Buyer's Remorse: Salvagable as a Rental?

[Cowspot28]

Hi,

My family and I bought our townhouse in a HCOLA in MD in 10/18. We are extremely unhappy here, and we are wondering what we can do at this point to mitigate losses. Obviously, it would have been better for us not to buy at all, but that ship has sailed.  We would like to move out summer 2020 or sooner if able. Does this property make sense as a rental, or is it better to sell and take the financial hit? We are prepared to take the hit on closing costs, etc, but probably couldn't sell it much below what we bought it for. If we had to, we could stay longer I guess, but we really don't fit in here.

Market Value: Zillow says 339299
Original Purchase price: 334999
Original Mortgage Amount: 334999, VA loan, no PMI
Interest Rate: 4.0
Mortgage Term: 30 years
Term remaining: 29.5 years
Amount remaining on mortgage: 330,994; payment 2015/month
Gross Rents: unsure, other rentals in the area seem to do ok, hoping 2300
Principal and Interest (the P&I of your PITI - should match with the above info):1600
Taxes and Insurance (the T&I of your PITI): 415
HOA costs: 1500/year but 1000 is included in escrow T&I above
Deferred maintenance notes: older roof
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.): VA loan so could limit our ability to borrow again if kept as rental as VA loans are capped at a specific dollar amount

Specific questions:
1. Does this make sense as a rental at all?
2. How much would rent need to be to make this worthwhile for us? I am aware of the 1% rule, but I know there is some controversy surrounding it. We plan to move locally so we would be nearby to address property concerns as needed initially at least.
3. Should we refinance it now (if kept as a rental)? We are getting mailings for 3.0%. Are there rules surrounding this (i.e. must live in property for a year after refinancing)?
4. Is there a best time to move if you are going to buy another place? Our realtor told us it was best to sell in spring/early summer, but I assume that means it's also harder to buy at that time as there is more demand.
5. Anything else that might be helpful to think about?

Thank you so much for your feedback. I have learned so much from this community.

[Papa bear]

Hi,

My family and I bought our townhouse in a HCOLA in MD in 10/18. We are extremely unhappy here, and we are wondering what we can do at this point to mitigate losses. Obviously, it would have been better for us not to buy at all, but that ship has sailed.  We would like to move out summer 2020 or sooner if able. Does this property make sense as a rental, or is it better to sell and take the financial hit? We are prepared to take the hit on closing costs, etc, but probably couldn't sell it much below what we bought it for. If we had to, we could stay longer I guess, but we really don't fit in here.

Market Value: Zillow says 339299
Original Purchase price: 334999
Original Mortgage Amount: 334999, VA loan, no PMI
Interest Rate: 4.0
Mortgage Term: 30 years
Term remaining: 29.5 years
Amount remaining on mortgage: 330,994; payment 2015/month
Gross Rents: unsure, other rentals in the area seem to do ok, hoping 2300
Principal and Interest (the P&I of your PITI - should match with the above info):1600
Taxes and Insurance (the T&I of your PITI): 415
HOA costs: 1500/year but 1000 is included in escrow T&I above
Deferred maintenance notes: older roof
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.): VA loan so could limit our ability to borrow again if kept as rental as VA loans are capped at a specific dollar amount

Specific questions:
1. Does this make sense as a rental at all?
2. How much would rent need to be to make this worthwhile for us? I am aware of the 1% rule, but I know there is some controversy surrounding it. We plan to move locally so we would be nearby to address property concerns as needed initially at least.
3. Should we refinance it now (if kept as a rental)? We are getting mailings for 3.0%. Are there rules surrounding this (i.e. must live in property for a year after refinancing)?
4. Is there a best time to move if you are going to buy another place? Our realtor told us it was best to sell in spring/early summer, but I assume that means it's also harder to buy at that time as there is more demand.
5. Anything else that might be helpful to think about?

Thank you so much for your feedback. I have learned so much from this community.

1. Does this make sense as a rental at all?

No. Unless you expect to have crazy appreciation over the next 2 years.  But we call that speculating.  May as well buy bitcoin or beanie babies.

