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Author: madbrain Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120826  
Subject: To become a landlord or not ? Date: 4/1/2011 10:11 PM
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Last year, I bought a new house without selling my previous home first. It's been sitting on the market since october, and I haven't been able to sell it, despite some significant price reductions and it looking good versus the comps. Two sales have fallen through due to banks not lending. Those sales were pending at prices much higher than what it's listed for now, the last one as recently as february. But no new buyers have come at reasonable prices since.

I am trying to figure out whether it makes sense to rent it out for some period of time until prices rebound. Home prices keep hitting new lows every month, and it doesn't seem like it's a very good time to sell.

On the other hand, I think it will take more than 2 years for the housing market to come back. And by that time, I would no longer be able to take the $250,000 exclusion on the sale of my primary residence. I moved out in September 2010, so the latest I could sell it to avoid tax on appreciation would be September 2013 - to make it 2 of the last 5 years as owner-occupied . If there is still appreciation by then, that is.

From what I hear, the rental market isn't that bad. I would definitely be able to recoup all my monthly expenses on the property. But the profit would be very small. What concerns me is that when I eventually sell, I would owe much higher taxes, and this could offset all the money made from renting it out, and then some.

Here is what the numbers look like :
- Townhome originally purchased for 228,000 in October 1997.
- 80k of improvements made to the house, including new kitchen, remodeled bathrooms, new zoned HVAC.
- Currently have a HELOC for 250k at 3% as only loan
- Listed for 445,000 in October 2010 based on comps at the time. First offer came at 429,000 in 3 weeks. But lender denied the PMI at the last minute in December due to "too many non-owner occupied properties" in the complex, and less than 20% downpayment
- Lowered the price to 435,000 in January 2011 . Second offer came in February 2011 for 430,000 . This was a VA loan. The lender backed out after only 2 weeks, despite having pre-approved the buyer.
- Got a new realtor with lower commission, and lowered the price to 399,000 in March 2011 . The hope was to generate multiple offers asking price with the low list price. This didn't work.
Only one lowball offer came, at 365,000, stupid people with 2.5% downpayment and FHA loan. I did not bother to counter because the price was way low.

If the financing had come through for either both of the previous offers, I should have netted about 140k, tax-free since this is below the 250k exclusion.

My rental agreement with my new realtor expires in 4 days and it doesn't appear that any other offer is forthcoming unfortunately.

I really hate the idea of becoming a landlord due to the headaches. I don't want to be spending a single minute even thinking about it. I just don't see how this home can be sold given the current market unless I discount the price to something unreasonably low, and let an investor pay cash for it, since these seem to be the only people that can actually buy houses right now. As I typed this email my realtor told me one investor wanted to send a cash offer for 350k. Based on that offer, I would only net about 80k.
On paper, the home value should definitely be above 400k based on comps. I think the 2 offers around 430k prove that too. I don't see the prices going anywhere but down for at least the rest of this year. And I don't have any confidence that the prices will have recovered before september 2012, the date at which I would have to pay capital gains on the proceeds.

The loan on this property is a HELOC at prime minus 0.75% with a 3% floor. This is a variable rate. Currently it's at 3%. The reason I got a variable rate was because I didn't intend to keep the house long term. Market conditions make it very difficult, though. I am not very comfortable with keeping a HELOC for more than 3 years.

There is no chance that I will ever move back into the property to take advantage of the capital gains after I rent. It is too small and I no longer wish to live in a townhome.

On the rental side, here is what the numbers look like per month :
- a property manager says it can rent for 1950
- HELOC payment (interest only) of 650
- HOA is 220
- property taxes 270
- property manager 195
- insurance 35
- maintenance estimated at 150
- vacancy estimated at 120

Net income per month is $310 . Or $3720/year.
Assuming $130k equity, this is a only a 2.8% return, very low for being a landlord. Equity is not growing since the HELOC is interest only.

Of course, that's still a whole lot better than the -15% with my expenses and no rental income right now. But the equity is going down every month with the home prices, while the expenses are not, so it really is even worse than -15%. And expenses will go up when rates go up, also.

Things start looking even bleaker when I account for depreciation on rental, and capital gains. I am not sure that I understand how this really works. But here I go.

