Author Topic: Best Financial Decision: Sell this home or keep it?  (Read 4313 times)

zurich78

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Best Financial Decision: Sell this home or keep it?
« on: April 24, 2014, 09:33:07 AM »
I live in Southern California (Orange County) and bought a home in February of 2011 for $475K as a slow flip.  Since I could not afford a home that I wanted for the long term, I decided to buy an older home that I could spend time fixing up and then hopefully sell for a profit which I could then use to potentially get in to a home that I wanted to commit to for the long term.  Property values have gone up roughly 20% or so since I purchased the house and are approaching about 15% of near peak/bubble levels.  I have a strong feeling we're approaching another mini bubble here in Southern California as we head in to the summer and so while I'm leaning toward selling, I'm also realizing that every other home has increased by 20% and so I don't know that I'll be getting great value if I sell and buy.

Understanding that I do NOT want this to be my primary residence for the long haul (for a variety of reasons but namely, the neighborhood, the layout of the house is not ideal, etc), I'd like to get your help on what would make the most financial sense for me moving forward.  Here are some details on the house and my situation and some options I've considered below.  Any and all input is appreciated!

Home Details
Home Information:  SFR, 4 bedroom, 2 bath, 1,500 sq ft (7,500 sq ft lot size), corner lot, 3 car garage
Home Purchase Price:  $475K (purchased Feb 2011)
Current Zillow Zestimate:  $565K
Assessment Value:  $600K (assessed last year for a refinance)
Mortgage:  $399K @ 4.125% (30 yr fixed)
Monthly Mortgage Payment:  $2,400 ($1,900 mortgage, $440 property taxes, $60 insurance).  There is no HOA or Mello Roos tax.

My Details
Annual Income:  Base Salary of $136K.  Additional ~$15K in bonuses and incentives.
Monthly Take Home:  $10K gross, $6.7K after taxes/max 401K contribution/etc (this does not include bonuses/incentives as those vary and are one-time distributions that often pay out but don't always do)
Personal:  Single, no kids, 35 yrs old

Zillow Chart


Options I've Considered
- Sell the house and immediately buy another property that is more desirable.
- Sell the house and rent.  Wait for a better value buy in the marketplace.  (Another benefit of this option is I could move to a more affordable area).
- Keep the house, rent it out (probably around break even for this house, maybe a slight profit).  Rent an apartment and save for the 'forever' home. 
- Keep the house, stay in it for a few more years at least, continue to save money as much as possible and decide later

What would you do in my situation, if you knew you did not want to live in this home for a long period of time, and you wanted to make the most financially sound decision possible?

Milspecstache

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Re: Best Financial Decision: Sell this home or keep it?
« Reply #1 on: April 24, 2014, 10:17:24 AM »
Are you downsizing or upsizing?

Downsizing would probably tell you to sell now if you think the market is near the peak.

skunkfunk

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Re: Best Financial Decision: Sell this home or keep it?
« Reply #2 on: April 24, 2014, 11:15:42 AM »
I like options 1 or 2. Don't care which, but I'd want to get out from under that thing.

zurich78

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Re: Best Financial Decision: Sell this home or keep it?
« Reply #3 on: April 24, 2014, 05:26:58 PM »
Are you downsizing or upsizing?

Downsizing would probably tell you to sell now if you think the market is near the peak.

Ultimately, the goal for me is to find a modest house that I wouldn't mind if it ended up being my forever home.  So it's not about downsizing or upsizing per se, but finding the right home at a good price.  Originally, I was purely looking to buy a good investment property that could also be my primary residence but I think I need to look at it the other way.  Find a primary residence that will also be an investment of sorts.

zurich78

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Re: Best Financial Decision: Sell this home or keep it?
« Reply #4 on: April 24, 2014, 05:29:00 PM »
I like options 1 or 2. Don't care which, but I'd want to get out from under that thing.

