Author Topic: Take the money and run?  (Read 7040 times)

somepissedoffman

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Take the money and run?
« on: April 20, 2014, 11:42:00 AM »
Another ‘Rent or Sell?’!!!!! Yay!

Here’s the deal:
-Girlfriend and I bought house Jan 2013 intending to stay in the area (San Diego)
-Girlfriend recently got a sweeeeet job offer in LA, so we’re gonna move
-House has gained much value
-We’re leaning towards selling, as we’re not super enthused to be long distance landlords, but were hoping for some opinions on the matter, because ya’ll here are very smart
-We intend to rent, not buy, in LA

Numbers:
*Purchase Price: 200k
*Current value: 300-350k (estimate based on appraisal from ~6 months ago, Zillow, and what we’ve seen selling in the neighborhood)
*Currently owe: 128k
*Mortgage: $1500 (including escrow for taxes and insurance), and is 15 year @ 3%
*Rental value: $1500-1800 (hard to tell, not many comparable houses are listed for rent in our neighborhood)

I'm informed that it is Easter today...so, Happy Easter!!!

Another Reader

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Re: Take the money and run?
« Reply #1 on: April 20, 2014, 11:54:03 AM »
In that price range in San Diego, you might be low if you rely on data that is not current.  As in what sold last week or is in escrow today.  It's a very hot market. 

I would favor selling from a rent to price ratio.  However, what happens if the job does not turn out as expected?  Would you stay in LA or move back to San Diego?  San Diego is still appreciating, so that's something to consider as well.

Shandi76

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Re: Take the money and run?
« Reply #2 on: April 20, 2014, 12:43:41 PM »
Interesting question. Your likely rental yield is quite low given the value of the house. $1500pcm is $18K per year, and you say the property would sell for between $300 to $350K. That gives you a yield of between 6% (if it is only worth $300K) down to only 5.1% (if it is worth $350K). You also have to bear in mind that you will probably need to pay a property manager since you will be in another state, and will have void periods and maintenance costs which will decrease the yield further. The mortgage cost is also the same as the rent, which is not what lenders are looking for: where I am they want the rent to be at least 130% of the monthly mortgage payment.

If it were me, unless I thought I might be moving back there within a few years then I would probably take the tax free increase in value, and use it to help fund a purchase in the new state. The other potential reason for keeping the property would be to keep some investment in property if you will not be buying in LA due to house prices pretty unaffordable there.

ch12

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Re: Take the money and run?
« Reply #3 on: April 20, 2014, 01:37:28 PM »
-Girlfriend and I bought house Jan 2013 intending to stay in the area (San Diego)
-Girlfriend recently got a sweeeeet job offer in LA, so we’re gonna move


You also have to bear in mind that you will probably need to pay a property manager since you will be in another state, and will have void periods and maintenance costs which will decrease the yield further.


Shandi, you do know that Los Angeles is in the same state as San Diego? Did you think that they were packing up for Louisiana (understandable)?

KingCoin

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Re: Take the money and run?
« Reply #4 on: April 20, 2014, 03:30:41 PM »
Selling seems like a no-brainer. Even if you have to come back to SD, you'd be better off renting a comparable property.

somepissedoffman

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Re: Take the money and run?
« Reply #5 on: April 20, 2014, 05:28:42 PM »
Thanks for the input everybody!  We don't have any strong ties to San Diego (except for the beer...), so we probably won't be moving back.

And we are going to Los Angeles, though Louisiana would be a lot cheaper :)




Shandi76

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Re: Take the money and run?
« Reply #6 on: April 21, 2014, 01:58:24 AM »
ch12, I have to admit my knowledge of USA geography is very poor. I had no idea they were in the same state and 120 miles apart!

In my defence, I'm Scottish, have never lived in the USA, and have only spent time in Washington (the state, not DC) and Florida. I should have googled it before assuming though.

electriceagle

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Re: Take the money and run?
« Reply #7 on: April 25, 2014, 10:40:38 AM »
I suppose that I'm the odd man out here.

I recommend that you hold onto it and rent it out.

1) San Diego is a high value area - certainly not a San Franciaco, but high enough in value not to be subject to the rules of Peoria.

2) Your property taxes are locked in at an amount proportional to your purchase price. If you sell for 350k amd then buy another house for 350k later, you will be trading a 350k house with a 2k prop tax burden for a 350k house with a $3.5k prop tax burden

Edit: at a 3.5% SWR, the $1500 diff in prop tax is about $43k.

3)LA is close enough that you can remote landlord reasonably. Heck, some unfortunate souls commute that distance.

« Last Edit: April 25, 2014, 10:42:48 AM by electriceagle »

AccidentalMiser

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Re: Take the money and run?
« Reply #8 on: April 25, 2014, 11:07:08 AM »
Sell! Sell! Sell!!!

Would you buy the house for its current value and turn it into a rental house if you didn't currently own it?

If the answer is yes, keep it.

If not, SELL IT!

Fishingmn

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Re: Take the money and run?
« Reply #9 on: April 25, 2014, 11:19:10 AM »
With the numbers you provided I would definitely sell.

Potential income barely covers mortgage/tax/insurance which means, in reality, you will likely be cash flow negative once you factor in vacancy, repairs and the possible additional costs like an eviction.

But most importantly - if you sell now you can pocket the appreciation tax free as your primary residence.

If you rent the house it's no longer your primary residence and when you sell you'll pay capital gains on the proceeds.

No brainer I think.

horsepoor

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Re: Take the money and run?
« Reply #10 on: April 25, 2014, 11:41:07 AM »
With the numbers you provided I would definitely sell.