My original purchase price was 228k. About 100k was land and 128k buildings. Plus 80k of improvements. So, the current basis is 308k. 188k can be amortized over 27.5 years. Or $6836 per year.
This means I would have a rental loss of about $3000/year.
0% of this loss would be tax-deductible, since I wouldn't be actively managing it, and my AGI is too high anyway.

At the time of sale, I would owe capital gains.
Let's say I sell for 400k in 2014 - that's assuming banks have started lending again by then.
The basis would be 308000 - 3* 6836 + 3*3000 (non-deducted rental losses added back) = $296,490 .
Capital gains would be $103,510. The federal rate will be 20% starting 2013, and 9.6% for California. So, I would owe $30,638 at time of sale.
That's 8 years worth of rental income.

The net would be about $110k then. Better than the $80k I could net from an investor today. But still way less than I should if banks were lending today like they should be.
Of course, prices could go down too, and the banks might still not be lending in 2014. And my interest rate on my HELOC could go up, making the losses even worse.

Do I have my numbers right when it comes to the depreciation ?

What would you guys do in my shoes ?
- Rent now, or keep trying to sell ?
- Rent now and try to sell before september 2013 to avoid capital gains tax ?
- Rent this property long-term, without the intent to sell it ? If so, refi the HELOC for something with a fixed rate ? I fear this would make the house cash flow negative, as the rate on an investment property will be much higher than 3%, and there will be principal payment
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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112887 of 120826
Subject: Re: To become a landlord or not ? Date: 4/2/2011 12:56 AM
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What would you guys do in my shoes ?

Stop calling potential buyers who are willing to pay what it's worth today "stupid," dump it and be done with it.

Phil
Rule Your Retirement Home Fool

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112889 of 120826
Subject: Re: To become a landlord or not ? Date: 4/2/2011 1:24 AM
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Sell it.

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Author: wrjohnston91283 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112897 of 120826
Subject: Re: To become a landlord or not ? Date: 4/2/2011 8:38 AM
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Stop calling potential buyers who are willing to pay what it's worth today "stupid," dump it and be done with it.



It could be that the people were "stupid" for other reasons. I had a friend who sold a house, and the buyers made some very dump and racially insensitive comments to them near closing. Thus they could be considered "stupid" for non-financial reasons.

For the OP - I recommend lowering the price to sell it. Does the condo even allow renting? My complex doesn't allow any terms less than 12 months. It makes renting a unit more difficult.

wrj

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112898 of 120826
Subject: Re: To become a landlord or not ? Date: 4/2/2011 8:47 AM
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It could be that the people were "stupid" for other reasons.

I honed in on that word because to me it signalled an emotional attachment. The extensive analysis says "investment."

Danger, Will Robinson! Danger! An emotional attachment to an investment can blind you to the fact that this one didn't work out, and it's time to take what you can get and move on to a more productive use of the cash. In OP's case there's even an advantage in the current market since he's not under water on the mortgage, so no having to convince the mortgage holder to close a sale.

Phil
Rule Your Retirement Home Fool

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Author: numbrel Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112900 of 120826
Subject: Re: To become a landlord or not ? Date: 4/2/2011 9:02 AM
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I would just like to point out that you lost a sale because your complex ALREADY has too many non-owner occupied units and now you want to add one more. That certainly won't help the prices in that complex.

But maybe you are right about not considering that last offer. Not because it is too low but because the people wouldn't get the loan due to the non-owner occupied units. Has your complex been certified by the FHA? My understanding is that multi-unit residential complexes have to be certified ahead of time by the FHA to qualify for their loans. One of the requirements is the renter/owner ratio, which you are planning to increase.

Barbara

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112903 of 120826
Subject: Re: To become a landlord or not ? Date: 4/2/2011 11:07 AM
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Things start looking even bleaker when I account for depreciation on rental, and capital gains. I am not sure that I understand how this really works. But here I go.

Depreciation is a current tax write off with the possibility of paying more taxes later. It isn't a cash loss and shouldn't be included in cash flow analysis. Depreciation basis is improvements plus cost of structures: 128K + 80K = 216K.

Losses will be carried forward until the property is sold or becomes profitable.

If you sell for a value greated than the depreciated value, there is recaptured depreciation which is taxed as regular income.

