Case study: sell after a year or stick it out?

[protostache]

Hey folks,

tl;dr: My wife and I bought a house a little over a year ago that has appreciated significantly in that time. We are trying to decide if we should stay or sell. Special snowflake details below.

Life situation

• Married filing jointly, no kids yet, Michigan

Gross Salary

• Me: $7,646
• Wife: $1,040
• Total W2 Income: $8,656

Taxes

• Federal: $1,066.60 + $66.65 = $1,133.25
• State: $319.44 + $45.19 = $364.63
• Social Security: $416.40 + $77.38 = $493.78
• Medicare: $97.36 + $18.10 = $115.46
• Total Taxes: $2,107.11

Other Income
I pay myself the above salary from steady consulting income. I bring in additional income and pay myself a variable bonus most months. For May this came to $1k into my SEP-IRA and $800 after-tax cash.

Budgeted Monthly Expenses

• Mortgage: $1,221
• Escrow: $734 including $80 PMI
• Groceries: $700
• Eating out: $400
• Fuel: $120
• Lawn maintenance: $150
• Short term save-to-spend: $959 (insurance, entertainment, utilities)
• Long term save-to-spend: $616 (medical out-of-pocket, house maint, car maint, furniture, travel)
• Total: $4,900

Other Expenses Paid By Business

• Medical: $800
• Internet: $140
• Phones: $90
• Total: $1,030

Monthly Saving

• Retirement: $1,700 (max DW's Roth + $300/wk to my SEP)
• Additional discretionary savings: $342
• Total: $2,042

Assets

• $102k invested 80% stock, 20% bond
• $30k cash, including primary $16k e-fund.
• $30k cash in business accounts, including another $19k e-fund / salary buffer.
• House worth ~$330-346k (low end is realtor guess, high end is current Zestimate)
• Total: $492-508k

House Details

• Purchase price, March 2014: $276k
• Down payment: $27,600
• Mortgage origination: $248,400 @ 30 year 4.25%
• Taxes: $6,600
• Insurance: $1,120
• Monthly P&I: $1,221.98
• Monthly T&I Escrow: $734.75
• Total monthly payment: $1,956.73
• Remining Mortgage Principal: $243,498 346 payments

Specific Question

My wife and I moved to this area of Michigan about two years ago for family reasons. Those reasons are still valid, so we have to stay in this approximate area for the time being. We're pretty sure this is not where we want to be long-term (2-3 years).

We bought a house 14 months ago that has increased in value by at least 20%. We've put significant money into it, including all new flooring, interior and exterior painting, and we're starting the quote process for landscaping with a budget of about $5k. That said, we bought way too much house for our current needs. Right now there's just the two of us and we bought a 2500 sqft 3bd/2.5ba. We have an amazing kitchen but also two bedrooms, a loft, and a bathroom that are only used by guests once every other month.

I've been browsing around on Zillow and have seen a number of great condos in the area for under $175k, some for under $150k. Then I look around this house and all I see is $60k of cash after expenses and cap gains taxes. I made a spreadsheet (attached) that lays out a number of different scenarios, projecting out one and two years from this month which says if we stay here another two years, and if market value increases 2% each year, we'll stand to make an additional $40k. Am I crazy for thinking seriously about wanting to exit this house right now? Or should we wait longer to see where our reasons for being here take us?

[humblefi]

Congrats on a nice chunk of money in equity! Some of the thoughts that came to me are:

1.

We're pretty sure this is not where we want to be long-term.

Define long term. If long term == 2 years, then sell it. If long term == 10 years, then keep it. Even if the market has one more dip in the next 10 years, you will also see a market rise in the same period. So, no point in letting go of a nice equity and reduced stress that comes with it in a down market.

2.
Are there any plans to grow the family i.e. kids in the near term? If so, is this a good area for kids...schools, neighborhood, etc If so, hold onto the house.

3.
Why did the house rise in price? Is it because of some positive development in the area like a new factory, new tech park, etc If so, I would hold on in the hopes of more appreciation OR at the least buy you some time to make the decision without too much of a fall in price. If the rise in price seems to have no foundation, then it has as good a chance at going down...i.e. I would sell it and cash out.

4.
Is there a possibility of renting out a portion of the house? Say I put some money and convert one of the rooms to a rental. If that is possible, then it would make sense to downsize in-place and get some money to boot. When you need the extra space again, then you can reclaim the rental space. Rental income should offset any drop in equity and help payoff the mortgage as well.

Hope that helps.

[protostache]

Thanks for responding! Responses inline.

1. Define long term.

I edited the original post to say that our "long term" is 2-3 years. If we were planning on even staying in this state for 10 years, we would definitely be staying in this house.

2. Are there any plans to grow the family

Yes. We're planning on one or two in the next two years, but due to some medical issues it might not happen at all. Sort of a wild card, and I feel like, until they're school age kids can pretty much live wherever.

3. Why did the house rise in price?

I don't have a good answer, but I have two theories. First, it needed quite a bit of work when we bought it below market. We did the work, put the money in, and now it's up to market price. Second, the subdivision we're in started in 2003 but sat half completed during the recession and just this year is finally done. At this point the buy-vs-build option is gone if you want to be in this pretty attractive sub.

4. Is there a possibility of renting out a portion of the house?

According to the HOA bylaws we could rent out the entire place, but we can't rent out portions. Not to say we couldn't get a variance, of course. The house isn't really set up for renting, though we could theoretically build out the basement.