is

It's a drain on my current cash flow but something I can handle. The only thing I'm worried about is post-FIRE it won't be so easy to handle.

  I would keep a property so close to such big names in tech with plenty of high income renters.  If it becomes not so easy to handle post-FIRE, then sell it!

I would look very closely at the amount you charge for rent.  It seems to be too little for the location.

[tonysemail]

i'd look to refinance. 
do you own another house where you live or are you currently renting?
this year, I did a cash out refinance of my primary residence to pay down a rental property.
that gives me a tax break on my 1040 while also lowering the interest rate.

yeah i'm surprised you need to pay any taxes on the rental income.
the mortgage wipes out a lot of the income on its own and there's also property tax, insurance, and depreciation.

if you're still keen on selling, can you use a realtor like redfin which charges lower fees?

[marty998]

I would look into the zoning of the house. If you're in the middle of an area being redeveloped with big companies moving in all around, you and your neighbours could get together, sell all houses in a block trade to developers and cash in.

Was a story of a street in the Northern part of Sydney earlier this year - 5 neighbours got together and sold their houses to developers for a combined $65 million.

The developers are trying to put 250+ apartments on the site.

[frugaliknowit]

Would you buy your house today for $735K and $333K down if you did not own it?

[lakemom]

Did you get a quote for 3.9% on a commercial/rental loan?  The last 'estimate' from a broker I received was 5.25-5.5% with at least 30% equity.  We have to wait until after we file taxes before we can apply since it was just put into service this year so no hard numbers yet.  I'd keep it and really work on raising rental rates over the next couple of years.

[Guesl982374]

But I would like to retire some time in the next 5-10 years, so that time horizon is more important. How should I think about this problem with that perspective?

I would refinance to improve cash flow which would lower your expenses while still keeping the same exposure to a hot real estate market then focus on increasing the rent.

Option 4) Try to pay down the mortgage in 5-10 years, after which it should cash flow a dependable $30K/year.

[seattlecyclone]

A few thoughts:
1) A house between Fremont and SLU (Queen Anne?) can probably get more than $3k rent in today's market. Prices are going up like crazy in this area.
2) You shouldn't be paying tax on the full $2,725/month. You should be able to deduct mortgage interest ($14k/year), depreciation (depends on what you paid for the building -- not land -- at the time of purchase), property tax/insurance ($7k/year), and any other maintenance expenses in addition to the management fee. The taxable amount probably won't be very high at all given that.

[Malum Prohibitum]

We receive $2,725 per month in rental income ($2,950 - $225 management fee). On which we pay a 48% marginal tax rate, therefore our net income on the house is $17,002.

  Do you have an accountant?  You might want to think about hiring one to do your taxes.

[Dicey]

We receive $2,725 per month in rental income ($2,950 - $225 management fee). On which we pay a 48% marginal tax rate, therefore our net income on the house is $17,002.

  Do you have an accountant?  You might want to think about hiring one to do your taxes.

Amen to this. But make sure you get a fully-qualified CPA (with a nod to our own mighty, mighty CheddarStacker).

I've been in this position. I bought a house as a future retirement property and it's never quite broken even, but it's finally pretty close. I've saved a buttload in taxes, plus all my repairs and travel there to do same are tax deductible.* I would start by asking how you feel about the house and location. If you love it and feel you'd always want to live there, I'd strongly consider those feelings when deciding to keep it or let it go. Consider your feelings, talk to an accountant and the answer will probably crystallize right before your very eyes.

*I just bought another one in the same area and it's going to be strongly positive right out of the gate. Live and learn, plus more favorable market conditions. And I love it there, so no complaints. I didn't maximize every green soldier, but I captured enough of them to FIRE, so all is well. If I can, you can.

[seattleite]

It turns out that I'm a dumbass and I would like you thank y'all for helping me realize it once again.

So, it turns out that I'm not paying a cent of taxes on the rental income! I took a look at Schedule E on last years taxes and the taxes + interest + depreciation covers all of my income. Wow, the tax person I hired paid for herself many times over just for making sure I did that whole thing.

So this changes stuff. My cash flow on the house is still negative, but not by much. I'll consider raising the rent soon. It is indeed Queen Anne, and yeah, wow, kind of crazy right now.

What I really learned from this discussion is that I know jack shit about this and that I need to read up more on real estate investing before making any decisions. (I've already ordered some of the recommended books) I had been ignoring the real estate section because I always expected to move back into that house, but now it seems that I've gotten myself into this space without putting any thought into it.

[Dicey]

Nah, you only feel like a dumbass right now. Looks you were getting more right than you realized.
My CPA is as curmudgeonly as they come, with a side of cranky just for fun, but his rates are reasonable and he saves me a shit-ton on taxes, so I keep going back for the abuse tax love.

[norabird]

It's good you checked! Seems like it will make sense to hold the house and raise the rent.