- Rent this property long-term, without the intent to sell it ? If so, refi the HELOC for something with a fixed rate ? I fear this would make the house cash flow negative, as the rate on an investment property will be much higher than 3%, and there will be principal payment

This is a strong argument for selling.

Equity is not growing since the HELOC is interest only.
At some point the HELOC be frozen and start requiring principal payments. The other reason equity isn't growing is that the housing market is bad.

You can try countering the 350K offer for slightly more (maybe the $365K of the other offer) and see what happens. I wouldn't risk the sale by asking too much. Cash buyers are looking for deals from those who need to sell. You have placed youself in that situation.

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112905 of 120826
Subject: Re: To become a landlord or not ? Date: 4/2/2011 2:19 PM
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The loan on this property is a HELOC at prime minus 0.75% with a 3% floor. This is a variable rate. Currently it's at 3%. The reason I got a variable rate was because I didn't intend to keep the house long term. Market conditions make it very difficult, though. I am not very comfortable with keeping a HELOC for more than 3 years.

So if you rent, are you going to rent it for a maximum of 3 years? Or are you going to rent it out until the housing values recover? Because if you are going to try to hang on until housing values recover, you probably need to refinance it pretty soon into a fixed rate mortgage, since you are uncomfortable keeping the HELOC for more than 3 years.

If you are going to do this, you should then refigure your cash flow with a fully amortizing 30 year payment with an investment property rate.

AJ

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Author: madbrain Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112906 of 120826
Subject: Re: To become a landlord or not ? Date: 4/2/2011 5:47 PM
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TMFParti,


Stop calling potential buyers who are willing to pay what it's worth today "stupid," dump it and be done with it.


I have an appraisal report from a bank from december that came in higher than my then-contract price, at $440k . It's hard to believe the price has dropped to $350k or $365k in just 3-4 months. I don't think I am being unreasonable with the $399k listing price.

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Author: madbrain Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112907 of 120826
Subject: Re: To become a landlord or not ? Date: 4/2/2011 5:49 PM
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vkg,

Thanks, that's been my inclination, and it's what I have been trying to do all along, without success.

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Author: madbrain Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112908 of 120826
Subject: Re: To become a landlord or not ? Date: 4/2/2011 5:51 PM
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wrjohnston91283,


It could be that the people were "stupid" for other reasons. I had a friend who sold a house, and the buyers made some very dump and racially insensitive comments to them near closing. Thus they could be considered "stupid" for non-financial reasons.


No, I never met any of these buyers, I only communicate through my agent.


For the OP - I recommend lowering the price to sell it. Does the condo even allow renting? My complex doesn't allow any terms less than 12 months. It makes renting a unit more difficult.


Yes, the complex allows renting, and there are no restrictions.

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Author: madbrain Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112909 of 120826
Subject: Re: To become a landlord or not ? Date: 4/2/2011 5:59 PM
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TMFPMarti,


I honed in on that word because to me it signalled an emotional attachment. The extensive analysis says "investment."

Danger, Will Robinson! Danger! An emotional attachment to an investment can blind you to the fact that this one didn't work out, and it's time to take what you can get and move on to a more productive use of the cash. In OP's case there's even an advantage in the current market since he's not under water on the mortgage, so no having to convince the mortgage holder to close a sale.


Firstable, that home wasn't an investment, when I bought it 13.5 years ago, it was to live in it. I only switched from renting because it was cheaper after the tax breaks. I could live in a 3 BR / 2.5 BA townhome for the same price as renting a 1 BR condo.

There is no emotional attachment, I am just trying to get a fair price for the property. I am not trying to sell it for the $600k that it would have been worth at the peak. Various home valuation web sites still put the value of the property above $400,000, and they don't take into account the individual remodeling that other units in the same complex don't have.

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Author: madbrain Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112910 of 120826
Subject: Re: To become a landlord or not ? Date: 4/2/2011 6:06 PM
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Barbara,


I would just like to point out that you lost a sale because your complex ALREADY has too many non-owner occupied units and now you want to add one more. That certainly won't help the prices in that complex.


The threshold that banks were looking at was 30% to issue PMI. There were 3 units rented out of 8 and that was 37%.

Anyway, I haven't occupied the unit since September 2010, so technically it is not owner-occupied already. I don't think putting a tenant in there changes that status.

Has your complex been certified by the FHA?


No, it hasn't.


