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Hi,
Cross-Posted to Buying/Selling Home

Let me first give you the facts. Me and my wife are currently 26 yrs old and own a home in Southern California, which we're renting out with a loss of $1,100 a month. If we were to sell it, we can get $100,000, which is the net of tax and commissions. We're currently renting an aparment for $1,200 a month so total housing related expense is $2,300 a month, which is 35% of our income. (Let me remind you that, in Southern California, it is extremely difficult to find a decent condo/house for $2,300 a month unless you get crazy monthly adjustable interest only loans.) We plan to move to the house in about 10 years but it's uncertain because you never know what's going to happen in the future. We can pay off the 2nd mortgage on this house in about 4 years, which means that the loss will be $450 assuming no rent increase. When we move to the house later in about 10 years, our housing expense will be about $2,300 and, by then, rent will be more than that for sure. If we were to sell this home, we'll probably hold on to the cash and buy a four plex later when rent and/or price seems more reasonable, if that happens at all. Well, this is the reality in Southern California.

So, what would you do in this situation? Sell it or keep it?

Thanks
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I would sell it.

Negative cash flow. Low appreciation expectation for the next 5 years. CA is a lousy place to be a landlord. Money can be better put to work elsewhere (even a CD would have a higher expected return with a lot less risk and hassle).

Now what you haven't mentioned is your tax situation. How much, if any, in capital gains you would have to pay? That can make a difference.
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What exactly was your purpose in buying this house?

Speculation: it's a house you really like, just too big for your present needs, but you project that in the future it would meet your needs

If so, are you betting that your needs will change but what you desire in a house won't?

I take it the $100,000 is after you pay off the mortgage, right? If you sold, what would you do with the cash while you're holding it?

Keep in mind though that when you have lots of cash you are exposed to erosion of its value due to inflation. And I-bonds are a horrible deal right now, so TIPS are your only choice for a low-risk inflation hedge. (There's a sale coming up.)
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Let me tell you a short story.

A few years ago, the company I work for in CA, hired a guy from the Washington, DC area.

Between the time he accepted the job and the time he actually moved out here, housing prices had gone up substantially, so he and his wife decided to "wait for prices to come down".

Two years later, prices hadn't gone down, his wife was tired of living in a apartment, and he asked to be taken back at his old job in DC with his tail between his legs.

The job took him back, but when he got there, they discovered that they didn't really have enough for a down payment in a good area. So, essentially what they got for their efforts was two moves, two years of apartment living, and a significantly downsized house in both square footage and neighborhood.

If you can afford to keep the house, keep it.
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Now what you haven't mentioned is your tax situation. How much, if any, in capital gains you would have to pay? That can make a difference.

That $100,000 is net of tax and commission.

What exactly was your purpose in buying this house?

Purpose was to buy a house now and live in it later. We love the neighborhood and the we looked at several houses before we found the one we love. We would live there but it's too big for us right now and the commute will kill us so we're eventually going to find a job out there.

We thought that we can find a condo around our current apt and go live there but the payment will be $3,000 a month. If we buy this future house, our loss will be $1,100 and apt $1,200 total $2,300 so better to buy this place further away and move our jobs over there eventually.
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And I-bonds are a horrible deal right now,

Why?
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Hmmm, in 10 years you plan on moving? How do you know the area won't change, your job won't change, or your tastes won't change? You're "locking" yourself in way too early IMHO. Here are some things for you to consider:

If you have the discipline and were to invest the profit of $100k and the $1100/mo you were spending to keep the house, assuming you only get 4% compounded per year (say an ING type account), you'd have over $300,000 for a down payment in 10 years.

If you keep the house you'll be paying approximately $85,000. I assume this is taking into account taxes you pay on the property? But that doesn't take into account maintenance costs which have to be factored in along the way (some percentage of your rental receipts 2-5% maybe?), as well as you may be wanting an overhaul of the house after having rented it for 10 years. New kitchen, new baths possibly. Renters don't usually care for the property as well as owners do. Also, vacancy may be an issue which would increase your costs of holding.

Don't see there being much in the way of appreciation for the next 10 years either, so I don't think you'll have to worry about prices getting away from you.

I'd probably take the money and run. There will likely be other houses that are just as nice when you are ready for it.

Good luck with the decision.
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And I-bonds are a horrible deal right now,

Why?

The fixed rate is extremely low. Even if you are in a high-tax state the I-bond will probably lose to a ladder of bank CDs. If you really need inflation protection, buy TIPS -- yes you have a little bit of interest rate risk to your principal, and yes there are some taxes to pay, but TIPS (fixed rate ~2%) look like such a better deal than I-bonds (fixed rate 1%).
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yes you have a little bit of interest rate risk to your principal, and yes there are some taxes to pay, but TIPS (fixed rate ~2%) look like such a better deal than I-bonds (fixed rate 1%). C

Can you give me some idea of what level of interest rate risk you are discussing? I really know nothing about TIPS.

Between this risk and taxes, which I don't expect to owe even when I cash in my I-bonds given that they'll be put towards our boys' college education, I don't see how a 1% increase in fixed rate is worth it.

IP,
grateful to have a significant cache of I-bonds with a 3.5%+ fixed component
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The interest rate risk with TIPS is:

- if you sell before maturity, you have no idea how much you'll get, based on current demand for TIPS.
- the inflation adjustment is added to principal, but the coupon payments are not and you don't know what rate you'll be able to reinvest them.
- If there is deflation you will lose nominal principal (perhaps even more principal than the coupon payment is)

I didn't know that you are likely to avoid all taxes when you cash them in, the I-bonds are clearly a better choice in your situation.

And of course there's no reason to cash in your old I-bonds unless you need the cash.
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I would refinace with an interest only loan for 5 years, raise the rent as best you can, pay down other debts besides the mortgage that are sucking away your cash (car payment, credit card, etc.). Then in 5 years refinance for a fixed rate (yes I KNOW!!! rate will be going up.)

By refi now you will decrease your loss per month, freeing up capital to pay off other debts.

Remember, the $100k may be profit, but, if you haveing lived in the property long enough, or at all even, your gains might get taxed very heavily. Imagine selling the home, profit of $100k and having to par $20k in taxes?

Selling investment property should be structured to best benefit you, not the tax man. Maybe you should move into?

cat
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