Totally understand why you're saying this ... but ... if you don't mind ... why?   When you say "under that thing" is there something in the chart that tells you I should GTFO of there?  I know almost nothing about investing and/or real estate ... I had a hunch we were in a bit of a bottom RE market wise back in 2011 and I have a hunch we're heading for another spike now over the next couple months.   So I'm not sure how you're coming to the conclusion that you are, but I'm kinda thinking that too, but mine is on a hunch -- what is it that is telling you selling the right move?

skunkfunk

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Re: Best Financial Decision: Sell this home or keep it?
« Reply #5 on: April 24, 2014, 06:07:11 PM »
I like options 1 or 2. Don't care which, but I'd want to get out from under that thing.

Totally understand why you're saying this ... but ... if you don't mind ... why?   When you say "under that thing" is there something in the chart that tells you I should GTFO of there?  I know almost nothing about investing and/or real estate ... I had a hunch we were in a bit of a bottom RE market wise back in 2011 and I have a hunch we're heading for another spike now over the next couple months.   So I'm not sure how you're coming to the conclusion that you are, but I'm kinda thinking that too, but mine is on a hunch -- what is it that is telling you selling the right move?

How much do you think you could rent it out for? I just don't see a return on investment renting it out. And can you handle months without a tenant?

And as far as option 4, you have a what, 600k house on a 135k salary. I'm just not comfortable having that much capital tied up in a house that isn't the long-term answer. Hell, I wouldn't be comfortable with it short term either. But that's just me.

Another Reader

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Re: Best Financial Decision: Sell this home or keep it?
« Reply #6 on: April 24, 2014, 06:35:18 PM »
The stats show the market is leveling off in Orange County.  I don't think you would be hurt much by selling and renting for awhile while you looked around.  The trouble with high demand areas is the better neighborhoods are the first to go up and the last to go down.  Timing when to move up in neighborhood quality is difficult.  Here in Silicon Valley during the last downturn, it would have taken about four years to get from the top in the marginal areas to the bottom in the best areas.  And there may not be a downturn this time, you may just get a stabilization of the market.

Renting makes sense if you lower your cost after tax considerations.  That might put you in a small apartment in a better neighborhood or a larger apartment in an area similar to where you are now.  Your mortgage payment as a percentage of your net income is high, but doable.  However, I do not think you will be satisfied until you find a house you like in a better area.

zurich78

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Re: Best Financial Decision: Sell this home or keep it?
« Reply #7 on: April 24, 2014, 07:46:31 PM »
I like options 1 or 2. Don't care which, but I'd want to get out from under that thing.

Totally understand why you're saying this ... but ... if you don't mind ... why?   When you say "under that thing" is there something in the chart that tells you I should GTFO of there?  I know almost nothing about investing and/or real estate ... I had a hunch we were in a bit of a bottom RE market wise back in 2011 and I have a hunch we're heading for another spike now over the next couple months.   So I'm not sure how you're coming to the conclusion that you are, but I'm kinda thinking that too, but mine is on a hunch -- what is it that is telling you selling the right move?

How much do you think you could rent it out for? I just don't see a return on investment renting it out. And can you handle months without a tenant?

And as far as option 4, you have a what, 600k house on a 135k salary. I'm just not comfortable having that much capital tied up in a house that isn't the long-term answer. Hell, I wouldn't be comfortable with it short term either. But that's just me.

It's 4 bedrooms so I'm thinking I could rent it out for $2,600.  That's also what the Zillow estimate for rent on this house is.  With my mortgage payment at $2,400, I'm going to assume it might cost me that extra $200/mo to have someone manage the property (I don't want to do it).  If I rented a cheap enough apartment, I could go a few months (plus I have some cushion in savings) without a tenant but I wouldn't want to.  That's a huge chunk of my monthly take home.  The only reason I'd consider it, is I'm basically having someone else cover my mortgage payment and building more equity in the home for me.  Later, when it's paid off, it could be $2,600+ of rental income coming my way.  The downside, is I don't have anywhere near another down payment to buy another home in this area.