My understanding is that multi-unit residential complexes have to be certified ahead of time by the FHA to qualify for their loans. One of the requirements is the renter/owner ratio, which you are planning to increase.


My previous realtor looked into it. First, she said that the process of approval for the complex could only start once somebody applied with an FHA loan. And this process can take many months.
Later, she said that because the unit was "fee simple", complex approval wasn't required.
I am not sure which one is right.

But let me just say that somebody just putting the bare minimum deposit, less than the 3% customary earnest money in Santa Clara county, and for way less than the $399k price, way less than the $440k appraisal in december, and way less than the $401k price estimate from some web sites, wasn't someone I wanted to deal with.

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112911 of 120826
Subject: Re: To become a landlord or not ? Date: 4/2/2011 6:10 PM
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Various home valuation web sites still put the value of the property above $400,000, and they don't take into account the individual remodeling that other units in the same complex don't have.

Unfortunately, websites also don't make offers.

I've sold properties in the best of times and the worst and found that if a property is priced right for today's market it sells, and sells quickly.

I was selling a condo in Chicago as executor of an estate after the bubble burst, and the neighbors, several of whom had within the year bought less desireable units for more than I was asking were furious. One, a real estate agent, said "I can get you $50,000 more than that." I told him to bring me an offer. Never heard from him again. We listed on a Monday and had three full-price offers by Friday. Might we have been able to squeeze another $10,000 out of it? Possibly, but in the meantime expenses of ownership continue.

I really think you should have a frank talk with your listing agent about why the property isn't moving. "The banks aren't lending" sounds like BS to me. The most common reason properties don't sell is that they're overpriced.

Phil
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Author: madbrain Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112912 of 120826
Subject: Re: To become a landlord or not ? Date: 4/2/2011 6:30 PM
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vkg,


Depreciation is a current tax write off with the possibility of paying more taxes later. It isn't a cash loss and shouldn't be included in cash flow analysis.


I didn't include it in the cash flow analysis in my post.


Depreciation basis is improvements plus cost of structures: 128K + 80K = 216K.


I think that's $208k.


Losses will be carried forward until the property is sold or becomes profitable.


I don't think the profit would become higher than the depreciation, unless I managed the property myself, was handy, or rents went up significantly. The first 2 aren't likely to happen. Rents are supposed to be going up, though.

In my earlier analysis, there was $310 of net income per month, and
$569 of depreciation. The good news is that means there is no tax on the net rent. Bad news is there is $259 non-deductible loss carried forward.


If you sell for a value greated than the depreciated value, there is recaptured depreciation which is taxed as regular income.


Are you sure that it's taxed as regular income ? And not as a long-term capital gain ? This would make the tax situation upon sale after september 2013 a lot worse - paying 28% federal at time of sale, instead of 20%.


This is a strong argument for selling.


I agree. It looks like currently my credit union is charging 5.625% for 30 year fixed on investment property with max 70% LTV. The LTV is not a problem. The monthly payment would be $1439 per month, vs the $650 right now. That would cause the property to be cash flow negative $500, instead of positive $300.

The question still remains as to when to sell, continue trying to sell now, or rent short term and try again a little bit later but before the residential exclusion on capital gains is due ?


At some point the HELOC be frozen and start requiring principal payments. The other reason equity isn't growing is that the housing market is bad.


The HELOC was taken last year and this would be interest-only for another 9 years. I don't have a crystal ball but I do think there is a good chance that the real estate market will be better within the next 9 years period than it is right now. However, I have no idea what rate the HELOC would adjust to within that period. It would have to go to 6.9% to reach $1439/month interest-only. Which would mean a 7.65% prime rate.


You can try countering the 350K offer for slightly more (maybe the $365K of the other offer) and see what happens. I wouldn't risk the sale by asking too much. Cash buyers are looking for deals from those who need to sell. You have placed youself in that situation.


I don't necessarily need to sell it immediately - renting it out is still an option . At least short term I will be cash flow positive. If there was no question, I wouldn't have posted here at all.

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112913 of 120826
Subject: Re: To become a landlord or not ? Date: 4/2/2011 6:34 PM
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If you sell for a value greated than the depreciated value, there is recaptured depreciation which is taxed as regular income.

