Author Topic: Case Study: San Diego Condo, Rent or Sell?  (Read 2747 times)

Jaayse

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Case Study: San Diego Condo, Rent or Sell?
« on: April 27, 2017, 01:03:21 AM »
Market Value:  $338,300 according to Zillow
Original Purchase price: $295,000 bought in October 2015, built in year 2005
Original Mortgage Amount: $263,250
Interest Rate:  3.5%
Mortgage Term:  30 years (matures 11/2045)
Term remaining:  26 years (due to additional principle payments)
Amount remaining on mortgage:  $242,869
Gross Rents:  estimated to rent for $2,000 per month by potential property manager
Principal and Interest (the P&I of your PITI - should match with the above info):  $1,182.11
Taxes and Insurance (the T&I of your PITI):  $444.85

HOA costs:  Just jumped to $190 from $165, I have not yet returned from deployment to be able to call and see if this is a permanent increase.

Deferred maintenance notes:  No maintenance required that I'm aware of, everything works and the water heater was replaced right before I purchased it.

Anything else special or unique in regards to the numbers of the property (not the property itself; things such as city assessments, back taxes, special costs due to unique features of the property, etc. etc.):  The condo comes with a 1 car attached garage and to get an additional parking spot is $450 per year, which is almost essential in my opinion to be a rental given most 2 car families or even 2 roommates.  The street parking is limited and almost always full, and although there is a parking pass for any unreserved spots inside the condo complex you can park in them for a max of 14 days a month with your pass and it is near impossible to find one during peak hours or in the evening.  Also, there is a litigation going on, that I was not made aware of when purchasing the condo, between the condo association and the builder.  I believe the litigation is partially what is driving up the HOA since there are no amenities other than the typical grounds and outside upkeep of the buildings.

As for the location and appeal of the property, the unit itself is very modern.  It includes stainless steel appliances, gas range, gas washer/dryer, and gas water heater.  It is located in an area with easy access to multiple freeways, within walking distance of a shopping complex with a home repair store, movie theatre, walmart, grocery store, banking, fast food, etc.  Also it is close to a water park and a huge discount mall, however it is not close to the city center (15 minute drive) and the universities (25+ minute drive).  It is still in a good location to get to the Naval base (10-15 minutes without traffic) and is very popular with military members.

I will be returning from a deployment in a few weeks and will have 2 months to either set up my condo for rent or sale.  I will be moving overseas and will have to hire a property manager if I rent it out.  I have contacted my realtor from purchasing the house and he offered to rent it for the following terms:  $275 move in fee for any new tenants, and 8% monthly fee.  As of a few months ago he estimated it could be rented for around 1900-2000 per month.  Listening to stories from others on my ship, housing is hot in San Diego right now.  A friend of mine said he heard of a house going on the market and selling within the weekend, which mirrors my experience buying a year and a half ago (there were at least 6 offers on the condo and I lost out on another condo a few weeks before).  Given the market in San Diego, it seems like it would not be vacant very long, and my intent would be to set terms for at least a year lease to discourage turnover.  Also, my realtor would be willing to look in on the place at certain times to verify there is no damage being done to the property.

I'm open to any suggestions or advice.  Is there anything I'm missing?  Should I try renting it out for the 2 years I'm overseas and then reassess or should I take my profit and run?

Modified to add some media on the area rental market:  http://www.kpbs.org/news/2017/jan/03/san-diego-rent-increases-slowing/
« Last Edit: April 27, 2017, 01:21:40 AM by Jaayse »

Another Reader

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Re: Case Study: San Diego Condo, Rent or Sell?
« Reply #1 on: April 27, 2017, 04:39:59 AM »
Depending on the real value, vs Zillow, you will come out a little ahead if you sell.  You will lose money if you rent it because you have not factored in vacancy and collection loss, repairs and maintenance, and the inevitable assessments for common area  improvements that are not included in the HOA fee.  You are going to be deployed for two years with no way to come back and deal with problems.

