Author Topic: Own a house, not good investment but $$$ market. Renting it out to downsize?  (Read 1593 times)

innkeeper77

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So, I've been away from the forums a LONG time, and have made some mustachian, less than mustachian, and totally non mustachian choices since then.

We have a big house, and live in an expensive market. Is us moving to a rental and then renting out our own house a stupid or sane idea for us? (Not much profit, but it would capture appreciation) (We don't want to get priced out of Denver) - Two adults, one child, two cats. We can move closer to daycare by renting. Additionally, we may need to move when I finish my degree and get a job, if we rent our house and have a history of rental income wouldn't that make getting a second mortgage easier? What am I missing? Tell me why this is a terrible idea, and if I am crazy it would be great if you could suggest alternatives! We currently aren't saving much money, and I would like to save more. Downsizing would be an added bonus. Should we just wait it out here until I have a job again and we know where we want to live?

TLDR details:

Finances: We have perfect credit, but are house poor. We also CANNOT get another mortgage here right now even if we sell, as although we pay our mortgage and still save quite a lot of money, we only have one salary and it isn't quite enough for a crazy expensive denver suburb house, as the floor of the market is so high. (A year ago I decided to quit my job, be a part time stay at home dad, and a part time CS student. (It's going great so far, near the top most of my classes, and have been told I will have no problem getting an internship, then jobs, after taking about another semester of classes including Algorithms. I also have a personal situation making education very cheap, so it makes a lot of sense and will hopefully pay out well in the next few years.) - Nearly all of our net worth is in home equity and retirement accounts, we aren't very liquid right now)

Life: My wife and I live in a Denver suburb, and had to move here from a different suburb a little over two years ago for her job (it made sense financially, and still does). We sold our house netting about $40k in capital gains after expenses. We lived with multiple roomates, and without thinking too much bought a house that is really far too big for our needs. "5" bedrooms (4 conforming) and 2700 sf, though a lot of that is a finished basement. It made sense at the time, but then we had a daughter, and the roomates moved away (One moved for personal reasons, the other left at our request due to raising a baby). We plan to have at most one more child, and that puts us at 3 to 4 people in a 5 bedroom house..... Given our busy lives we really DONT have the time to spend gardening, puttering around cleaning a too big house, etc. Honestly, even as much as I like living in a house, an apartment or managed property probably makes more sense. We do have free time, but aren't getting much value from that free time spending it on the house. Socially, we are fairly bad at putting down local roots. I would love to live in an area where it is easier, but I am aware the problem is 95% personal and at most 5% location. At least it makes deciding to move not very painful...
DW drives to work, I take public transit to my college. We have two cheap to run older cars, but usually the larger car stays at home. Her only decent daycare option (Per DW and relatives as well, who are helping pay, so it's non negotiable) is 15 minutes away from our current house, in the opposite direction from DW's workplace.... I will be doing the transport as much as possible but due to schedules will not be able to do as many.

House info: Zillow estimate is above $375k, we owe slightly over $300k. Smaller homes rent for above $2k, because we are in a desired school district (Cherry creek). Zillow estimates $2150. HOWEVER, there are drawbacks. The house has NO cooling, so we would possibly need to add some to attract renters, or accept the low end of income. Additionally, there is a fair amount of deferred landscaping that needs to happen, juniper bushes cover HALF of the exterior, and they really really need to go. That will be a big job, and I have been putting it off because I don't know what I would replace them with, and the huge root systems are scary... if we just cut them down it would be extremely ugly, although I suppose I could fill them in with some dirt and put down rocks.... (still ugly) - aside from that, and a 20 year old roof, it is in rather good shape, and doesn't have any other real deferred maintenance.

Rental finances: Right now mortgage + escrow is $1800 a month, of which $500 goes to principal. Rent conditions say we could bring in $1900-$2100. I am aware that this would be a terrible investment, but we are scared of selling and renting. (see below). The house has appreciated at over 7% while we have owned it.

We want to own a home when out child(ren) are older, probably in the Denver area, and if the appreciation here continues I would worry about being priced out of the market like has happened in some California cities. I do not know where my job when I get one will be located, but we want to be as close as possible to our jobs when that happens. Am I right in being worried about this, and wanting to hold on to a house? Would it be worth it in this situation? The ability to just move back into this decent house in a nice area is worth something.. Downsizing our lives would be good, but we would miss the garage and easy guest parking. Living 5 minutes from daycare instead of 20 would save 40 minutes a day of driving. Due to the cats and baby we need some space, but 2 bedroom 1000 sf apartments start around $1400. Homes start at $1900 which would be a bit silly.. Apartments farther away (close to us now) start at $1300.


