Would You Sell Or Continue Renting Out My Condo?

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wholeinone04
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Would You Sell Or Continue Renting Out My Condo?

Post by wholeinone04 »

So I bought a condo in April of 2010 for 280k in San Diego (Mission Valley). I put 20% down (56k), got the 10k homebuyer credit but spent 10k on initial repairs. I have no cost refi'd twice and I'm currently 2 years in (about to start year 3) of a 7/1 3.125% ARM. Today, it's probably worth 375k based on what's listed/sold in the past few months.

Last summer I rented it out on a 2 year lease that is set to expire on Aug. 1, 2015. I rented it for $1,900 and my total costs including everything are around $1,630.

Now my question is simple: when the lease is up should I continue renting it out and making money every month or cash out and sell for around 375k (assuming it will sell for this much next summer).

If I continue renting, I'll probably make around $700/month ($300 cash flow, $400 principal) - expenses.

I will owe around 205k next summer so if I sell at that time for 375k (minus 6% of 375k for realtor fees = 352.5) that would leave me with 147.5k in cash (352.5 - 205k). So I'm making around 5.7% on this idle cash (my equity) in a best case scenario, but likely there will be expenses so I'd say the return will be in the 4-5% range.
nordsteve
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by nordsteve »

What assumptions around vacancy rate and maintenance do your profit numbers include? What is the history in your condo association regarding special assessments?

It seems like your profit number assumes no depreciation or nonrecurring expenses.
madbrain
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by madbrain »

wholeinone04 wrote: I will owe around 205k next summer so if I sell at that time for 375k (minus 6% of 375k for realtor fees = 352.5) that would leave me with 147.5k in cash (352.5 - 205k). So I'm making around 5.7% on this idle cash (my equity) in a best case scenario, but likely there will be expenses so I'd say the return will be in the 4-5% range.
Consider that if you continue to hold it too much longer, your equity will no longer be yours - the capital gain exclusion is only good if you have lived in the place for 2 of the last 5 years. And even then, the exclusion will be prorated between between how long you have lived in the place, and how long you rented it out.
So you might still owe long term capital gains on about half your appreciation when you sell. And of course California taxes you fully on that. I found out the hard way.

4-5% is not a good return, and it will look much worse when you adjust for this capital gains tax.
Considering it'a s completely undiversified investment, personally, I would sell in your case.
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wholeinone04
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by wholeinone04 »

madbrain wrote:
wholeinone04 wrote: I will owe around 205k next summer so if I sell at that time for 375k (minus 6% of 375k for realtor fees = 352.5) that would leave me with 147.5k in cash (352.5 - 205k). So I'm making around 5.7% on this idle cash (my equity) in a best case scenario, but likely there will be expenses so I'd say the return will be in the 4-5% range.
Consider that if you continue to hold it too much longer, your equity will no longer be yours - the capital gain exclusion is only good if you have lived in the place for 2 of the last 5 years. And even then, the exclusion will be prorated between between how long you have lived in the place, and how long you rented it out.
So you might still owe long term capital gains on about half your appreciation when you sell. And of course California taxes you fully on that. I found out the hard way.

4-5% is not a good return, and it will look much worse when you adjust for this capital gains tax.
Considering it'a s completely undiversified investment, personally, I would sell in your case.
Hmm so you're saying that if I rent it out for two years and lived in it for 3 before that I would only get a capital gains tax exclusion of (3/5)*250k = 150k? I don't think that's right from what I've been reading. I thought all you had to do was live 2 out of the past 5. If I lived 1 out of the past 5 then it would be 50% pro-rated I believe and I would be able to exclude only 125k (instead of 250k).

And for CA taxes, there is no exclusion so I'd pay my marginal state tax rate on the gains? I always forget about that one too haha.
madbrain
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by madbrain »

wholeinone04 wrote: Hmm so you're saying that if I rent it out for two years and lived in it for 3 before that I would only get a capital gains tax exclusion of (3/5)*250k = 150k? I don't think that's right from what I've been reading. I thought all you had to do was live 2 out of the past 5. If I lived 1 out of the past 5 then it would be 50% pro-rated I believe and I would be able to exclude only 125k (instead of 250k).

