Rent vs. Sell case study: keep 1st home?

[mountainfamily]

Information removed, as I don't want so much of my situation detailed online.

[Papa bear]

I only need to read like 3 lines of this to know that it’s 100% sell sell sell.

Sell it and take the tax free capital gains.  This is not a good rental.  If you ever want to go back to the city, buy something else.  If you want a rental, go buy a place that will actually cash flow.  The entire notion that you can make it work because you are both working is bonkers.  It’s an investment property. It supposed to make you money.


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[Paper Chaser]

So, you guys are moving because remote work means you don't have to be in the city for your high paying job, but you expect high paid tech workers to make the opposite choice and continue to fork over $3k/mo to live there when they don't have to?

There's a whole bunch of overlap in those who can afford high rents and those who can suddenly work almost anywhere they choose. You're not the only high earners leaving expensive cities because of remote work. It's "a thing" right now. Large, expensive cities are already seeing rents drop due to dropping demand. Expecting home values/rents to increase from current levels is not guaranteed. If your plan works, and your rents/home value stay flat or increase, you're still getting just $3k/mo in rent on a place that's worth $800k. That's pretty not great.

[swashbucklinstache]

I agree with the others that this feels like a strong sell case. In particular, I'm wondering if you can't get substantially more than your expected price given that you could have a second unit on the property. That is, if you know that others can too. Are there small non-building (e.g. permitting) steps you could take that might add a couple hundred thousand to the sticker price, for example? That could be your "job" in the sense of trading your time for money for the next 6 months related to this. You might even dwarf your spouses income for the year =).

[Mustache ride]

Those numbers are awful for a rental. That's an easy sell.

[waltworks]

Sell it and never look back.

-W

[mountainfamily]

I agree with the others that this feels like a strong sell case. In particular, I'm wondering if you can't get substantially more than your expected price given that you could have a second unit on the property. That is, if you know that others can too. Are there small non-building (e.g. permitting) steps you could take that might add a couple hundred thousand to the sticker price, for example? That could be your "job" in the sense of trading your time for money for the next 6 months related to this. You might even dwarf your spouses income for the year =).

We've looked into this extensively. The conclusion is that the buildable land's value cannot be unlocked in the open market and that the average buyer will not be willing to add hundreds of thousands for the buildable piece of land; we'd have to list it and see what offers came in. In order to add the value, we need architectural drawings, permits, to bring in sewer, etc. It would be 6 months minimum to do this and I'm expecting a baby around then. For many reasons, embarking on that is not the right move right now, but if we can hold onto the property I'd like to develop it myself when I have time. We also interviewed many developers who made offers on the place, and the best we could get was $800k, and he'd just tear down or gut the house we just remodeled.

[mountainfamily]

OK, that's a lot of strong votes for sell! Thank you for your input. We have about 5-7 months to decide. Staying in the big city is still a slim possibility, so it's best to hold our cards for now. We nearly sold to a developer who would build the second home, but we started to get the idea that he would also basically tear down or gut the house we just remodeled, so we decided to wait.  We can list it and sell it within a week at any point, assuming there's not a catastrophe, so we have that option.

[waltworks]

Who care what someone does with the house after you sell it? It's sticks and drywall, not a family member.

-W

[franklin4]

Another thing to keep in mind is that although you would not have to pay capital gains, there are still big costs associated with selling. 6% to real estate agents - somewhat less if you use redfin or can work a deal with an agent, about 1.2% excise tax to the county. For an 800k sale price you'd probably hand over 50k to agents and local government.

If a builder was willing to pay 800k it's would likely sell for more if it was listed.

[mountainfamily]

Another thing to keep in mind is that although you would not have to pay capital gains, there are still big costs associated with selling. 6% to real estate agents - somewhat less if you use redfin or can work a deal with an agent, about 1.2% excise tax to the county. For an 800k sale price you'd probably hand over 50k to agents and local government.

Yes, we're aware of selling costs. Builders will do it with fewer fees, but they are, of course, trying to make the most profit.

[waltworks]

First step would really be to get an actual CMA done so you know what it might sell for. Unsolicited offers from builders are not a great guideline.

-W

[mountainfamily]

First step would really be to get an actual CMA done so you know what it might sell for. Unsolicited offers from builders are not a great guideline.

-W

Maybe I should have included more detail about the level of research we've done for our situation! We've done a CMA and spoken to about 4 real estate agents/investors and more than 5 developers. Price on the open market is a bit unpredictable due to the quickly rising market here and the unknown outcomes of bidding wars - some properties sell for asking, while others go for 100-150k over even if they have dated kitchens or something. I've watched every comp for the last 3 years, and comps for cottages like the one that could be build on our spare piece of land. I have done extensive research on permitting, costs, timelines, and spoken with investors who have done cottages like the one we could do.

