MattInCali wrote:Thanks again for these most excellent replies. Selling sure does seem to make the most sense, yet there are a few things that are still giving me pause.
1. The area where we are renting now is high-risk for natural disasters (earthquake, fires). I'm sure earthquake and fire insurance will be quite expensive. Isn't it irresponsible to buy a new house in such an area? True, the condo we'd rent out is also in earthquake country, but fire insurance is included in HOA.
2. I have quite a bit (too much) in my emergency savings account (around 120k; more than 2-3 years worth of expenses). What if I attempted to aggressively pay down the 165k that I owe on the condo with the help of emergency savings and the small profit I'll hopefully make from renting it out? Would a paid-off investment property be a lot more appealing, especially if I decide I don't want to buy another house at this time?
Actually paying down a rental condo is the worst thing you can do-- at least it is in tax codes (not US) I am familiar with. AFAIK you can deduct the interest from the rent for tax purposes. It should be fairly easy to structure the whole thing so you pay no tax on the rental income.
The way professional landlords do it is to do this, and then, when the mortgages are finally repaid, they can sell the properties as and when they need to release capital.
Getting trapped on capital gains on a condo that is *not* a long term investment for you is something you really want to avoid.On earthquake and fire insurance that's something YOU are going to have to research.
The iron principle of insurance is 1). self insure as much as you can SUBJECT TO 2). buying as high a 'total wipe out' coverage as you can get (high deductible, high coverage). Ie it's more important to be insured against a $500k loss than a $10k one.
With this additional information I'd probably say sell the condo now and look to buy a new home (reducing your emergency savings down to 6 months, say) within 12 months. You want/ need to put at least 20% down on a new home to give yourself the most flexibility and lowest cost re mortgage options, I believe. (a piece of advice about new homes, if you can, keep $10k-$40k say out for 'surprise' expenditures post purchase-- we effectively doubled our home renovations budget post purchase. ie an 80% mortgage not a 75% one, say. Houses always have something that surprises you on the cost and repair side).
I sense you are caught in 'sunk cost fallacy'. You keep thinking about what you paid for the condo. Also you are worried about what might happen to it in the next 12-24 months.
Losing the capital gains tax exemption should tip you over right there-- if you still have it, you really want to use it. I cannot work out the tax you would pay on that property, but it could easily be 30% of your gains.
But if you are really resolved to buy a new home in that time period, it does not really matter. Whilst the condo could easily be worth +10% more in a year's time, it's hard to see it being +20% (warning: I don't live in USA don't know market, I am really levering off reading Calculated Risk).
My contribution to your decision process is limited, what I want you to do is:
- not to focus on what you might 'lose' by selling now, but what you might gain depending on what property you do buy (and what timing)
- remember the hassles of being a landlord. Don't 'drift' into landlordism, make a conscious decision this is part of the your investment portfolio going forward
- remember US tax law, AFAIK, is generally incentivized towards personal home ownership, not rental property ownership