Sorry for the wall of text, thanks for looking!

BicycleB

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It sounds like selling the house and renting the $1400 apartment in the neighborhood you want would be your best bet.

Hard to be sure without knowing the future.  You don't sound like a focused enthusiastic landlord, so I suggest avoiding the landlord option. Perhaps the market will keep going up forever, but what if it falls and your equity disappears?


innkeeper77

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I would like to be enthusiastic! (May I blame the baby for sleep deprivation and over proofreading my post, probably making it even more muddled than when I first wrote it?)

I've had a pipe dream for a while to buy and rent out property, and do enjoy tinkering. I essentially flipped the first house, redoing everything including the plumbing and electric (mostly myself) and had a lot of fun, but did learn what to hire out in the future! I wanted to be the landlord providing homes to decent tenants that were actually outfitted with energy saving improvements, etc. (I always hated when I was a renter in a different market and the landlords ignored HUGE efficiency issues) While this house isn't there yet, it's quite decent, and halfway there in terms of efficiency.

I will continue to think about it, it's probably just emotions talking, but I don't want to go back to (just) renting a small apartment with no freedom. The day I took a sledgehammer to a wall in our first house is an extremely happy memory for me.

Equity and risk: It's true that we wouldn't be in a great position if the housing market falls, but on the other hand, an 18% fall right now would put us back to zero, and we could still walk away. More than that in the short term and we wold be underwater.. but even with the housing market cooling off Denver is still a desirable market. I find a severe market value drop unlikely compared to either slowed appropriation on steady market values while salaries catch up, but I am not at all a professional. (And the chances of such a  bad downturn are far more real than an equivalent for the stock market (at least long term), yes..)

I also don't know if saving $500 a month is worth it over just staying here and re-evaluating in two years. Sure that is $12k, but less closing costs etc. And if appreciation does continue, I would be very disappointed!
« Last Edit: December 11, 2018, 10:54:21 PM by innkeeper77 »

cchrissyy

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This house sounds too big for you, obviously, and also too big or unconventional to be a good rental.

It sounds like what ties you to it is

1) the idea that someday maybe it would be worth more - that's a fine guess but not a sure thing. another fine guess but not guaranteed is if you invested the equity in something else, like the stock market, it would probably increase. Nobody knows the future % return in either case. But I do know that renting this house will be work and hassle for you, while index funds will never call you up and ask for a repair or a landscaper or break their lease early. And you don't sound at all like you're interested in those headaches or think it's worth it.

2) someday maybe you'd move back. But it will still be a VERY big house in the future. 5 bedrooms for 3 or 4 people?! Also, you have no way of knowing if your workplace location and school preferences even mean you want this neighborhood years down the line.
 
I think you should sell.

Go enjoy that apartment close to the daycare and save the money every month without adding the complications of having to manage this other place. When your work location changes, you will be free to move closer to it, if you want. Great! Take advantage of better prices and spaces that suit you better at every turn instead of sticking with this one huge thing. And OMG being 5 minutes from daycare will be SO nice every day. Sleep in a little! Enjoy an extra half hour at home. Who really cares about "easy guest parking" compared to that? Your guests will be fine.

You say positive things over and over about "downsizing". Do it!

Car Jack

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First some questions:

1) Does the mortgage company know you're renting and do you have the proper mortgage for rental property?  If yes, good.  If no, you might want to look at remedies in your mortgage documents which might include the ability of the mortgage to call the mortgage in full when they find you're renting, violating the terms of the mortgage.

2) Insurance.  At least tell me that you have proper homeowner insurance for a rental unit.  If not, get to your insurance agent today and go ahead and faint when you hear the insurance is now going to double.  After that, pay it.  The problem that occurs if you don't have the house properly insured is that if a claim comes in and the insurance company finds that this is a rental (and you're insuring as owner occupied residence), they just cut you off.  House burns down?  You get nothing.

3) Owner occupied gain exclusion:  If you have been in the house for long enough, you can sell it and pay no cap gains tax.  If not, you're paying tax through the nose.  If you don't have enough years in the house, what I'd do is set up your rental to end when your tenants lease ends, move into the house for long enough and then put it up for sale.  Of course find a place to rent while it's up for sale.


waltworks

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The big appreciation days in Denver are over, man. Sales are down 25% from last year and active inventory is up almost 50%.

I mean, anything can happen, but the writing is on the wall for slow price declines or at best stagnation in the medium (5-10 year) term.