The real estate upcycle is getting a little long in the tooth.  The condo is still involved in the usual construction defects litigation, over which you have no control.  In your shoes, I would take a hard look at comparable sales with an eye to selling this unit and moving on.

Jaayse

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Re: Case Study: San Diego Condo, Rent or Sell?
« Reply #2 on: April 27, 2017, 08:48:05 PM »
Thank you Another Reader!  I appreciate your input and I have been leaning a bit towards selling, if only to keep it from hanging over my head. 

I would appreciate it if a few more people would chime in who are knowledgeable in real estate to solidify that this is the right thing to do.  I did send an email to the realtor I used to buy the property to hopefully get some more information.  I'll report here if I get anything useful.

Modified to add additional information about my condo:  1336 square feet, 2 bedroom, 2.5 bath, attached single car garage, corner unit, townhouse style (no one above or below)
« Last Edit: April 27, 2017, 08:57:10 PM by Jaayse »

bryan995

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Re: Case Study: San Diego Condo, Rent or Sell?
« Reply #3 on: April 27, 2017, 09:34:30 PM »
I am in SD, looking to buy.  It is absolutely a sellers market right now, especially for anything sub 700k.  Multiple offer situation, usually selling for 10% over ask.  Check out https://piggington.com for SD specific housing news. I am looking in UTC or a bit further north (del mar, carmel valley) - Not sure about the market further south, or condo vs SFH.

If I were in your situation then I too would be learning towards selling for the peace of mine and simplicity.  Especially when you could be half-way around the world.
« Last Edit: April 27, 2017, 09:36:41 PM by bryan995 »

Tuskalusa

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Re: Case Study: San Diego Condo, Rent or Sell?
« Reply #4 on: April 28, 2017, 12:08:02 AM »
One thing to think about would be your long-term plans. Do ou see yourself eventually moving back to San Diego?  Would you want to live in this condo again?  I could see hanging onto the property and renting if you wanted to return to the area.

Jaayse

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Re: Case Study: San Diego Condo, Rent or Sell?
« Reply #5 on: April 28, 2017, 12:26:14 AM »
I'm in the military and there is the slight chance that I will return to the area.  I would love to live there again if I did return, however, I may never be in the area again. 

I will spend the next two years overseas in Italy, then will either lat transfer to another officer designation (if I'm lucky), get out of the military, or realize that I'm close enough to FI to stick it out for Department Head School before getting assigned to two 1.5 year periods and spend half my life at sea again.  Not always much choice involved in where I go while I'm in the military, but I do love San Diego... if only housing wasn't so expensive.

I'm just worried that there may be a bust in the San Diego housing market... surely a condo can't keep appreciating by 8% every year, and if there is a downturn then the mortgage might overrun the rent since it is on the edge right now.

Jaayse

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Re: Case Study: San Diego Condo, Rent or Sell?
« Reply #6 on: April 28, 2017, 11:42:43 PM »
So, I have additional information from my Realtor:

Quote
"It has been the norm to charge 6% commission, That gets split between the agencies representing the seller and the agency representing the buyer, say 3%, 3%.
Legally that is negotiable.
I can do it for 5% (2.5%, 2.5%)

Depending on where you price it, will depend on selling time frame, it takes, in today's market, less then 30 days to get a buyer under contract.
Then you need about 45 days average time on the market, so a total of about two and a half months.
In some cases it could be less.

Putting it on the market takes only a day or two.

I will check on prices and send you a Market Analysis via our MLS/Realtor service.
What is the approximate loan balance and interest rate you have?
I'll send you a cost/net estimate."

Then after I sent him the answers to his questions, I received the following:

Quote
"in looking at your properties information, I see we closed escrow on 10/23/15, per Federal Tax Law you cannot sell the condo and close escrow until after 10/23/17, otherwise you will need to pay Capital Gains tax.
However,
please check with your tax person because there may be a "condition" on that because you are in the military and have Orders.

Having said that,
a market analysis show the sales vary in your complex; sales from $295K - $333K, you have a nice place so it may sell at least at the low $300's.
You have nothing to loose by trying at a higher price, but if it sells say at $315K, you would net about $50,000, enclosed is an estimated net sheet."