Yeah, it's about $600K and my salary is $135K.  Keep in mind I bought it for $475K so I've got about $125K equity in the house.  I have $399K left on my mortgage and I have about $100K all-in when I combine my downpayment plus money spent on upgrading the house so my true profit will be around $100K less closing costs.  Even still, that's 100% return on my money in 3 years.  Not bad and so the question is ... should I take it?  You guys are definitely steering me towards taking it =)

The down side of course, is that the median home price in Orange County is $580K right now so the barrier to entry to another house, at least right now, is quite high.  I'm single with no kids and 1 dog.   I can rent, if it makes sense.

How do you guys factor in, if at all, the benefit of the mortgage interest and property tax deductions in to this?  If I rent, and I guess I need to do the math here, I won't be able to take advantage of those tax shelters, but on the other side, I won't need to budget for home improvements/upgrades and overall maintenance will be lower too.  A 1 bedroom apartment around here would be $1.7K/month.  Only $700/month less than the mortgage on my (small) 4 bedroom home which I basically "get back" through the mortgage and prop tax deductions!  So this is why it's a dilemma for me quite honestly.

zurich78

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Re: Best Financial Decision: Sell this home or keep it?
« Reply #8 on: April 24, 2014, 07:55:07 PM »
The stats show the market is leveling off in Orange County.  I don't think you would be hurt much by selling and renting for awhile while you looked around.  The trouble with high demand areas is the better neighborhoods are the first to go up and the last to go down.  Timing when to move up in neighborhood quality is difficult.  Here in Silicon Valley during the last downturn, it would have taken about four years to get from the top in the marginal areas to the bottom in the best areas.  And there may not be a downturn this time, you may just get a stabilization of the market.

Renting makes sense if you lower your cost after tax considerations.  That might put you in a small apartment in a better neighborhood or a larger apartment in an area similar to where you are now.  Your mortgage payment as a percentage of your net income is high, but doable.  However, I do not think you will be satisfied until you find a house you like in a better area.

You're right.  My mortgage payment as a percentage of my net income is, IMO, high.  In fact, that's one of the drivers for me of this consideration to sell.  Since I have a lot of equity (let's just say $175K after closing costs), my thinking was, maybe I should pull that out now, invest it, take my time, and just wait for a good deal on a house I want to be in long term.

I guess I just want to make the most financially sound decision.  If that means getting out of this house, I'm going to do it.  If it means sticking it out for a few more years, I can do that too.  Sorry if I'm driving you guys nuts. =)

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Re: Best Financial Decision: Sell this home or keep it?
« Reply #9 on: April 24, 2014, 08:04:17 PM »
Mortgage interest and property taxes are deductible operating expenses for a rental.

I don't personally see holding this with the expectation of a lot of near term appreciation.  With inflation picking up, the Fed will start raising interest rates soon, making houses less affordable.  The main advantage you have with this property is the low interest rate and the lower Prop 13 taxes.  However, you have to factor in vacancy and collection loss, maintenance, and capital improvements.  Count on carpet and paint every 5 to 7 years with long term tenants, more often if you get a bad tenant.  The nice stuff you did to the house when you moved in will have a shorter life than if you lived there.  Tenants break stuff a lot, and they push stuff that is nearing the end of its life to break.  So you will have substantial expenses and this will be cash flow negative over time.

If you want to speculate on appreciation or are willing to accept significant negative cash flow to keep the mortgage and the taxes for a long term holding, then consider keeping the house.  Otherwise sell and move on.  If you lean toward keeping the property, do a lot of reading about being a landlord before you make a final decision.

skunkfunk

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Re: Best Financial Decision: Sell this home or keep it?
« Reply #10 on: April 25, 2014, 08:01:56 AM »
I like options 1 or 2. Don't care which, but I'd want to get out from under that thing.

Totally understand why you're saying this ... but ... if you don't mind ... why?   When you say "under that thing" is there something in the chart that tells you I should GTFO of there?  I know almost nothing about investing and/or real estate ... I had a hunch we were in a bit of a bottom RE market wise back in 2011 and I have a hunch we're heading for another spike now over the next couple months.   So I'm not sure how you're coming to the conclusion that you are, but I'm kinda thinking that too, but mine is on a hunch -- what is it that is telling you selling the right move?