And for CA taxes, there is no exclusion so I'd pay my marginal state tax rate on the gains? I always forget about that one too haha.
You need to live in the house 2 out of the past 5 years to get any capital gains exclusion at all.
If you lived in the house for only 1 out of the past 5 years, you won't get any capital gains exclusion.

If you are eligible for a capital gains exclusion, but have ever rented out the house, the exclusion amount will be reduced, depending on the amount of time the house was rented out. The rules for calculating this reduction are complicated. I didn't know about them until I sold my home, and Turbotax told me that owed tax on the appreciation when I filed :(. Then, I read the IRS publication.

As I recall, it went something like this :
I bought a townhome in October 1997 for $228k and used it as my reduce. I moved out in September 2010.
I then tried to sell it, but due to market conditions, gave up, and rented it out from June 2011 until June 2012.
In June 2012, I listed it for sale, and it closed in August 2012 for $450k.
I had about $72k added to the basis for improvement - rounding up the basis to $300k.
This meant appreciation of $150k. If the house had never been rented, that entire $150k gain would have been non-taxable.

But because it had been rented, there was some depreciation recapture, for the year it was rented out, and I don't recall the exact amount of that.
Part of the gain also become taxable based on how long the place had been rented out. This was about 1 year of rental out of about 15 years of ownership.
Again I don't recall the exact amount . I think in the tax year of the sale, I had something like an extra $10k of taxes that I had not anticipated. I would have to go back and check my returns for tax year 2012. This kind of thing is why I use tax software (you might choose an accountant instead).

As far as CA, I believe the capital gain exclusion amount on home gain is the same as the federal amount.
What I meant is that if some part of your home gain is considered taxable (as will be the case, since you rented it out), there is a preferred federal tax rate for long-term capital gains - you won't pay ordinary income tax rate, whereas California taxes all capital gains as ordinary income - California has no preferential tax rate for capital gains.

You could read IRS docs like the following to understand the gory details :
http://www.irs.gov/taxtopics/tc701.html
http://www.irs.gov/publications/p523/ar02.html
http://www.irs.gov/uac/Publication-544, ... -Assets--1

IMO, you should understand these details before deciding to be a long-term landlord.
Most people know about the 2 out of 5 year period requirement for some capital gain exclusion.
But the details with depreciation recapture, and reduction of this exclusion based on commercial use, are complicated.
I decided early on that I didn't want to be a long-term landlord. I was an accidental landlord for 1 year. It was an easy decision to sell. I could have rented it out and held it for another year, and it would have appreciated another $80k. But there was the risk of running beyond the 5 year period, which would have made the entire appreciation taxable, and I didn't want to take that risk and wait too long - if the sale closed beyond August 2013, it would have been too late.
cherijoh
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by cherijoh »

See the link here regarding the sale of a house used as both a primary residence and rental property. They give two examples - one where the taxable gains were prorated and the other where they were not. In both cases any recapture for depreciation (whether or not you claimed it or not on your taxes) is not eligible for the capital gains exclusion.

The difference is that in example 1, the owner lived there for 16 months, rented it for 22 month, and then moved back in for 22 months. The owner had 668 days of non-qualified use out of 2080 days (period she owned the house). In example 2, the owner lived in the house more than 2 of the past 5 years then rented it out before selling it. He never moved back in, so he had no days of non-qualified use. The key seems to be whether the rental occurred before or after the last day of the owner's residency in the house.

Madbrain, it sounds like you followed the example 1 calculations, but based on your description it sounds like you were eligible for the full exclusion (as illustrated in example 2). As would the OP in this case.

Full disclosure: I am not a tax accountant, so read Pub 523 and make your own interpretation or talk to your accountant.
JGoneRiding
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by JGoneRiding »

Do you have a good tenant? Is s/he likely to continue to rent the unit? If the answer to both of those os yes then I would continue to rent it to them. If not then I would most likely sale unless you like being a LL your cash flow is decent.
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wholeinone04
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by wholeinone04 »

cherijoh wrote:See the link here regarding the sale of a house used as both a primary residence and rental property. They give two examples - one where the taxable gains were prorated and the other where they were not. In both cases any recapture for depreciation (whether or not you claimed it or not on your taxes) is not eligible for the capital gains exclusion.