Does anyone know the answer to the military on orders question?  About whether I can avoid the Capital Gains Tax? 

Overall, based on his responses, it looks like I can come out breaking just about even with what I put into the place as far as principle.  So should I sell, or rent?

Nords

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Re: Case Study: San Diego Condo, Rent or Sell?
« Reply #7 on: April 30, 2017, 12:08:16 AM »
Does anyone know the answer to the military on orders question?  About whether I can avoid the Capital Gains Tax? 

Overall, based on his responses, it looks like I can come out breaking just about even with what I put into the place as far as principle.  So should I sell, or rent?
Sure, here you go:

https://paycheck-chronicles.military.com/2017/03/07/military-capital-gains-extension-may-extend-retirement/
http://www.katehorrell.com/capital-gains-rules-for-military-families/

Based on my many questions (and sad stories) from military long-distance landlords, the short answer is:  Sell.  Now.


Another Reader

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Re: Case Study: San Diego Condo, Rent or Sell?
« Reply #8 on: April 30, 2017, 06:44:56 AM »
"Overall, based on his responses, it looks like I can come out breaking just about even with what I put into the place as far as principle.  So should I sell, or rent?"

Please show your math.  In my opinion, this will be a money loser from the get-go. 

In your shoes, I would sell.  However, I might shop agents.  This one has some vested interests that might not align with yours.

tralfamadorian

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Re: Case Study: San Diego Condo, Rent or Sell?
« Reply #9 on: April 30, 2017, 08:09:08 AM »
Market Value:  $338,300 according to Zillow
Original Purchase price: $295,000 bought in October 2015, built in year 2005
Original Mortgage Amount: $263,250
Interest Rate:  3.5%
Mortgage Term:  30 years (matures 11/2045)
Term remaining:  26 years (due to additional principle payments)
Amount remaining on mortgage:  $242,869

Principal and Interest (the P&I of your PITI - should match with the above info):  $1,182.11
Taxes and Insurance (the T&I of your PITI):  $444.85

HOA costs:  Just jumped to $190...

... litigation...

...an additional parking spot is $450 per year...

...he offered to rent it for the following terms:  $275 move in fee for any new tenants, and 8% monthly fee.  As of a few months ago he estimated it could be rented for around 1900-2000 per month. 

As a rental real estate owner this is how I would estimate the monthly running costs on this property:
Rent: $1950
PITI: $1626.96
HOA: $190
Management: $156
Move in management fee: $22.92
Additional parking: $37.50
Vacancy (reducing from avg 10% to 8.3%): $161.85
Repairs (reducing to 5% due to condo): $97.50
CapEx (reducing to 5% due to condo): $97.50

Monthly cash flow: -$440.23


Even with overly generous vacancy/repairs/capex (I personally always keep these at 10% across the board), this property is an anchor.  Other deal breaker red flags are the HOA litigation that has a good chance of landing you with a special assessment in the future and the fact that CA is the worst state in the nation in which to be a landlord. 

And for fun, selling costs:
Purchase price: $295,000
Selling price: $320,000
Selling costs (I usually make this 8%; reducing to 7% given concession mentioned by realtor): $22,400
Selling net used to calculate capital gains: $297,600
Remaining mortgage: $242,869
Walk away with: $54,731

Your gain is near zero so capital gains should not part of the discussion. 

Another Reader

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Re: Case Study: San Diego Condo, Rent or Sell?
« Reply #10 on: April 30, 2017, 09:14:24 AM »
+1 to everything Kellyincville says, except the extra parking, which the tenant can rent from the property management company.  No matter, you are still hugely negative in cash flow.  S/he just did the math for you.

Jaayse

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Re: Case Study: San Diego Condo, Rent or Sell?
« Reply #11 on: April 30, 2017, 06:14:38 PM »
Thank you all for your help!  Especially your math Kelly!  I'm pretty much set on selling now.