Are you sure that it's taxed as regular income ? And not as a long-term capital gain ? This would make the tax situation upon sale after september 2013 a lot worse - paying 28% federal at time of sale, instead of 20%.


The bad news is yes, it's taxed as ordinary income. The (relatively) good news is that the rate is capped at 25%.

See IRS Publication 527.

Phil
Rule Your Retirement Home Fool

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Author: madbrain Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112914 of 120826
Subject: Re: To become a landlord or not ? Date: 4/2/2011 6:44 PM
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aj845,


So if you rent, are you going to rent it for a maximum of 3 years?


Ideally, rent it for 1 to 2 years and then sell. The property has been sitting on the market since october, which is a long time and it's harder to sell now. It was sale pending for about half the time, but unfortunately the property prices went down in the meantime.

I just met with a property manager today at the townhome to discuss renting after the 5th. We were interrupted by one agent with some potential buyers. There was a big stack of realtor cards in the kitchen. People are definitely visiting.


Or are you going to rent it out until the housing values recover?


That's the big question, which is why I am asking this in the tax forum. If I rent past september 2013 it changes the equation very significantly.

Most likely, I would start with 1 year lease with a tenant, then go month to month after that. And if market conditions, improve, kick the tenant out and sell. If not, continue to rent it out.


Because if you are going to try to hang on until housing values recover, you probably need to refinance it pretty soon into a fixed rate mortgage, since you are uncomfortable keeping the HELOC for more than 3 years.


Well, if rates aren't going anywhere I'm fine keeping the HELOC. I just fear that they will be higher in 3 years.


If you are going to do this, you should then refigure your cash flow with a fully amortizing 30 year payment with an investment property rate.


At 5.625% fixed rate on investment property, with principal payment included, the loan payment would be $1439. Monthly cash flow would be about $500 negative with today's rents.

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112915 of 120826
Subject: Re: To become a landlord or not ? Date: 4/2/2011 7:32 PM
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We were interrupted by one agent with some potential buyers. There was a big stack of realtor cards in the kitchen. People are definitely visiting.

If you are getting lots of visits, but no offers, there is something wrong. Generally, that's price.

Most likely, I would start with 1 year lease with a tenant, then go month to month after that. And if market conditions, improve, kick the tenant out and sell. If not, continue to rent it out.

Seems like a gamble with a variable rate loan.

Well, if rates aren't going anywhere I'm fine keeping the HELOC. I just fear that they will be higher in 3 years.

I wouldn't count on rates staying the same for all that long. From this article http://www.philly.com/philly/travel/119108264.html

Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, said an increase in economic growth or inflation could require the Fed to begin withdrawing its record monetary stimulus and possibly raise its main interest rate by the end of this year.
.
.
.
some central bankers are focusing on the strategy and timing for shrinking the Fed's record $2.63 trillion balance sheet and eventually raising interest rates above the zero-to-0.25 percent range that has been in place since December 2008. The committee sets the Fed's policy on interest rates.

"We should not be too sanguine in believing that such a time is a long way off or that the process will only be gradual," Plosser said.

Fisher said the Fed was moving closer to a period where reversing its accommodative policies "makes a lot more sense." He said the economy now was "self-sustaining."


With trial balloons like this being flown, rate increases probably won't take 3 years to materialize.

At 5.625% fixed rate on investment property, with principal payment included, the loan payment would be $1439. Monthly cash flow would be about $500 negative with today's rents.

Seems like an argument to sell. You seem to be in a place where you can either bleed away money through rate increases on the HELOC or negative cash flow after refinancing, or you can get it over with all at once by selling. Since you have said you don't want to be a landlord, that argues toward selling.

AJ

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Author: madbrain Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112917 of 120826
Subject: Re: To become a landlord or not ? Date: 4/3/2011 3:55 PM
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TMFPMarti,


I really think you should have a frank talk with your listing agent about why the property isn't moving. "The banks aren't lending" sounds like BS to me. The most common reason properties don't sell is that they're overpriced.


"The banks aren't lending" is just my observation after being in contract for several months, and having buyers denied, despite having pre-approvals (not prequals). It is not my realtor's comment.

My previous realtor did tell me price was too high when it was listed at $445k. But she was still able to get several offers at $430k. Neither of which went anywhere because the bank loans didn't close. I did lower the price to $435k in january after the first offer fell through. But after 4.5 months, she was no longer my agent.