2. How much would rent need to be to make this worthwhile for us? I am aware of the 1% rule, but I know there is some controversy surrounding it. We plan to move locally so we would be nearby to address property concerns as needed initially at least.

The controversy comes from people who think they are real estate geniuses because they got lucky that their house doubled in value even with a monthly cash loss on the rental. The 1% rule works because it’s math. It’s not a hard and fast rule, you can still make money at .8%, but the opportunity cost of your time and money starts to make it look better to sock it in the market.

3. Should we refinance it now (if kept as a rental)? We are getting mailings for 3.0%. Are there rules surrounding this (i.e. must live in property for a year after refinancing)?

If you are going to use this as a rental for 5+ years, then yes, refinance.  If this is a short term solution, your loan costs will overcome any savings on your interest. 

4. Is there a best time to move if you are going to buy another place? Our realtor told us it was best to sell in spring/early summer, but I assume that means it's also harder to buy at that time as there is more demand.

Not really.

5. Anything else that might be helpful to think about?

The house is a sunk costs.  You can only look at what the best option is moving forward.  That is not a good rental.  You wouldn’t buy it as a rental.  Maybe spruce it up and put in some trendy paint colors to get a few extra thousand on the sale. 

You also need to look at tax implications.  Selling now for a gain, you will pay cap gains taxes, since you are less than 2 years in the house and without a qualifying life event.  If you go rental, you will depreciate the property, which is good for taxes, but when you sell, you have a lower basis and will have to pay depreciation recapture. 


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[kenmoremmm]

regarding refi: i suspect the 3% quote you see is for primary residence. if so, then yes, you need to live there for 1 year unless there are unforeseen circumstances that force you to move.

[Papa bear]

regarding refi: i suspect the 3% quote you see is for primary residence. if so, then yes, you need to live there for 1 year unless there are unforeseen circumstances that force you to move.

That all depends on the lender.  Most only ask that you have the intent to live there following the refi.


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[cchrissyy]

you have no equity, I'd be shocked if the refi offer applies to your situation even without considering the rental situation.

[Cowspot28]

Thank you all for your responses. It's good to know it doesn't work as a rental so we will move forward with an eye for selling.

Re: paying capital gains if less than 2 years in house: Does that mean for purchase price only or can you include transaction costs too? For example if house sold for 340,000 + 20,000 closing costs, would we owe capital gains? Do you include costs for both buying and selling? Can you take a capital loss if sold for less?

Is that true about equity? VA loans are a bit different. The loan officer originally told us he could give us better rates with 0% down, and they began calling us after 6 months because that's when we became eligible to refinance. I don't think it makes sense anyway if we want to sell, but I want to understand for next time.

There are rentals in our small neighborhood. How are people making money? I know they aren't charging 3300/month. Do you think they just bought at a better time?

[doingfine]

They either bought at a better price, or they aren’t really making any money short of hoping for appreciation that outpaces their cash flow losses. The latter is extremely common.

[waltworks]

[url]

There are rentals in our small neighborhood. How are people making money? I know they aren't charging 3300/month. Do you think they just bought at a better time?

Some bought at a better time. Many/most are not actually making money but think they are, because they are bad at math.

These are the same people who buy lottery tickets and don't put in money to their 401k to get their company match. They're idiots - hence the term "dumb money".

There's a lot of dumb money in RE right now.

-W

[Villanelle]

Thank you all for your responses. It's good to know it doesn't work as a rental so we will move forward with an eye for selling.

Re: paying capital gains if less than 2 years in house: Does that mean for purchase price only or can you include transaction costs too? For example if house sold for 340,000 + 20,000 closing costs, would we owe capital gains? Do you include costs for both buying and selling? Can you take a capital loss if sold for less?

Is that true about equity? VA loans are a bit different. The loan officer originally told us he could give us better rates with 0% down, and they began calling us after 6 months because that's when we became eligible to refinance. I don't think it makes sense anyway if we want to sell, but I want to understand for next time.

There are rentals in our small neighborhood. How are people making money? I know they aren't charging 3300/month. Do you think they just bought at a better time?

