Author Topic: Case Study - Seeking Advice: Southern California Townhome  (Read 1815 times)

ribby

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Case Study - Seeking Advice: Southern California Townhome
« on: January 23, 2020, 03:36:49 PM »
Hi there! 

Our family is growing and we're looking to move soon to accommodate.  We just finished saving 20% for a downpayment on the next place, so now we're trying to decide on renting or selling our current condo.  Here are the specs:

Location: Southern California, 1 mile from the beach.
Type: 2 bed, 2.5 baths, townhome, 2-car garage, good schools
Market Value: $565,000
Original Purchase price: $450,000
Original Mortgage Amount: $405,000
Interest Rate: 3.6%, flat
Mortgage Term: 30 years
Term remaining: 30 years (just refinanced)
Amount remaining on mortgage:$388,000
Gross Rents: Based on recently posted rentals in our condo complex, I think we could get at least $2800/mo, maybe $3,000/mo.
Principal and Interest: $1,764 (roughly $600 principal)
Taxes and Insurance: $519
HOA costs: $425
Deferred maintenance notes: None.  We renovated the whole place recently, no special assessments on the horizon
Selling costs: Our realtor quoted us about 6% for total selling costs (2.5% to each realtor + fees,  I guess that's the norm for this price range in the area)

I know it doesn't meet some of the typical rules of thumb for rentals, but I still think it might be worth keeping.  I'm curious if you agree.  I'm happy to manage the property (very handy, flexible job, will live nearby, and have some experience).  Tenant-favoring California laws add some additional considerations.

The thing that kills me with selling is the 6% selling cost, actually eats up about 19% of our current equity $34k/$177k, and I like that we're locked into "cheaper" property taxes since they are capped at 2% annual growth.  I figure it's not amazing as a rental for the immediate term, but might be nice in the long-term. 

What do you think you'd do in this position?

edit: removed some unnecessary info.
« Last Edit: January 23, 2020, 03:39:58 PM by ribby »

Another Reader

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Re: Case Study - Seeking Advice: Southern California Townhome
« Reply #1 on: January 23, 2020, 05:35:31 PM »
You have not considered vacancy and collection loss, repairs, or capital improvements.  Over time, your expenses typically amount to 50 percent of your rental income, including these items.  You will have a large, negative cash flow on this property over time.

You are betting on appreciation exceeding that negative cash flow.  Occasionally that works out.  Usually that's in a market that is rapidly appreciating.  Southern California's appreciation run is getting long in the tooth.  Personally, I would not bet on appreciation turning this property into a winning investment.

In your shoes I would sell.  You should be able to find a broker that will charge less than 6 percent.  However, you will also have closing costs, so 6 to 7 percent total selling costs would be a reasonable expectation.

BECABECA

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Re: Case Study - Seeking Advice: Southern California Townhome
« Reply #2 on: January 23, 2020, 06:08:34 PM »
I personally would sell. Since you were living in it, all the gains on the sale are tax free up to $250k for single tax filer, $500k for married. Iíve been a landlord in landlord friendly state and dealt with an eviction and I would not want to have to try dealing with that in CA. But more importantly, your cash on cash return for this property is not good enough to keep as a rental. Youíre better off selling it and putting the equity into index funds.

waltworks

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Re: Case Study - Seeking Advice: Southern California Townhome
« Reply #3 on: January 24, 2020, 08:10:00 AM »
So, if everything goes perfectly, you're basically at break-even?

Sell it.

Your landlording/handy-manning time isn't free, btw. If you insist on thinking so, you can come replace my roof this summer.

-W

Dicey

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Re: Case Study - Seeking Advice: Southern California Townhome
« Reply #4 on: January 24, 2020, 08:17:07 AM »
Another vote to sell.

ribby

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Re: Case Study - Seeking Advice: Southern California Townhome
« Reply #5 on: January 24, 2020, 08:20:38 AM »
Haha! Thanks all for the quick and consistent feedback... this is starting to feel like a no-brainer, and that I was too emotionally invested into the property :)
« Last Edit: January 24, 2020, 10:18:06 AM by ribby »

Lucky13

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Re: Case Study - Seeking Advice: Southern California Townhome
« Reply #6 on: January 24, 2020, 10:15:27 AM »
Well I'm going to give the opposite advice just so you have something to think about. :D If you don't have any rental properties it could be a nice addition to your portfolio.