I would sell the house and rent (hell, you can rent the same house or a little nicer and save money). You are not going to get priced out of Denver anytime soon, and your place is a *horrible* rental property (negative cash flow, needs work, a little weird/big).

-W

Tuskalusa

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You have a lot of great opportunities in front of you. Your wife has a good job, and you are on track to finish school and get a good job. Youíre new parents, which is both exciting and exhausting. You seem to be on track to a bright future.

My opinion is that the stress and cost of this house is holding you back. It seems like you could greatly improve your quality of life by selling the house and moving closer to daycare. Having some extra cash from lower rent would be a bonus. It would give you some breathing room.

There will be another house in your future. Itís probably not this house, for a lot of reasons. You can free yourself up for the next opportunity by downsizing you life today. Then, when youíre out of school, your family can freely plan your next move.

Good luck!  :)

innkeeper77

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Thanks all! You have pretty much convinced me, but for now I've moved the cosmetic work the house needs (cheap/free, mostly just labor) to the top of the to do list so it all gets done before the summer which is likely when we would list it.

DW is on board. We are usually on similar wavelengths, and she is on board with shooting for FI. She is also on board with a downsize- we had a super involved conversation about it. There are non logical emotions at play as well, but overall she is in agreement. We are going to start "downsizing in place" right away. (Not many of our things are "valuable" - we have about an apartments worth of "nice" furniture, and all of it was passed on to us from family. Everything else was from a resale shop/freecycle! We still have too much clutter, and will have that fixed by the time a move is viable) - We will likely end up in a medium sized house eventually for when our offspring are older, but will try to stay smaller than this house!

And to those concerned, I made sure when getting the house that the mortgage was able to be converted into a rental instead of owner occupied, and rental insurance wasn't much more expensive last time I checked. Not that it makes the home a better rental property... but those bases were covered!

innkeeper77

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As an update to everyone who has chimed in, we SORT of followed your advice! We are under contract to sell the house... but we are buying another one...

Now, the new house is nearly $100k cheaper than our current one, and a more reasonable size, with a easier property to keep up. We have managed to change up the daycare situation to be more reasonable. We will have a smaller monthly payment in addition to a smaller mortgage balance, and will also take out quite a bit of equity in cash.

It will be bigger than an apartment, but not by much unless you count the unfinished basement. 3 bedrooms, but each is much smaller than before. And we still get to have a (one car) garage and a yard.

The new house DOES have a much worse interior, but we have worked on a fixer upper before, and it will be fine. Honestly, this is nicer inside than our first house, so hopefully it is a "third time the charm / Goldilocks / the medium is best" type of scenario. That, and the exterior/property is in much better shape needing minimal work. I am more comfortable with interior work than exterior, so it works well. We can hire out some as needed, and even could do an OK fix and flip if we hired it all out (better than break even, but we weren't able to get a true good investor price) - but we will not be hiring out for much, even though we could afford it with all the equity we will be taking out.

So thanks for the encouragement, we will at least be in a more reasonable situation soon! Perhaps it isn't as ideal as renting, but at a comparable price to renting a nicer two bedroom apartment, with the stability of a fixed rate mortgage and an area we know, and with DW on board, I am happy.
« Last Edit: June 18, 2019, 10:11:45 AM by innkeeper77 »

Dicey

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Thanks for the update!

electriceagle

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Thanks all! You have pretty much convinced me, but for now I've moved the cosmetic work the house needs (cheap/free, mostly just labor) to the top of the to do list so it all gets done before the summer which is likely when we would list it.

DW is on board. We are usually on similar wavelengths, and she is on board with shooting for FI. She is also on board with a downsize- we had a super involved conversation about it. There are non logical emotions at play as well, but overall she is in agreement. We are going to start "downsizing in place" right away. (Not many of our things are "valuable" - we have about an apartments worth of "nice" furniture, and all of it was passed on to us from family. Everything else was from a resale shop/freecycle! We still have too much clutter, and will have that fixed by the time a move is viable) - We will likely end up in a medium sized house eventually for when our offspring are older, but will try to stay smaller than this house!

And to those concerned, I made sure when getting the house that the mortgage was able to be converted into a rental instead of owner occupied, and rental insurance wasn't much more expensive last time I checked. Not that it makes the home a better rental property... but those bases were covered!

Have you considered creating a "virtual" second unit?

I don't mean putting up a wall in the middle of the house. I mean choosing a bedroom/bathroom combo/set of closely spaced rooms/entire floor that you might rent out? This could help reduce your net cash outflow while saving the hassle/expense of selling.