The difference is that in example 1, the owner lived there for 16 months, rented it for 22 month, and then moved back in for 22 months. The owner had 668 days of non-qualified use out of 2080 days (period she owned the house). In example 2, the owner lived in the house more than 2 of the past 5 years then rented it out before selling it. He never moved back in, so he had no days of non-qualified use. The key seems to be whether the rental occurred before or after the last day of the owner's residency in the house.

Madbrain, it sounds like you followed the example 1 calculations, but based on your description it sounds like you were eligible for the full exclusion (as illustrated in example 2). As would the OP in this case.

Full disclosure: I am not a tax accountant, so read Pub 523 and make your own interpretation or talk to your accountant.
Thanks for the link, I honestly had no idea there was any type of restriction at all on converting to a rental property but either way it sounds like I would fall under example 2 so I would be able to take the full exclusion. So that would leave me another year (once the lease expires in august 2015) to decide if I want to continue renting or sell.

Not sure if this complicates things but I was single while I was living there, and just got married three months ago, so when I would sell I would be married so I suppose I would get up to a 500k exclusion right? (if I needed it)

@madbrain Thx for the info, good to know that the capital gains exclusion is on federal and state level. I forgot about having to pay ordinary income (ca state tax) taxes on my gain if I do end up selling some day.

I'm also aware of the depreciation recapture and that is about 7.6k/year (I got a little creative here: http://yourpfpro.com/depreciation-new-best-friend/) so I know that I would have to pay the recapture tax (25%) but that would be pretty minimal compared to 150k in pure un-taxed profit :)
JGoneRiding wrote:Do you have a good tenant? Is s/he likely to continue to rent the unit? If the answer to both of those os yes then I would continue to rent it to them. If not then I would most likely sale unless you like being a LL your cash flow is decent.
Yea I have a really good tenant, he is a landlord himself so he fixes a lot of the little things himself and I pay for them (no labor though :) I am probably 3-5% above market rent and I suspect they will continue to rent the unit, the only complain they've had is it's a little bit noisier than they thought (street noise) but nothing unreasonable. I thought my cash flow was decent too (especially with principal and depreciation + all the other expenses - I'm pretty aggressive with trips/mileage/etc) but if you assume a good case scenario where I'm making $500- $700/mo, that's $6,000 - $8,400 a year divided by my equity after paying realtors (150k) = 4 - 5.7% return...

5.7% isn't too bad but 4% kinda sucks haha. The cash flow is definitely nice but it sucks having to tie up 150k to get it don't you think? If I wasn't about to lose out on the cap gains exclusion I would probably continue renting but I'm basically going to lose a ton of money just by continuing to rent out the unit...

I am leaning towards selling but I also have a little twist to the story that I'll let you guys in on in my next post :) And if it matters, I like being a landlord, I live an hour away, never have visited the property once (officially at least) and take care of everything over the phone, not too much has/should go wrong. Did have to do a new a/c for 3k but that was about it so far.

So I think it really comes down to two options:
1. Sell by Aug. 2018 and assuming a sales price of 375k I would pocket around 150k and there would be no taxes since I could use my capital gains exclusion of 250k (maybe even 500k since I"m now married - btw this exclusion can be used again on a new property right?). The only tax I would owe is 25% x 3 years x $7,600 (assuming I rent out for 3 years) = $5,700

2. Continue renting and never sell bc then I would owe a lot of depreciation recapture and have to pay LTCG federal tax and CA ordinary income state tax on the profit, leaving me with not very much :) Obviously I don't think this is a bad option bc I can cash out refi, 1031 or leave to heirs at a stepped up basis. Sound right?
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Meg77
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by Meg77 »

Why are you considering selling? What would you do with the proceeds from the sale?

