Author Topic: Advice for sister - sell or continue to rent out W. Seattle house?  (Read 1558 times)

Malaysia41

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My sister, who is 50 y.o. and lives in Florida, owns a house in West Seattle.  It's set up like a duplex, but really is a SFH.

Valued at $850k-$900k, she owes $550k on it. The mortgage is interest only at 2.7% and resets to 30 year variable in November.   

At first she told me rents are $2700.  I said, "OMG Sell!" But then she said, "well, if we rented the second unit and got new tenants in the top unit who pay market price, we could get $4200 total."

Yeah, well then, maybe, do that ... yesterday?

Assuming her rate sets to 4%, her monthly mortgage payment becomes $2626, and PITI is $3330.

P = $ 792
I = $1,833
T = $ 550/ mo    $6,600 / yr
I = $ 150/ mo   $1800 / yr(seems high)
PITI = $3330
ITI = $2540.

$4200-3330 = $870 per month income (cash flow)
$4200-2530 = $1670 per month

The glaring problem is the variable rate mortgage.  When rates rise she'll have a tough time.  She could pay down the note to a conforming $417k and see what fixed rate she could get, but she's recently divorced and her alimony runs out in 2 years, so she doesn't think she can secure a loan without a co-signer, given her salary. 

Personally I think it's a great asset.  West Seattle is prime real estate.  What worries me is the size of the note, the resetting of the note, and opportunity cost of $ tied up in this asset that's returning 2.35% on the value of the home, 3% on what she paid for it ten years ago.  ... but it's potentially an appreciating asset.

Any advice?  Continue to rent it out?  Sell? Any other info you need?   One other bit of info - the ex owns 25% of it.  He's said he's cool with whatever she decides to do.  This isn't the battle he wants to pick.  And I believe him.  So while this may raise red flags in your minds, knowing him, he's going to do what he says.

jooles

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Re: Advice for sister - sell or continue to rent out W. Seattle house?
« Reply #1 on: July 02, 2015, 10:47:02 AM »
Sell

Big margin to be realized by the sale and too many possibilities for headaches and $$ losses by continuing to rent.

Take the $$ and move on to whatever is next.  Maybe a new rental near where she lives now. 

James

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Re: Advice for sister - sell or continue to rent out W. Seattle house?
« Reply #2 on: July 02, 2015, 10:51:10 AM »
Sell. She isn't managing it well to make money at the current time, is she really going to change and start managing it well in the future? Is the amount she would make larger than the amount the money would make in index funds? Can she handle the risk of a crash or glut of housing removing her rental income? Would she buy and rent a home like that if she didn't own it?

Bearded Man

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Re: Advice for sister - sell or continue to rent out W. Seattle house?
« Reply #3 on: July 02, 2015, 10:57:09 PM »
There are other factors that are not being taken into account here. Would she be willing to invest in index funds instead with the proceeds, or will she just stick it in a CD?

Does she work? If so, is it a high income job? The depreciation benefit would be something I would factor in. Also, consider the principal payment, it's pretty hefty and going to the assets side of the balance sheet.

I agree with you, Seattle is prime real estate. The tech boom in the area is amazing, and it could turn into SF in a a few years or a decade. My vote is to keep it, but like I said, it depends on her situation. You didn't mention if she is retired or not. Frankly, while working, I'd use the expenses and depreciation to lower my tax liability while the property appreciates. You could always have her refinance now too. I wouldn't be too comfortable with a variable rate mortgage...30 year fixed only.

Malaysia41

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Re: Advice for sister - sell or continue to rent out W. Seattle house?
« Reply #4 on: July 03, 2015, 12:35:28 AM »
She works but hates her job.  She doesn't make a lot of money, but keeps the job for medical benefits.  She has alimony coming in for 2 more years, and as long as she's receiving that, ACA rates are high.   

I've convinced her to put 30% of her alimony into her investment account - where she buys VTI (per my suggestion). 

She depreciates the property.  It does help her tax bill. 

Crushtheturtle

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Re: Advice for sister - sell or continue to rent out W. Seattle house?
« Reply #5 on: July 03, 2015, 03:17:37 AM »
Your calculated cash flow isn't that high, if you're not taking into account things like property management, maintenance, possible future capital expenditures, vacancies, etc.

A very rough rule of thumb, as I understand it:

Cash flow = 50% rental income - (mortgage principal+ interest)
« Last Edit: July 03, 2015, 03:25:25 AM by Crushtheturtle »

Malaysia41

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Re: Advice for sister - sell or continue to rent out W. Seattle house?
« Reply #6 on: July 03, 2015, 04:05:12 AM »
Your calculated cash flow isn't that high, if you're not taking into account things like property management, maintenance, possible future capital expenditures, vacancies, etc.

A very rough rule of thumb, as I understand it:

Cash flow = 50% rental income - (mortgage principal+ interest)

Yeah.  I've played with scenarios where DH and I take on a 30-40% ownership, account for management, maintenance,  pay the mortgage principle down to and take on a 4.5% 30 yr fixed loan.  The return for us would be between 3.5% and 4.5% and that would be with my sister and bro-in-law agreeing to a favorable valuation for us.  Not that great.

Thing is, I know the Seattle rental market is zooming.  If it goes up another 15%, the investment returns 5+%.  That looks much better.

One of the reasons I like the idea of holding onto this property is that I consider the area home.  Any number of scenarios could come out of it - if my parents needed help in ten years, either my sis or my family could move to this place.  Or, in time, if we decide to move to Seattle, I'd be happy in one of the units.  It feels like our roots are there, and selling this house would be pulling up a big root.  Sis already sold the house they'd lived in up the road.

Also, if there's one thing I've learned, it's to hold onto appreciating property when you have it.  So I want to give this due consideration.  In 2003 I sold my house in the Bay Area.  It didn't really occur to me to rent it out.  Selling that house was one of the worst financial decisions I've ever made.  (And there have been MANY :) ).

That said, I'm too old to base my advice on emotion.  But I am willing to inform my advice with my own personal experience.