On March 5, I then got a new realtor charging 3.5% commission instead of 6% (that's 1% for him and 2.5% for the buyer agent). The theory was that this would allow me to lower the price significantly, which I did, to $399k. The new realtor thought this lower price would generator multiple offers above the asking price. But in the end not a single one at asking price came through. It may be that he didn't do enough advertising. I guess the low commission has a price. This new realtor will no longer be my realtor on april 5 if I'm not in contract as the listing agreement was for 30 days only.

I don't see what else I can very well do except take it off the market and put a tenant at this time, at least temporarily. I'm not really keen on trying to sell the place at a new market bottom. This is what the first realtor is advising me, she says the market conditions are very bad right now.

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Author: madbrain Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112918 of 120826
Subject: Re: To become a landlord or not ? Date: 4/3/2011 4:01 PM
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TMFPMarti,

Thanks for your response. That makes it all the more important for me to sell the property as my primary residence.
Does the 2 out of 5 yr exclusion work on capital gains tax year or does the closing of the sale have to be exactly within 5 years of moving out ? I moved out on September 11, 2010. So do I have until September 11, 2013 to close on the sale to avoid tax , or December 31, 2013 ?

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Author: madbrain Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112919 of 120826
Subject: Re: To become a landlord or not ? Date: 4/3/2011 4:15 PM
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aj845,

Thanks for your reply.


If you are getting lots of visits, but no offers, there is something wrong. Generally, that's price.


I would think if the price was too high that people wouldn't be visiting it at all.

Seems like a gamble with a variable rate loan.


Yes, it would be. I wish I had some idea of the direction home prices will take when rates go up. To me it would seem that it would bring them down further.


Seems like an argument to sell. You seem to be in a place where you can either bleed away money through rate increases on the HELOC or negative cash flow after refinancing, or you can get it over with all at once by selling. Since you have said you don't want to be a landlord, that argues toward selling.


There are many other variables at play, whether home prices will recover or not, and also whether rents will appreciate.

I don't see the rents appreciating by more than $500 anytime soon, though, so there would still be some negative cash slow for a while, making it a bad investment. Though some of that negative cash flow would be equity growth.

As for the home price appreciation, if it takes more than 3 years, a good chunk of it would be eaten away in taxes at resale time if I tried to take advantage of it.

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Author: RHinCT Big red star, 1000 posts Ticker Guide SC1 Red Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112920 of 120826
Subject: Re: To become a landlord or not ? Date: 4/3/2011 4:55 PM
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I would think if the price was too high that people wouldn't be visiting it at all.

Generating interest only helps if the people interested can afford to buy. So far, by the sound of things, none of the serious interest has been from the people who can afford it - and that is the only group you can actually sell to. It seems reasonable that those with the funds might also be the most careful shoppers who have taken the time to study the market. So I agree that what you describe points to the price being too high.

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112921 of 120826
Subject: Re: To become a landlord or not ? Date: 4/3/2011 5:41 PM
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I would think if the price was too high that people wouldn't be visiting it at all.

My experience in buying & selling houses has been that when there are lots of visits, but there are no offers, is that the price is too high compared to what else is available on the market. What feedback have you gotten from the agents whose stacks of cards were left? Have they said that the price was too high? Or was there some other reason that their clients didn't make an offer? If your cut-price broker isn't getting feedback for you, then you need to get on the phone and call those agents that left the cards to get their feedback yourself.

I wish I had some idea of the direction home prices will take when rates go up. To me it would seem that it would bring them down further.

Well, you have some experience with increasing rates since you put your home on the market in October. From http://mortgage-x.com/x/ratesweekly.asp it appears that after an initial drop, rates have mostly increased:

Weekending	30 year FRM
10/1/2010 4.32
10/8/2010 4.27
10/15/2010 4.19
10/22/2010 4.21
10/29/2010 4.23
11/5/2010 4.24
11/12/2010 4.17
11/19/2010 4.39
11/26/2010 4.40
12/3/2010 4.46
12/10/2010 4.61
12/17/2010 4.83
12/24/2010 4.81
12/31/2010 4.86
1/7/2011 4.77
1/14/2011 4.71
1/21/2011 4.74
1/28/2011 4.80
2/4/2011 4.81
2/11/2011 5.05
2/18/2011 5.00
2/25/2011 4.95
3/4/2011 4.87
3/11/2011 4.88
3/18/2011 4.76
3/25/2011 4.81
4/1/2011 4.86

Where have prices gone in the last 6 months?