I've talked to more than one person who "makes money" on their rental.  A few of them are actually in the black, but it's an inconsequential  amount compared to having the money in the market.  Some are figuring in the appreciation, even though they haven't sold yet.  But many (most?) of them look that the mortgage payment or maybe the mortgage and property taxes, and if that's less than the rent, they think they make money.  Never mind maintenance (and deferred maintenance), vacancy, property management, marketing, etc. 

So basically, if they only count a few of their expenses, they are making money.

[monarda]

How old is the roof? What kind of life is left? Have you priced a new roof? Might be worth doing the calculation. You might get a little better sales price.

I ask because we had our house with an older roof on the market (at prime time) starting this past early spring, then it leaked (a realtor at a showing told us!), then we took it off the market and replaced the roof in April. Then we got an offer in May. Closing still to come, in August- the buyers have to close on their previous house, first.

[redbirdfan]

What is the housing market like in the area?  Is it appreciating?  This may be too complicated to be worthwhile, but you may consider renting it with an option for the tenant to purchase in 2-3 years.  You would agree to the purchase price in advance and calculate how much rent would go towards the purchase.  This would allow you to get a tenant more likely to take care of the place, you could charge higher rent (as part would go to the purchase price), and you could sell the place with lower transaction costs.  If the tenant opts not to buy, you've made more money on the rental and perhaps the market would have appreciated slightly. 

You don't have enough equity to refi (usually you need at least 10% equity) and you may not own the home long enough to recoup the refi cost. 

[ysette9]

Without having a good idea of what your townhouse would rent for it is mostly impossible to answer the question of whether it would make a good rental. Everything hinges on that number.

[Car Jack]

1% rule minimum.  2% is more betterer.

For people who are making money on rentals, ask to see their spreadsheet breakdown of everything.  People who just fly by the seat of their pants, assuming they're making money are losing money like crazy.  They simply don't know it.  If you don't keep track of things, you can say anything you want.

Don't forget real estate agent costs in selling.  But if you really hate it, sell and rent somewhere you like. 

[robartsd]

Re: paying capital gains if less than 2 years in house: Does that mean for purchase price only or can you include transaction costs too? For example if house sold for 340,000 + 20,000 closing costs, would we owe capital gains? Do you include costs for both buying and selling? Can you take a capital loss if sold for less?

I'm not an expert, but I'm pretty sure transaction costs you paid both purchasing and selling can be deducted from proceeds of the sale for determining capital gain (or loss). A capital loss would first be deducted from any other capital gains you had in your tax year. A limited amount of net capital loss in a tax year can be deducted from ordinary income.

[Cowspot28]

How old is the roof? What kind of life is left? Have you priced a new roof? Might be worth doing the calculation. You might get a little better sales price.

Roof is around 20 years old I think. There are no problems with it leaking or anything, and we would know with all rain we've had recently. Does it make sense to replace it before we sell?

Without having a good idea of what your townhouse would rent for it is mostly impossible to answer the question of whether it would make a good rental. Everything hinges on that number.

Good point. I know one is renting for 2000 across the street. Rentometer says 2000. Obviously, that's not worth it as our mortgage is higher. Our realtor had told us it might rent for 2300 when we bought it. I guess I was just confused about the 1% rule because around here, the rent would be too high at current sale prices. I'm just wondering how many landlords really are making money or just think they are as others have alluded to.

What is the housing market like in the area?  Is it appreciating? 
You don't have enough equity to refi (usually you need at least 10% equity) and you may not own the home long enough to recoup the refi cost. 

Hard to say about appreciation. One site I found states average annual is 3.4%. I know you aren't supposed to bank on that anyway. It looks like it will just make more sense to get rid of it at this point.

Thank you to everyone for your input.

[monarda]

Roof is around 20 years old I think. There are no problems with it leaking or anything, and we would know with all rain we've had recently. Does it make sense to replace it before we sell?

Ask your realtor. It might make sense. If shingles are cupping or looking old in spots, then probably do it. People's eyes are going to go right to that.  It might not be a bad idea to get a couple of estimates, regardless. That way you know what the cost might be, for purposes of negotiation.

You might or might not get a higher price with a new roof, but it could make the difference between sale and no sale.