If you don't need the cash and you have positive cash flow, then just keep it. Every year your equity increases and hopefully so does your cash flow. Once the mortgage is paid off this will be an even nicer source of alternate income. If you sell you have to pay realtor commissions and title fees along with capital gains taxes, and then you have to find another investment opportunity for those funds that *might* earn you a similar rate of return. Sounds like a big hassle at best.
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by spectec »

madbrain, if I understood your post correctly, you way overpaid your taxes. I estimate your Federal tax to be about $3k plus maybe $1k in state tax. If you paid $10k due to the sale of the residence, then that $50 tax program cost you a ton of money. The program is only as good as the accuracy of the data it is given.

If I'm correct, you have until Apr 2016 to amend the return, unless you're happy leaving $6k on the table.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers
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wholeinone04
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by wholeinone04 »

Meg77 wrote:Why are you considering selling? What would you do with the proceeds from the sale?

If you don't need the cash and you have positive cash flow, then just keep it. Every year your equity increases and hopefully so does your cash flow. Once the mortgage is paid off this will be an even nicer source of alternate income. If you sell you have to pay realtor commissions and title fees along with capital gains taxes, and then you have to find another investment opportunity for those funds that *might* earn you a similar rate of return. Sounds like a big hassle at best.
I'm considering selling bc I put 56k into the property and now I can cash out 150k just 4-5 years later. I have no idea where the RE market is headed (if I had to guess I'd say down) but I would be happy with making 100k during a short amount of time. If it was a stock, I would sell half and put a stop order in :) but unfortunately I can't do that...

I wanted to save this until now so I'll also mention that my wife is in med school (2nd year) and we'll have about 175k of debt at 6.8% when it's all said and done. I'm not sure I want to magically make that debt disappear though bc I don't know if it sends the right message. I want my wife to have to 'live like a resident' as WCI puts it. But that may be a discussion for a whole nother topic.
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by madbrain »

spectec wrote:madbrain, if I understood your post correctly, you way overpaid your taxes. I estimate your Federal tax to be about $3k plus maybe $1k in state tax. If you paid $10k due to the sale of the residence, then that $50 tax program cost you a ton of money. The program is only as good as the accuracy of the data it is given.

If I'm correct, you have until Apr 2016 to amend the return, unless you're happy leaving $6k on the table.
Thanks - no, I would not leave this much on the table, so I'm looking this over now. I know I'm always very careful with the data I enter, and I checked the data I entered several many times.

I was misremembering - it was about $10k extra taxable income attributable to the sale my home that I had not expected, not $10k in extra taxes. The taxable gain for my home on my 2012 return was $12,871, all of which was long-term capital gain. At 15% federal tax on capital gains, and 9.3 state tax, this corresponds to about $3k extra tax indeed.
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by denovo »

Can I ask why you chose an ARM if you were planning on keeping the property as a long-term rental?
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wholeinone04
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by wholeinone04 »

denovo wrote:Can I ask why you chose an ARM if you were planning on keeping the property as a long-term rental?
I wasn't planning on renting out, I wasn't sure at all. I don't know why people are so anti-ARM, I suppose it's because they don't like the risk. But for me, I would rather under-pay and take the risk than over-pay. I think the break even point on a 7/1 arm also came out to 9 or 10 years compared to a 30 year mortgage at the time. So I have 9 or 10 years (assuming worst case scenario the arm resets to the maximum of +4%) where I still would have come out ahead. That seems like a no-brainer to me but I'm weird, I like my money in my pocket :)
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by spectec »

madbrain wrote:
spectec wrote:madbrain, if I understood your post correctly, you way overpaid your taxes. I estimate your Federal tax to be about $3k plus maybe $1k in state tax. If you paid $10k due to the sale of the residence, then that $50 tax program cost you a ton of money. The program is only as good as the accuracy of the data it is given.

If I'm correct, you have until Apr 2016 to amend the return, unless you're happy leaving $6k on the table.
Thanks - no, I would not leave this much on the table, so I'm looking this over now. I know I'm always very careful with the data I enter, and I checked the data I entered several many times.