AJ

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112922 of 120826
Subject: Re: To become a landlord or not ? Date: 4/3/2011 5:48 PM
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Does the 2 out of 5 yr exclusion work on capital gains tax year or does the closing of the sale have to be exactly within 5 years of moving out?

It's actual dates.

Phil
Rule Your Retirement Home Fool

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112932 of 120826
Subject: Re: To become a landlord or not ? Date: 4/3/2011 9:47 PM
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Depreciation basis is improvements plus cost of structures: 128K + 80K = 216K.


I think that's $208k.


You are right.

If you sell for a value greated than the depreciated value, there is recaptured depreciation which is taxed as regular income.


Are you sure that it's taxed as regular income ? And not as a long-term capital gain ? This would make the tax situation upon sale after september 2013 a lot worse - paying 28% federal at time of sale, instead of 20%.


Not the full amount, but the amount depreciated is subject to recaptured depreciation.

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112935 of 120826
Subject: Re: To become a landlord or not ? Date: 4/4/2011 12:24 AM
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vkg:

{{{Depreciation basis is improvements plus cost of structures: 128K + 80K = 216K.}}}


<<<I think that's $208k.>>>

"You are right."

Except you cannot depreciate land, so original basis needs to be allocated.

Regards, JAFO

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112945 of 120826
Subject: Re: To become a landlord or not ? Date: 4/4/2011 2:04 PM
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Except you cannot depreciate land, so original basis needs to be allocated.

Regards, JAFO


A previous email had allocated $128 to the structure and the rest of the purchase price to the land.

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Author: madbrain Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112951 of 120826
Subject: Re: To become a landlord or not ? Date: 4/4/2011 2:48 PM
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RHinCT,

Generating interest only helps if the people interested can afford to buy.

Indeed. I don't know where those people are. A lot of people still seem to think that they can get away with little or no downpayment, but that is clearly not the case anymore.

The one that wanted to send a cash offer for $350k is probably an investor.

I think the property makes more sense for somebody who wants to live in it than for an investor.

With 20% down and a 30 year mortgage of 320k at 4.86% for residential according to bankrate today, monthly payment would be $1690/month. HOA $220. Property tax $366 (based on reassessed value). This is a total of $2276/month. About $300 more than the rent I believe I can get for it, but the income tax deductions on property tax and interest should more than make up for that for most buyers. Basically, it is competitive or at least on par with renting, and rents are expected to rise.


It seems reasonable that those with the funds might also be the most careful shoppers who have taken the time to study the market. So I agree that what you describe points to the price being too high.


Unfortunately, about 40% of sales right now are short sales and foreclosures that keeps pushing prices down. And a good chunk of those sales are cash sales from investors buying at depressed prices. I don't know when that inventory will deplete and the market will get better. I just know it's a very bad time to sell.

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Author: madbrain Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112952 of 120826
Subject: Re: To become a landlord or not ? Date: 4/4/2011 2:53 PM
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aj845,


What feedback have you gotten from the agents whose stacks of cards were left? Have they said that the price was too high? Or was there some other reason that their clients didn't make an offer? If your cut-price broker isn't getting feedback for you, then you need to get on the phone and call those agents that left the cards to get their feedback yourself.


Not a lot of feedback. Some people don't like the apartment complex next door. Many people don't like the small living room and dining area. None of which are things that I can do anything about. The last 2 things are the main reasons that I moved. I just sent my agent an email asking to make the calls. My experience is that many agents don't return calls, though.


Where have prices gone in the last 6 months?


They have decreased. But I'm not sure if that is in direct relationship to the rates rise, or other economic factors. The unemployment rate in Silicon Valley is still much higher than the national average.

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Author: madbrain Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112953 of 120826
Subject: Re: To become a landlord or not ? Date: 4/4/2011 2:53 PM
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TMFPMarti,

It's actual dates.

Thanks !

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Author: madbrain Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112955 of 120826
Subject: Re: To become a landlord or not ? Date: 4/4/2011 3:06 PM
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vkg,


Are you sure that it's taxed as regular income ? And not as a long-term capital gain ? This would make the tax situation upon sale after september 2013 a lot worse - paying 28% federal at time of sale, instead of 20%.

