Author Topic: Keep or Cash Out on Highly Appreciating House (in Austin, NOT a bubble!)  (Read 4437 times)

jngreenlee

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Hey, I'm in the good fortune of having a close-to-downtown house in Austin, in a neighborhood that shooting up in value (and I don't think its a bubble, the local corporate momentum is too strong). It's a lovely city, but we don't need to live there anymore and are currently renting it out at breakeven.

Right now we could sell for around $650k and payoff $458k in debt financing at 4%. After commissions, taxes, I'll have enough to payoff a final tranch of student loans at 6.5% for 25K, and then have a cool $100k to be our starting stach.

Now that all sounds good, but I'm leading myself around in circles with..."well then what?". I like RE as an investment category, and Austin is going to be a hot market over the next 5 years or so.

Does anyone think the cash out story is compelling?

sirdoug007

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This is an investment like any other.  But with negative dividends as you say you are breaking even which means you will likely lose some money on maintenance, vacancies, etc. over time.

You are really talking about speculating that Austin real estate will continue to increase in value faster than the stock market considering the money you will have to put into the house over the next 5 years.  Why do you think this is true? 

If you don't need to live there and aren't getting cash flow from the rental I would sell it and start your 'stache.  Killing your 6.5% student loans is pretty compelling too.

Another Reader

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Yes.  When tech starts to cool, the secondary markets will get hit first.  Real estate cycles in secondary tech areas have more pronounced swings than does the Bay Area/Silicon Valley.  Ask folks in Austin that went through the last downturn what it was like.  I already see signs of some cooling in my Silicon Valley neighborhood.  Time on market is climbing and multiple offers are common only on the best located properties in top condition.  Rates are starting to climb as well.  I question your breakeven analysis as well.  Unless you are collecting $6,500 in rent per the one percent rule, this is not a good long term investment. 

One more thing.  If you think real estate is not in a bubble, wait until mortgage rates rise above 5 percent and employment drops a little.  The number of people that can qualify to buy a house will decline sharply and you will shift to a buyers' market fairly quickly.  Remember, bulls make money, bears make money, but pigs get slaughtered.
« Last Edit: May 06, 2015, 09:42:45 AM by Another Reader »

Cpa Cat

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Did you live in it for 2 of the last 5 years? If so, I would sell it immediately to make use of the capital gain exclusion.

If you still want to be in rental real estate, then perhaps consider whether there are more appropriate rental properties to purchase.

sirdoug007

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Did you live in it for 2 of the last 5 years? If so, I would sell it immediately to make use of the capital gain exclusion.

+1  If you just moved out don't miss out on this tax break.  Otherwise you will be giving a chunk of that equity to the IRS!

WerKater

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Hey, I'm in the good fortune of having a close-to-downtown house in Austin, in a neighborhood that shooting up in value (and I don't think its a bubble, the local corporate momentum is too strong).
Where did you get your crystall ball?

You say that you are renting out at breakeven. What does that mean? What is your return on investment? By cashing out, you are looking at a pretty nice guaranteed return of 6.5% by paying off the student loans.

jngreenlee

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This is an investment like any other.  But with negative dividends as you say you are breaking even which means you will likely lose some money on maintenance, vacancies, etc. over time.

You are really talking about speculating that Austin real estate will continue to increase in value faster than the stock market considering the money you will have to put into the house over the next 5 years.  Why do you think this is true? 

If you don't need to live there and aren't getting cash flow from the rental I would sell it and start your 'stache.  Killing your 6.5% student loans is pretty compelling too.

Thank you for the thought process of 'negative dividends'. This makes sense to me. You are correct, it would result in the upside being all about additional property appreciation. Since this is not our only house (just our only one in Austin), we already have enough RE exposure and have benefited from the Austin upside.

jngreenlee

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By cashing out, you are looking at a pretty nice guaranteed return of 6.5% by paying off the student loans.

You are right, but that's only for $25k, so the rest has to go into stocks or gold and ammo or something, and maybe it's irrational but I think the Austin story is still compelling. Could be emotional, based on excitement though, and I need to reflect on that.

jngreenlee

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Did you live in it for 2 of the last 5 years? If so, I would sell it immediately to make use of the capital gain exclusion.

If you still want to be in rental real estate, then perhaps consider whether there are more appropriate rental properties to purchase.

It is a chunk of change, so I could 1031 into something small and close to me in CO I guess. I'll hit two years this September. Savings by hitting that point will be around $15k, equiv. to $10/sq ft. So right now, if the market is likely to drop by more than that amount between now and fall, I may want to take the hit...

jngreenlee

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One more thing.  If you think real estate is not in a bubble, wait until mortgage rates rise above 5 percent and employment drops a little.

I don't disagree with your comment overall, but wanted to ask more about this: I think both the rates going up AND employment dropping are unlikely, due to the Fed's current prime directive to keep rates low until employment is boosted already. Now maybe a [R] president could do something to upset that. What do you think?

Another Reader

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Economies are cyclical.  Eventually tech will cool and rates will go up.  How long do you want to play musical chairs?  I have been around long enough to see at least two cycles where you couldn't give away Texas real estate, and that included Austin.  Some big tech companies, some of whom are no longer in business, got stuck with land they could not sell there.

30French

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Did you live in it for 2 of the last 5 years? If so, I would sell it immediately to make use of the capital gain exclusion.

If you still want to be in rental real estate, then perhaps consider whether there are more appropriate rental properties to purchase.

It is a chunk of change, so I could 1031 into something small and close to me in CO I guess. I'll hit two years this September. Savings by hitting that point will be around $15k, equiv. to $10/sq ft. So right now, if the market is likely to drop by more than that amount between now and fall, I may want to take the hit...

If you 1031 the new property has to cost more than the net sales price of the relinquished property.  If you take any cash out of the deal you face a tax bill.  After the 1031 you can refinance as long as you can justify "independent economic substance" for the refi.

If you can still sell as primary residence that is likely your best bet.

bacchi

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Yes.  When tech starts to cool, the secondary markets will get hit first.  Real estate cycles in secondary tech areas have more pronounced swings than does the Bay Area/Silicon Valley.  Ask folks in Austin that went through the last downturn what it was like. 

During the dot bomb, Austin housing barely moved in price. That's because 1) housing was still cheap; 2) Austin wasn't as tech dependent as it is now (it was buffered more, percentage wise, by the Capitol and University).

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I already see signs of some cooling in my Silicon Valley neighborhood.  Time on market is climbing and multiple offers are common only on the best located properties in top condition.

If anything, time on market in Austin is shortening, at least in the core neighborhoods.

That's not to say that Austin isn't in a bubble. Worsening traffic, increasing cost of living, and the impending rate increase will all put a slap down on the Austin housing scene. I'd sell.