Author Topic: Rent (husband's position) or sell (my idea) in central California--who is right?  (Read 3288 times)

Calivalley

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Hey folks.

New reader here looking to see if you can help settle a dispute between the husband and I. We own two houses in the same town--one is our primary residence and the other is a rental. We are looking at getting into a larger/nicer house in the next few years, with the assumption that the frenzy will have receded a bit (prices have gone up 25% in the last two years in our area).

My position--we sell both houses because they don't make good rentals (based off what I've gleaned from this site). Husband wants to rent both and simply save up a hefty down for the next place. Here are the numbers:

House #1--Rental House:

Market Value: $215,000
Original Purchase price: $150,000
Original Mortgage Amount: $110,000
Interest Rate: 3.25%
Mortgage Term: 15 years
Term remaining: 14 years
Amount remaining on mortgage: $102,000
Gross Rents: $1125/mo


House #2--Primary residence:

Market Value: $300,000
Original Purchase price: $245,000
Original Mortgage Amount: $175,000
Interest Rate: 3.625%
Gross rents: Would be $1300/mo
Mortgage Term: 30 years
Term remaining: 29 years
Amount remaining on mortgage: $168,000

Other information: Husband comes from a family that is dead scared of the stock market. They have only ever put extra money into rental houses, and husband is of the same mindset. I can't convince him to invest more than his 6% 401k contribution. He is also reluctant to get rentals out of the area. The man wants to have assets that he can see/visit/touch, but I'm pretty frustrated thinking that we are not making the kind of gains we could if we do something else with the money (perhaps half towards the new house and half into a Vanguard account or even rentals in a different area).

Am I wrong on this? If I am, I owe him some good lovin' for nagging him about this!

Thanks for whatever help you can offer!






monarda

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At a glance, it looks like I side with you. But a few additional pieces of info might help to make your case stronger. How much are property taxes on each house? What kind of neighborhoods? Do you get good tenants? Does he like being a landlord? How many years have you rented house 1? What have expenses been like? Any major expenses anticipated before you want to move to house 3 in a couple of years?

I'm not so fond of the stock market myself, so I might have some sympathy for your husband's position on house 1 for the short term, if the answers to the above questions give you a decent cash flow (in the short term) on house 1.  When you buy house 3 in the next few years, where is the down payment going to come from?   I'm thinking the cash flow on house 1 still isn't going to be great. We have a house worth about $300K, original purchase price $150K, with a 15 year loan, but gross rents are $2500 monthly. Making a guess on your property taxes, I predict you're not netting very much at all each month on house 1.

Can you both be right for now?   Assuming cash flow is good, keep renting house 1 until you find house 3? Then sell house 2 (those numbers look like a sell, again, without all the info), and decide what to do about house 1 at that point?
« Last Edit: June 29, 2014, 09:17:08 AM by monarda »

Zette

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This might be an allocation decision -- how much of your portfolio in real estate vs stocks.

Then for the real estate portion, figure out how to maximize your return.  For instance, if you sold the houses, are there properties in your area that would generate more rental income for the investment?  Would your DH be ok with selling and buying one of those properties?

waltworks

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Those are AWFUL rentals. Terrible failures on 1% and 50% rules, probably costing thousands a month to hold onto them. I'd sell immediately.

-W

Calivalley

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More information:

Cash flow on House #1: $156/mo.

House is 35 years old in a neighborhood that is slowly being overrun by the town's homeless population.

Just put $6,000 into updates/minor repairs when the last tenants left in January.
 
It took us _3_ months to get the repairs done and get it re-rented. He didn't want to pay people to do the work, but was very slow to get it done himself.

On House #2, potential cash flow would be $150/mo. Newer track home neighborhood, close to university.

If anyone could recommend a specific book where I could get educated about this, I would really appreciate it. Selling him on getting rid of both houses will be extremely difficult. He prides himself on being financially savy because he has always lived frugally and never gotten into debt, but I am really concerned that his stubborn insistence to follow what his family has always done will not enable us to retire early (my goal more than his).

monarda

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More information:

Cash flow on House #1: $156/mo.

House is 35 years old in a neighborhood that is slowly being overrun by the town's homeless population.

Just put $6,000 into updates/minor repairs when the last tenants left in January.
 
It took us _3_ months to get the repairs done and get it re-rented. He didn't want to pay people to do the work, but was very slow to get it done himself.
 

Does $6000 include the 2 months of rent you could have earned if you'd hired someone and gotten the updates done sooner? Does you and he have contractors you trust?   We're doing a lot of work ourselves on our remodel, and it does take a while longer, but that's because we're using all reclaimed wood, and most contractors don't want anything to do with that.
Whenever we consider whether to do something ourselves, we always balance the lost rent against the contractor cost. Often it's a wash, so sometimes we hire out, sometimes we don't.  If a contractor can do something in three days that would take us two months, then we hire out. Even if it's $1000 more, counting gained rents.

Both houses do badly fail both the 1% rule and 50% rule as waltworks says.   There's a lot of good information on these rules and other info about what makes a good rental on biggerpockets.com:  for instance, here's a search that helped me out last fall   http://www.biggerpockets.com/search?term=50%25+rule

How have you calculated the cash flow?  It doesn't at all seem like you've allowed for 50% expenses.
A real net cash flow of $150 per month is okay according to BP, they say to aim for a minimum of $100 per 'door' per month (single family house= 1 door).

waltworks

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I'm assuming OP is just subtracting monthly PITI from the gross rent. FWIW, CaliValley - that's not generally how an investor would calculate cash flow. Google up the 50% and 1% rules (or read some of the other rent/sell threads here) and you'll get a better idea of how to figure out your return.

I can say with relative certainty that your houses are cashflow negative. Whether they will end up being good investments basically depends on how  much appreciation you get. IMO much riskier (and more work) than the stock market. But it sounds like this is an emotional issue for your SO. Might be worth sitting down for some number crunching with him. I also like to point people to this article:
http://awealthofcommonsense.com/worlds-worst-market-timer/

-W

Calivalley

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Thanks for your responses and the links to biggerpockets. It is embarrassing how little we really know about what our money is doing. I think DH and I need to make truly learning about this a priority.

DoubleDown

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Thanks for your responses and the links to biggerpockets. It is embarrassing how little we really know about what our money is doing. I think DH and I need to make truly learning about this a priority.

Good for you, that is the right attitude! It's great to hear when someone is receptive to learn more. And I agree, you're talking about nearly a quarter million dollars in equity in these two homes (not counting transaction costs), so this is not a trivial thing to gloss over. That's a lot of money that could be doing more for you.

By the way, if it helps, you might pick a target return rate for an alternate investment you would make, if you were to sell these two properties. For example, let's say you are willing to go with historical returns from the stock market of about 9% nominal returns as a basis to compare against. Then, you would likely only hold these two properties if you could exceed 9% returns after all expenses are taken out, since holding rental properties does involve some level of work and they are illiquid assets, whereas holding stocks requires virtually no work and is very liquid (but does involve risk of course). In this case, you would only hold these properties if you could net more than $250,000 x 9% = $22,500 each year in net profit (rents minus all expenses/repairs/vacancies/management costs/etc.).

Think of that (or perhaps your husband should): You should likely be earning $22,000+ per year from the money you have invested in these homes! And if you're not, that's a lot of money to leave on the table each year.

Disclosure: Like many or most here, I have stocks and real estate. Most of us think diversification is a good thing. Owning real estate would be a great thing for you to continue to do, but you can likely find much better "cash flowing" properties.