After following your links Nords, I found Publication 523 and if I am reading this correctly, I would qualify for a partial exemption, which if I sell at the 22 month mark would be close to 230,000 exemption.  Which I will not come anywhere close to reaching. (https://www.irs.gov/publications/p523/ar02.html#en_US_2016_publink100011707)

Quote
"Showing facts and circumstances.   If your circumstances donít match any of the standard requirements described above but the primary reason for sale, based on facts and circumstances, is work-related, health-related, or unforeseeable. Important factors are:

    The situation causing the sale arose during the time you owned and used your property as your residence.

    You sold your home not long after the situation arose.

    You couldnít have reasonably anticipated the situation when you bought the home.

    You began to experience significant financial difficulty maintaining the home.

    The home became significantly less suitable as a main home for you and your family for a specific reason.

Another Reader, for the math, I will borrow from Kelly:  $54,731 would be my take home in that case

295,000-242869 = 52131

So I would be taking back the principle I put in and breaking just about even on the principle I put into the place

Basically I can write off the interest, taxes, and insurance cost as my "rent" for the time I held the property, and take back all the principle.  The majority of the time I held the property my costs were (PITI+HOA of 165) 1791.96 and I didn't pay for the parking.  So with an average of around 450 principle per month (estimate) I was only spending around 1342 per month. 

Ironically that is cheaper than the first 1 bedroom/1 bathroom apartment I got at the steal price of 1350 per month while the complex underwent change of ownership.  That same starter apartment today is at 1780 per month in mission valley.
« Last Edit: April 30, 2017, 06:20:26 PM by Jaayse »

Villanelle

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Re: Case Study: San Diego Condo, Rent or Sell?
« Reply #12 on: April 30, 2017, 07:13:53 PM »
As an overseas military landlord with a rental in San Diego, I'd say "SELL!".  While financially it has paid off for us--and that was really just due to market conditions-- it's been a pain and a stressor.  We are currently facing a ~$7,000 bill when our current tenant moves out, and thanks to an absolutely awful former PM and to CA's laws, most of that will be out of pocket for us.  We decided to keep it because our property was down about $125k from purchase price when we left, and we could rent it and for just slightly less than break even (to include tax implications + and projected expenses -).  We are now back up to purchase price plus a bit, so in 7 years, we've made about $150k in appreciation, plus a much smaller number on rental profit. Rents have also gone up and we refi-ed so costs have gone down, meaning it's actually profitable now, but not by huge amounts.   So, while I'm happy we did it, it's been a decent amount of headache.  We really, really struggled with the decision to keep renting or sell when this tenant moves out.  In the end, inertia carried the day.  (Selling from overseas seemed pretty daunting!)  We are making a few hundred dollars a month, and would have had to spend that repair money whether we rented or sold.

I will say we've never had a real vacancy.  Between tenants the only empty time was whatever time the PM needed to get the property ready to rent again.  I believe it was actually rented before the old tenant even vacated.  This time, we will probably be empty for ~3 weeks, for painting, new carpet, and a few other things. 

Jaayse

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Re: Case Study: San Diego Condo, Rent or Sell?
« Reply #13 on: February 27, 2018, 04:52:37 PM »
An update for any who might find it interesting...

I rented out the condo for a few months at 2k per month and managed to get a tenant almost immediately (less than 2 weeks after I left).  It was not the best situation, but I was waiting for the litigation to be completed.  My tenant had to leave unexpectedly in the middle of January due to military orders and it went vacant from then until now.  The litigation finished and although comps have not yet sold (most have sold at around 295k), I'm not willing to wait with the property vacant or provide another year long lease since my realtor/PM unexpectedly came to me with an offer for 319k with 5% for the realtors and 450 back for the parking spot.  The new owners will also rent for 2 months while waiting for divorce settlement to help them provide the down payment.

I took the offer and am waiting for the paperwork to be finalized.  This will get tenants in immediately as well as solve the issue with not wanting to wait for interest rates to rise or some world event to send the market/housing market tumbling down.

Jaayse

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Re: Case Study: San Diego Condo, Rent or Sell?
« Reply #14 on: April 26, 2018, 01:23:45 PM »
Update.

THE HOUSE IS OFFICIALLY SOLD!