Case Study Request - Rent or Sell My Bachelorette Pad

[Jess403]

The story: Two years ago, my dude and I decided to buy a house together. (His apartment lease was up and it was TIME.) I was pretty fond of him, but I always like to have a plan B. So, I kept my cozy little condo in Bonsall, CA and rented it out. Thus, I became a bit of an accidental landlord. Fast forward two years, my tenants are looking to move out and me and the dude are still doing well. I no longer feel the need keep the condo for possible relationship escape purposes. So, now I need to decide whether to keep it as an investment property or to sell it an invest the equity in a more traditional investment.

Goal: I don't exactly have a money mustache, but I've got some sexy girlie stubble coming in. I'm financially secure. No debt except the two mortgages. I'm in the 'growing my stache' phase of FIRE, so my goal is to grow my money as much as possible.

The details:

Condo: 1,125 square feet; 2 bed/2.5 bath in Bonsall, CA, a semi-rural patch of land at the nothern most edge of San Diego County. It attracts retirees and young people who can't afford to live in San Diego. It's also close to Camp Pendleton, a truly massive marine base.

Original Purchase Date: 2016

Original Purchase Price: $214,000

Current Loan Balance: $172,740

Mortgage (includes property tax and insurance): $1094.32
- Principal: $329.50

Interest Rate: 3.75%

Loan Type: 30-year standard

HOA: $295/mo (includes water and trash)

Maintenance requirements: New carpet. New paint. Furnace is original from the 1990s and will have to be replaced in the next five years.

Rent Potential: I rented this place for $1,900/mo for the past two years. Another, identical unit in the complex is advertising at $1,990 per month

Property Management: These past two years taught me that I DO NOT want to be a property manager, so if I were to hang onto this property, I would want a property management company. I found a company that charges a flat $395 placement fee and an 8% monthly management fee. For $1,900 rent, that would be $152.

So, monthly costs of mortgage + HOA + management = $1,541.32/mo
This DOES NOT include maintenance, vacancy, or placement fees, so the true cost would be higher.

Earnings are rent + principal pay down = $2,229.50/mo

Additionally, the house is appreciating at a good clip. The original purchase price in 2014 was $214,000. Other condos in the complex (identical footprint) are selling for around $320,000.

Equity growth is roughly $17,650 per year or (if my math is correct) about 8.2% growth.

If I decide to sell the place, here's some basic assumptions:

Sale price: $320,000
(Mortgage balance is: $172,740)
Repairs before sale: $3,500 (paint and carpet and misc.)
Agent fee: $16,000 (5% assumption)
I also learned from my accountant, that I would have to pay $5,850 in taxes on the depreciation I've been taking

So, rough estimate of earnings on the sale is: $121,910

This would be the amount (roughly) that I could then invest freely in index funds or maybe REITs.

One other MAJOR factor to consider is that if I sold the house this year or next year, I would NOT have to pay capital gains, since I would have lived in the house for two of the past five years. If I hold onto the house for more than two years, I'll be paying a 15% tax on all capital gains.

So, how can I make the most money? My thought is that keeping the house will earn the most. The rent pays the mortgage, HOA, and management fees and chips away at the principal. The main earnings come from the appreciation. San Diego is still growing, which means more and more people will be pushed out of the city and into outlaying areas like Bonsall. As a community, Bonsall is growing, too. I forsee that property values will continue to rise. Am I missing anything? What does the community think? Since I am an accidental landlord, I worry that there may be factors I'm not considering or that maybe my math is off. Any feedback or advice would be greatly appreciated!

Total 

[waltworks]

I'd sell it. Maintenance and vacancies/tenant placement fees are going to kill a lot of your already minimal profits. And it's a condo, which means that capital improvements/exterior maintenance are completely out of your control. The board might decide to replace the entire roof, build a fancy new pool, etc, and you could be on the hook for $10k all of a sudden one year.

Everyone wants to bet on appreciation when they've seen a bunch of it, and everyone (seriously, read through the RE forum for a few minutes) thinks their area will keep appreciating because it's up and coming.

Some of them are right, of course, as you might be. Everyone was saying the same thing in 2006.

I'd take the bird in the hand, avoid the capital gains, and put the proceeds into something boring like an index fund.

-W

[Jess403]

Thanks Waltworks. Yes, the capital gains are going to sting. On a profit of $106,000, 15% capital gains means a $15,900 payment to Uncle Sam if I don't sell in the next two years.

[stashja]

You're in CA. Community property state. Check on this, but is it the case that if you keep it, it's yours alone, but if you sell it, the profits are community property, meaning if your relationship ends, only 1/2 is yours? This is true in my community property state. I took the plunge in a similar circumstance. I sold a condo and bought a house in a community property state as a married woman, but I did so with full consciousness of the legal situation.

[Jess403]

California is a community property state, but I am not married, so the house is fully mine. It would remain mine even after marriage as long as I used only my money to pay for it. The only time it would become community marital property is if I got married and my husband started contributing to mortgage payments or if he helped pay for renovations or anything like that. As long as we kept the money supporting the house separate, it would not become a community asset. (Note: I'm not a lawyer, but this is my understanding after having previously studied community property laws.)

[Villanelle]

I'd sell.  A $300,000 purchase price or $1990ish in rent?  Absolutely not worth it, especially since it is riskier than stocks, and even more so because you are still in that sweet cap gains-free window. 

[Bobberth]

Unless you bought specifically to rent out, rarely does it make financial sense to rent instead of sell. CA might be in the rarely part because of appreciation but with everything else you posted, selling is definitely your best bet.

[Jess403]

Thank you all! I really appreciate all of your advice. There's a strong consensus for selling, which I will consider very carefully. At the end of the day, that does seem like the simplest option, especially because I never set out to become landlord.   

[MrThatsDifferent]

I’d sell and then invest the money before you get married. I’d also get a pre-nup if you get married.

[Dicey]

Thank you all! I really appreciate all of your advice. There's a strong consensus for selling, which I will consider very carefully. At the end of the day, that does seem like the simplest option, especially because I never set out to become landlord.

1. Check our Redfin to save some commissions.
2. Consider LVP instead of carpet. People don't want carpet these days. Check that your HOA doesn't have noise restrictions if you're an upper unit.
3. Obvs, my vote is to sell.

[BicycleB]

California is a community property state, but I am not married, so the house is fully mine. It would remain mine even after marriage as long as I used only my money to pay for it. The only time it would become community marital property is if I got married and my husband started contributing to mortgage payments or if he helped pay for renovations or anything like that. As long as we kept the money supporting the house separate, it would not become a community asset. (Note: I'm not a lawyer, but this is my understanding after having previously studied community property laws.)

I think the poster on this topic meant if you keep the condo, it's clearly yours, but if you convert to financial assets, half of those might become yours spouse's.

I live in a different state. If I understand the rules of my state correctly, the value of the financial assets before marriage (say $100,000) remain yours but the gains (say another $50,000) are shared.

From the link below, California appears to hold that your stock that you buy before marriage remains entirely yours, and so do profits from them, as long as you continuously hold the stock and the profits separately from your spouse. If you put the stock money in a shared account after marriage with hubby's name on it, suddenly half of that stock money would be his if I read correctly, even if he only put $1 in the account. Read further on your own - I'm neither a lawyer nor a California resident.

https://www.courts.ca.gov/1039.htm?rdeLocaleAttr=en