Not the full amount, but the amount depreciated is subject to recaptured depreciation.


Only if that depreciation was actually deducted, not a loss carried forward, right ?

Going back to my original case, if I sell after 3 years of renting.

- I sell for 400k in 2014.
- basis is 308k -3* 6836 (depreciation) + 3*3000 (losses carried forward) = $296,490 .

Taxable amount is $103,510 . This would all be taxed as regular income, up to 25% for federal purposes. And California would tax it at the top rate of 9.55% currently. There is no capital gains rate for California, thus no question there. So, I would owe 34.55% of tax on this gain, or $35,762. That's a big chunk of money. The property would have to increase in value by 134.55% of that amount just to make up for the tax consequence of waiting. I have a whole lot of scenarios to put in a spreadsheet and think about now.

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112957 of 120826
Subject: Re: To become a landlord or not ? Date: 4/4/2011 4:39 PM
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Only if that depreciation was actually deducted, not a loss carried forward, right ?

My understanding is that the carry forward loss would be realized when the property is sold and that depreciation has to be taken.

If rented, are you considering repair that would need to be done before the property could be sold?

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Author: madbrain Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 112958 of 120826
Subject: Re: To become a landlord or not ? Date: 4/4/2011 5:16 PM
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vkg,


My understanding is that the carry forward loss would be realized when the property is sold and that depreciation has to be taken.


So, can you explain how that would work in my example ?


If rented, are you considering repair that would need to be done before the property could be sold?


I think I accounted sufficiently as the maintenance amount, which would be to keep the property in the same shape. Hopefully that is, unless I get a really bad tenant.

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Author: madbrain Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113139 of 120826
Subject: Re: To become a landlord or not ? Date: 4/15/2011 10:08 PM
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I ended up taking the home off the market. I think that this is really a bad time to sell and realize the losses. My crystal ball does not tell me if prices will recover sufficiently before the 2.5 years after which I would have to pay capital gains and depreciation recapture on the sale, but I'm hopeful that there will be some good appreciation over a longer period, possibly enough to make it worthwhile and pay for said taxes.

I put the home with a management company. I hope it will be rented within a few weeks. I am doing a no-cost refi at 4.5% on a 7 year ARM as a non-owner-occupied property. The principal and interest payment will be $1266. That is double the $625 interest-only payment on the line of credit currently. But I won't have to worry about interest payments going up. 7 years should be enough time for prices to recover to some acceptable level. Even after that, the lifetime rate cap is 9.5% . The lifetime rate cap is 18% on the current HELOC.

The higher payment means that the property will be cash flow negative for at least the first year. I put in 4.5% vacancy rate for the county, 8% management fee, $200 for maintenance, the current HOA monthly fees and insurance rate, and came up with $261 per month cash flow negative the first year. On the first payment on the new loan, there will be $329 of principal payment. So, it's not really losing money, unless property values drop further, and I'm betting that within the next 7 years, they will be higher than now.

I have been reading more about the tax rules. It seems that only the depreciation that was taken is recaptured and taxed as ordinary income. But if there is other appreciation, it's still taxed as a capital gain. So the penalty for selling after september 2013 is not quite as bad as I previously thought. I will still try to sell before in 2 years if market conditions are good, of course, but if not I will continue renting out.

Apparently, the IRS rules may consider me an "active manager" if I make decisions such as setting the rent. I don't have to be managing every detail of the property, the property management company will do that.

Lastly, thing is that my partner and I are going to finally enter into a California domestic partnership this year. The rules for gay and lesbian couples are very complicated, and we can't file jointly for federal purpose, but we have to add our incomes and deductions, divide by two, and then file separate federal returns. Because my partner earns much less than me, this means that I will be regarded as a much lower earner on my 1040, less than 6 figures, and will be able to fully deduct all the losses from depreciation and other rental losses every year. I will be in a lower tax bracket and my partner in a higher tax bracket. The effective tax rate will be lower. With no rental losses, and about 7000 of depreciation, the deduction should be worth at least 2500, so in the end it would be close to cash flow neutral after taxes. Of course that depreciation would be recaptured eventually upon sale.

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