edit: just found this when I was researching something else "Southern California's Rent is Growing Nearly Twice as Fast as the Inflation Rate" (September 2019)
https://commercialobserver.com/2019/09/southern-californias-rent-is-growing-nearly-twice-as-fast-as-the-inflation-rate/
« Last Edit: January 28, 2020, 02:18:35 PM by Lucky13 »

Another Reader

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Re: Case Study - Seeking Advice: Southern California Townhome
« Reply #7 on: January 24, 2020, 02:12:46 PM »
Well I'm going to give the opposite advice just so you have something to think about. :D If you don't have any rental properties it could be a nice addition to your portfolio. I own two rental properties in California and initially they were barely break-even but rents always go up! now 10 years later they are generating cash flow and it's nice to know I'm not relying 100% on my stocks/bonds for retirement. I have a property manager now since I moved out of state (and not very handy to begin with) so if you're local and can do the repairs yourself that works in your favor as well.

edit: just found this when I was researching something else "Southern California's Rent is Growing Nearly Twice as Fast as the Inflation Rate" (September 2019)
https://commercialobserver.com/2019/09/southern-californias-rent-is-growing-nearly-twice-as-fast-as-the-inflation-rate/

We have had a nice run up in values and rents.  Neither is sustainable long term.  Values and rents may flatten or decline.  Eventually, they will likely climb again.  When?  Who knows?

If you think in terms of decades or generations and don't mind losing money for an extended period, you might keep it.  But don't count on an extended run up in prices and rents in the short term or even medium term.

Villanelle

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Re: Case Study - Seeking Advice: Southern California Townhome
« Reply #8 on: January 24, 2020, 02:30:16 PM »
Sell.

Also, you can negotiate realtor fees.  There might be room there, perhaps to knock half or a quarter point off both the buying and selling percentages, if that's really bothering you. 

Wrenchturner

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Re: Case Study - Seeking Advice: Southern California Townhome
« Reply #9 on: January 24, 2020, 02:36:08 PM »
Well I'm going to give the opposite advice just so you have something to think about. :D If you don't have any rental properties it could be a nice addition to your portfolio. I own two rental properties in California and initially they were barely break-even but rents always go up! now 10 years later they are generating cash flow and it's nice to know I'm not relying 100% on my stocks/bonds for retirement. I have a property manager now since I moved out of state (and not very handy to begin with) so if you're local and can do the repairs yourself that works in your favor as well.

edit: just found this when I was researching something else "Southern California's Rent is Growing Nearly Twice as Fast as the Inflation Rate" (September 2019)
https://commercialobserver.com/2019/09/southern-californias-rent-is-growing-nearly-twice-as-fast-as-the-inflation-rate/

We have had a nice run up in values and rents.  Neither is sustainable long term.  Values and rents may flatten or decline.  Eventually, they will likely climb again.  When?  Who knows?

If you think in terms of decades or generations and don't mind losing money for an extended period, you might keep it.  But don't count on an extended run up in prices and rents in the short term or even medium term.

Your patience in threads like this is remarkable.

As a tenant though, I say the OP should keep their rental property!  I like downward pressure on rent!

robartsd

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Re: Case Study - Seeking Advice: Southern California Townhome
« Reply #10 on: January 24, 2020, 02:51:36 PM »
I think you can probably get lower real estate commission. Does Redfin or Purplebricks operate in your area?

ixtap

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Re: Case Study - Seeking Advice: Southern California Townhome
« Reply #11 on: January 24, 2020, 02:56:07 PM »
The new rental laws have no direct affect on the condo and rent control laws have a general tendency to push up the rents for properties that are excluded from them. Even if it did apply to you, it allows for CPI +5%, increases topped off at 10%. Compare this to homeowners who insist that their property taxes be capped at the lower of CPI or 2%.

Nonetheless, this property does not look like a good investment on paper.

When I ran the numbers for a similar property (lower rent, but also lower HOA), it only made sense if our area becomes the next San Francisco, ie values continue to increase significantly more than inflation. Frankly, that seemed to me to be betting against a place I love.

CLD1974

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Re: Case Study - Seeking Advice: Southern California Townhome
« Reply #12 on: January 28, 2020, 10:25:31 AM »
So, are you selling the house or renting it out.