Potential income barely covers mortgage/tax/insurance which means, in reality, you will likely be cash flow negative once you factor in vacancy, repairs and the possible additional costs like an eviction.

But most importantly - if you sell now you can pocket the appreciation tax free as your primary residence.

If you rent the house it's no longer your primary residence and when you sell you'll pay capital gains on the proceeds.

No brainer I think.

You need to have lived in the house for 2 years though, and they bought in Jan 2013.  I'm sure someone here will know if the capital gains are somehow prorated if you've been there for 75% of that time.  If not, it might be worth running the numbers on hanging onto it as your primary residence until you hit the 2-year mark, and then sell.


dragoncar

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Re: Take the money and run?
« Reply #11 on: April 25, 2014, 11:44:03 AM »
Sell! Sell! Sell!!!

Would you buy the house for its current value and turn it into a rental house if you didn't currently own it?

If the answer is yes, keep it.

If not, SELL IT!



Another bonus is that if you ever do decide to buy in LA, you won't have to deal with selling the old place first (if that would be a factor)

Fishingmn

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Re: Take the money and run?
« Reply #12 on: April 25, 2014, 11:49:12 AM »
You need to have lived in the house for 2 years though, and they bought in Jan 2013.  I'm sure someone here will know if the capital gains are somehow prorated if you've been there for 75% of that time.  If not, it might be worth running the numbers on hanging onto it as your primary residence until you hit the 2-year mark, and then sell.

Didn't look closely at the date - good catch.

Does make selling it now somewhat painful as you weigh the $20-30k tax hit vs. the $1,500/mo+ holding costs.

dragoncar

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Re: Take the money and run?
« Reply #13 on: April 25, 2014, 12:25:47 PM »
You need to have lived in the house for 2 years though, and they bought in Jan 2013.  I'm sure someone here will know if the capital gains are somehow prorated if you've been there for 75% of that time.  If not, it might be worth running the numbers on hanging onto it as your primary residence until you hit the 2-year mark, and then sell.

Didn't look closely at the date - good catch.

Does make selling it now somewhat painful as you weigh the $20-30k tax hit vs. the $1,500/mo+ holding costs.

Quote
You may qualify for a reduced exclusion if the primary reason for the sale of your main home is a change in the location of employment of a qualified individual.

http://www.irs.gov/publications/p523/ar02.html

Looks like the maximum exclusion ($250k) is simply prorated over the 2 years.  You may end up paying taxes anyways, since you are unmarried.  It may be worth renting it out for 6 mo, or holding, but do you really want to sell in January?
« Last Edit: April 25, 2014, 02:42:23 PM by dragoncar »

horsepoor

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Re: Take the money and run?
« Reply #14 on: April 25, 2014, 01:51:49 PM »
Renting it wouldn't do any good, because it needs to be your primary residence for 2/5 years to avoid the short-term capital gains.  They would have to hold.  Not sure if the San Diego market would slow down as much in winter as in a colder area.  It's a gamble, because they could see additional appreciation during the holding time, or the market could slump.  The OP could stay in SD and take the time to find a better paying position in LA, or maybe he already has something lined up?  Lots of things to consider and some judgement calls to be made.  Agree that keeping long-term as a rental doesn't make a ton of sense, though.

dragoncar

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Re: Take the money and run?
« Reply #15 on: April 25, 2014, 02:43:33 PM »
Renting it wouldn't do any good, because it needs to be your primary residence for 2/5 years to avoid the short-term capital gains.  They would have to hold.  Not sure if the San Diego market would slow down as much in winter as in a colder area.  It's a gamble, because they could see additional appreciation during the holding time, or the market could slump.  The OP could stay in SD and take the time to find a better paying position in LA, or maybe he already has something lined up?  Lots of things to consider and some judgement calls to be made.  Agree that keeping long-term as a rental doesn't make a ton of sense, though.

True -- corrected above.  I bet it still slumps in the winter -- I think it's more about families with kids.

somepissedoffman

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Re: Take the money and run?
« Reply #16 on: April 29, 2014, 09:26:35 PM »
We appreciate the contrarian view, electriceagle!  Good points.

We're still not certain about how the taxes work on the gains, trying to work through that.  You're *supposed* to be able to prorate the 2 years if you're moving for a new job, if we're understanding the rules correctly.  But I seem to never understand the rules correctly...






SingleMomDebt

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Re: Take the money and run?
« Reply #17 on: July 30, 2014, 08:17:19 PM »
How did you find a place so low in SD? Nice job.

RobLucky

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Re: Take the money and run?
« Reply #18 on: July 30, 2014, 09:08:03 PM »
I'm sure the original posters' decision was made months ago, but something to consider (possibly for others in the situation): San Diego is a highly desirable vacation destination. If allowed in the neighborhood, a vacation rental can yield far higher returns than a long-term month-to-month rental. Away.com is a good starting point to research the possibility.

somepissedoffman

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Re: Take the money and run?
« Reply #19 on: August 05, 2014, 04:38:53 PM »
Wanted to update ya'll real quick, house sold in our expected price range, and now we have a lot money, thanks again for all your advice!

How did you find a place so low in SD? Nice job.
Thanks!  It was a short-sale in City Heights at the bottom of the market, we definitely got lucky.


Weedy Acres

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Re: Take the money and run?
« Reply #20 on: August 07, 2014, 07:27:44 AM »
Jan 2013 was the bottom of the market???

somepissedoffman

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Re: Take the money and run?
« Reply #21 on: August 07, 2014, 09:22:05 AM »
Jan 2013 was the bottom of the market???

The short-sale was not short, it was actually priced in early 2012