How much do you think you could rent it out for? I just don't see a return on investment renting it out. And can you handle months without a tenant?

And as far as option 4, you have a what, 600k house on a 135k salary. I'm just not comfortable having that much capital tied up in a house that isn't the long-term answer. Hell, I wouldn't be comfortable with it short term either. But that's just me.

It's 4 bedrooms so I'm thinking I could rent it out for $2,600.  That's also what the Zillow estimate for rent on this house is.  With my mortgage payment at $2,400, I'm going to assume it might cost me that extra $200/mo to have someone manage the property (I don't want to do it).  If I rented a cheap enough apartment, I could go a few months (plus I have some cushion in savings) without a tenant but I wouldn't want to.  That's a huge chunk of my monthly take home.  The only reason I'd consider it, is I'm basically having someone else cover my mortgage payment and building more equity in the home for me.  Later, when it's paid off, it could be $2,600+ of rental income coming my way.  The downside, is I don't have anywhere near another down payment to buy another home in this area.

Yeah, it's about $600K and my salary is $135K.  Keep in mind I bought it for $475K so I've got about $125K equity in the house.  I have $399K left on my mortgage and I have about $100K all-in when I combine my downpayment plus money spent on upgrading the house so my true profit will be around $100K less closing costs.  Even still, that's 100% return on my money in 3 years.  Not bad and so the question is ... should I take it?  You guys are definitely steering me towards taking it =)


That is a horrible ROI. 5.2% and that's if you don't spend a dime on repairs, managing, empty months, etc. That doesn't even meet half of the 1% rule. I doubt you would even have an overall positive cash flow. I'd rather cash out that equity. Can you get roommates with which to split rent?

zurich78

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Re: Best Financial Decision: Sell this home or keep it?
« Reply #11 on: April 25, 2014, 08:32:05 AM »
I like options 1 or 2. Don't care which, but I'd want to get out from under that thing.

Totally understand why you're saying this ... but ... if you don't mind ... why?   When you say "under that thing" is there something in the chart that tells you I should GTFO of there?  I know almost nothing about investing and/or real estate ... I had a hunch we were in a bit of a bottom RE market wise back in 2011 and I have a hunch we're heading for another spike now over the next couple months.   So I'm not sure how you're coming to the conclusion that you are, but I'm kinda thinking that too, but mine is on a hunch -- what is it that is telling you selling the right move?

How much do you think you could rent it out for? I just don't see a return on investment renting it out. And can you handle months without a tenant?

And as far as option 4, you have a what, 600k house on a 135k salary. I'm just not comfortable having that much capital tied up in a house that isn't the long-term answer. Hell, I wouldn't be comfortable with it short term either. But that's just me.

It's 4 bedrooms so I'm thinking I could rent it out for $2,600.  That's also what the Zillow estimate for rent on this house is.  With my mortgage payment at $2,400, I'm going to assume it might cost me that extra $200/mo to have someone manage the property (I don't want to do it).  If I rented a cheap enough apartment, I could go a few months (plus I have some cushion in savings) without a tenant but I wouldn't want to.  That's a huge chunk of my monthly take home.  The only reason I'd consider it, is I'm basically having someone else cover my mortgage payment and building more equity in the home for me.  Later, when it's paid off, it could be $2,600+ of rental income coming my way.  The downside, is I don't have anywhere near another down payment to buy another home in this area.

Yeah, it's about $600K and my salary is $135K.  Keep in mind I bought it for $475K so I've got about $125K equity in the house.  I have $399K left on my mortgage and I have about $100K all-in when I combine my downpayment plus money spent on upgrading the house so my true profit will be around $100K less closing costs.  Even still, that's 100% return on my money in 3 years.  Not bad and so the question is ... should I take it?  You guys are definitely steering me towards taking it =)


That is a horrible ROI. 5.2% and that's if you don't spend a dime on repairs, managing, empty months, etc. That doesn't even meet half of the 1% rule. I doubt you would even have an overall positive cash flow. I'd rather cash out that equity. Can you get roommates with which to split rent?