If we sell the house either to a builder or on the open market we will likely walk away with a little money lost to all the remodeling and realtor fees. If we didn't have a buildable piece of land, I'd definitely sell, shrug, and move on despite the sunk costs. However, we desire to hold the property so we have the chance to develop it on our own when the timing is better for us. I am also interested in accumulating investment properties, if there is a profitable way to do so, and none in this city, or our new city, meet the traditional 1% rule of thumb. Plus, many would need renovations, which can be a bit of a wild card, and we know/trust every inch about our house.

[swashbucklinstache]

I agree with the others that this feels like a strong sell case. In particular, I'm wondering if you can't get substantially more than your expected price given that you could have a second unit on the property. That is, if you know that others can too. Are there small non-building (e.g. permitting) steps you could take that might add a couple hundred thousand to the sticker price, for example? That could be your "job" in the sense of trading your time for money for the next 6 months related to this. You might even dwarf your spouses income for the year =).

We've looked into this extensively. The conclusion is that the buildable land's value cannot be unlocked in the open market and that the average buyer will not be willing to add hundreds of thousands for the buildable piece of land; we'd have to list it and see what offers came in. In order to add the value, we need architectural drawings, permits, to bring in sewer, etc. It would be 6 months minimum to do this and I'm expecting a baby around then. For many reasons, embarking on that is not the right move right now, but if we can hold onto the property I'd like to develop it myself when I have time. We also interviewed many developers who made offers on the place, and the best we could get was $800k, and he'd just tear down or gut the house we just remodeled.

Yep, that kind of stuff was what I had in mind. But yeah, if a baby is on the way / it isn't worth the hassle, then I think I'm fully on the side of just put it on the market and let the chips fall where they may. If you end up with a non-builder as your highest offer, I guess in the event they wanted something you didn't want to give up in a negotiation you could bring up this upside they might not be thinking of or something...

Re: teardown your recent remodeling -
If it's environment reasons:
For some perspective, I know someone in the commercial HVAC business whose company regularly redoes full HVAC replacement on 30+ floor commercial buildings that everyone knows will be coming down in < 2 years. He says he's seen full gutted renos happening alongside him too in those cases. And this is in California =(.

If it's emotional reasons:
Well, see Walt's answer. But also consider that you might prefer a teardown to visiting 2 years later only to see the new owners trashing the place etc. Let me tell you stories of homemade backyard above ground pools with pallets stacked up to act as a deck and zip-tied to the top of the chainlink fencing to make a higher fence... Kind of like putting your terminally ill dog down rather than see it suffer.

[ToTheMoon]

I agree with the others that this feels like a strong sell case. In particular, I'm wondering if you can't get substantially more than your expected price given that you could have a second unit on the property. That is, if you know that others can too. Are there small non-building (e.g. permitting) steps you could take that might add a couple hundred thousand to the sticker price, for example? That could be your "job" in the sense of trading your time for money for the next 6 months related to this. You might even dwarf your spouses income for the year =).

We've looked into this extensively. The conclusion is that the buildable land's value cannot be unlocked in the open market and that the average buyer will not be willing to add hundreds of thousands for the buildable piece of land; we'd have to list it and see what offers came in. In order to add the value, we need architectural drawings, permits, to bring in sewer, etc. It would be 6 months minimum to do this and I'm expecting a baby around then. For many reasons, embarking on that is not the right move right now, but if we can hold onto the property I'd like to develop it myself when I have time. We also interviewed many developers who made offers on the place, and the best we could get was $800k, and he'd just tear down or gut the house we just remodeled.

Your spouse has a high income with a secure job, you have purchased a new house next to great friends & family with excellent outdoor access, and you have a baby on the way (congrats!)  You are already winning at life!

Disregard the sunk costs and what anyone might do with this house once you sell. (A family could buy it up and you feel all warm and fuzzy inside, and then they could turn around a bulldoze it anyhow when it turns out their uncle is a developer. This is a business transaction no matter how much blood sweat and tears you have put into it. Easier said than done, I know!)

If I were in your shoes, I would list that property and sell it as soon as possible. Spend that energy creating the life you want in your new town, and leave that property behind for someone else to contend with. :)

[waltworks]

You're not going to want to DIY build a house a decade from now with kid(s) and living 90 minutes away. Which you might or might not even be allowed to depending on zoning.

That's hilarious.

-W