Is it wrong for me to factor in the mortgage interest and property taxes deduction that I would get by keeping this house and renting it?  Yes, I'd be renting it out and breaking even each month on the rent collected, but what about the money I'm getting back from these deductions, that wouldn't be available if I were say, just renting an apartment?  Couldn't I consider that my 'profit' or is that a bad way to view it?

I could certainly get roommates, but I'd prefer not to.  Which is why I've considered just selling the place and buying a property that is lower cost and more well suited for me in the long term.  Problem is that I live in one of the worst areas for real estate affordability in the country where median home price is $580K.  Maybe it's just not feasible to be mustachian and then live in a place like this, lol.

skunkfunk

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Re: Best Financial Decision: Sell this home or keep it?
« Reply #12 on: April 25, 2014, 08:36:23 AM »
I like options 1 or 2. Don't care which, but I'd want to get out from under that thing.

Totally understand why you're saying this ... but ... if you don't mind ... why?   When you say "under that thing" is there something in the chart that tells you I should GTFO of there?  I know almost nothing about investing and/or real estate ... I had a hunch we were in a bit of a bottom RE market wise back in 2011 and I have a hunch we're heading for another spike now over the next couple months.   So I'm not sure how you're coming to the conclusion that you are, but I'm kinda thinking that too, but mine is on a hunch -- what is it that is telling you selling the right move?

How much do you think you could rent it out for? I just don't see a return on investment renting it out. And can you handle months without a tenant?

And as far as option 4, you have a what, 600k house on a 135k salary. I'm just not comfortable having that much capital tied up in a house that isn't the long-term answer. Hell, I wouldn't be comfortable with it short term either. But that's just me.

It's 4 bedrooms so I'm thinking I could rent it out for $2,600.  That's also what the Zillow estimate for rent on this house is.  With my mortgage payment at $2,400, I'm going to assume it might cost me that extra $200/mo to have someone manage the property (I don't want to do it).  If I rented a cheap enough apartment, I could go a few months (plus I have some cushion in savings) without a tenant but I wouldn't want to.  That's a huge chunk of my monthly take home.  The only reason I'd consider it, is I'm basically having someone else cover my mortgage payment and building more equity in the home for me.  Later, when it's paid off, it could be $2,600+ of rental income coming my way.  The downside, is I don't have anywhere near another down payment to buy another home in this area.

Yeah, it's about $600K and my salary is $135K.  Keep in mind I bought it for $475K so I've got about $125K equity in the house.  I have $399K left on my mortgage and I have about $100K all-in when I combine my downpayment plus money spent on upgrading the house so my true profit will be around $100K less closing costs.  Even still, that's 100% return on my money in 3 years.  Not bad and so the question is ... should I take it?  You guys are definitely steering me towards taking it =)


That is a horrible ROI. 5.2% and that's if you don't spend a dime on repairs, managing, empty months, etc. That doesn't even meet half of the 1% rule. I doubt you would even have an overall positive cash flow. I'd rather cash out that equity. Can you get roommates with which to split rent?

Is it wrong for me to factor in the mortgage interest and property taxes deduction that I would get by keeping this house and renting it?  Yes, I'd be renting it out and breaking even each month on the rent collected, but what about the money I'm getting back from these deductions, that wouldn't be available if I were say, just renting an apartment?  Couldn't I consider that my 'profit' or is that a bad way to view it?

I could certainly get roommates, but I'd prefer not to.  Which is why I've considered just selling the place and buying a property that is lower cost and more well suited for me in the long term.  Problem is that I live in one of the worst areas for real estate affordability in the country where median home price is $580K.  Maybe it's just not feasible to be mustachian and then live in a place like this, lol.

The "mustachian" way to do it, in my opinion, would be to rent the cheapest place possible with some roommates while you accumulate to FIRE, at which point you move somewhere with a low COL.

I would not consider paying 15000 in interest to save 4000 in taxes an "advantage". It's -11000 dollars, not +4000.

My problem has been that I keep my taxable income so low so far that I don't actually GET a tax advantage from having these deductions. My own mortgage interest deduction saved me exactly $0 on taxes.