I was misremembering - it was about $10k extra taxable income attributable to the sale my home that I had not expected, not $10k in extra taxes. The taxable gain for my home on my 2012 return was $12,871, all of which was long-term capital gain. At 15% federal tax on capital gains, and 9.3 state tax, this corresponds to about $3k extra tax indeed.
OK. That makes more sense. Your figures are more in line with what I was expecting the tax liability to be, based on the original basis info, sales price, and time of residence you provided.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by madbrain »

wholeinone04 wrote: I wasn't planning on renting out, I wasn't sure at all. I don't know why people are so anti-ARM, I suppose it's because they don't like the risk. But for me, I would rather under-pay and take the risk than over-pay. I think the break even point on a 7/1 arm also came out to 9 or 10 years compared to a 30 year mortgage at the time. So I have 9 or 10 years (assuming worst case scenario the arm resets to the maximum of +4%) where I still would have come out ahead. That seems like a no-brainer to me but I'm weird, I like my money in my pocket :)
I closed a 3.375% fixed 30 year conforming $417k mortgage with First Internet Bank of Indiana in mid-September 2012 with no cost - ie. all closing costs paid by lender, negative points. The timeframe is very close to your loan, and the rate is really not much higher than your 3.125% rate on a 7/1 ARM. IMO a 0.25% difference in rate is not worth getting an ARM for. Maybe you didn't shop around for your loan enough, or your credit and the loan balance didn't allow for the terms I got.
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by magneto »

The answer hinges on what the rest of your portfolio looks like.
'There is a tide in the affairs of men ...', Brutus (Market Timer)
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wholeinone04
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by wholeinone04 »

magneto wrote:The answer hinges on what the rest of your portfolio looks like.
Good point, we are doing well.

I'm 27, married, wife has 60k of student loan debt and will be 175k -ish by summer of 2017 (she's an MS2). No other outstanding debt other than mortgage on this rental property (207k).

We have 160k in tax advantaged retirement accounts (401k, hsa, roth) and 90k in cash. My income is around 80k W2, 20k 1099 and we rent an apt for 1775/mo. Our rental prop is worth about 375k, so after realtor fees about 150k in equity if we sold.
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by magneto »

If we separate out the debt from the property and apply it to the whole portfolio, then portfolio looks something like :-

Stocks/Bonds 26% (RealYields 2.00% / and 2.21% - infl = -0.35% respectively)
Cash 14% (Real Yield est 2.00% - infl = -0.5%)
Property 60% (Real Yield 4-5%)

Leverage 43% (Real Cost 3%? - infl = 0.5%)

Note : Inflation going forward assumed at 2.5%.

If it were not for the fact that you are renting rather than owning your present home, would suggest portfolio is a bit heavy on property.
But at least the exposure to property prices provides 'insurance' against rising property prices should they rise substantially by the time you want to buy your own home.

There may be other reasons guiding your choices.
'There is a tide in the affairs of men ...', Brutus (Market Timer)
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Meg77
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by Meg77 »

wholeinone04 wrote:
Meg77 wrote:Why are you considering selling? What would you do with the proceeds from the sale?

If you don't need the cash and you have positive cash flow, then just keep it. Every year your equity increases and hopefully so does your cash flow. Once the mortgage is paid off this will be an even nicer source of alternate income. If you sell you have to pay realtor commissions and title fees along with capital gains taxes, and then you have to find another investment opportunity for those funds that *might* earn you a similar rate of return. Sounds like a big hassle at best.
I'm considering selling bc I put 56k into the property and now I can cash out 150k just 4-5 years later. I have no idea where the RE market is headed (if I had to guess I'd say down) but I would be happy with making 100k during a short amount of time. If it was a stock, I would sell half and put a stop order in :) but unfortunately I can't do that...

I wanted to save this until now so I'll also mention that my wife is in med school (2nd year) and we'll have about 175k of debt at 6.8% when it's all said and done. I'm not sure I want to magically make that debt disappear though bc I don't know if it sends the right message. I want my wife to have to 'live like a resident' as WCI puts it. But that may be a discussion for a whole nother topic.
That makes sense. Yes in your case I can understand the desire to sell, and I think it makes sense. I still think it makes sense as a good long term investment, but if you sell you could use the proceeds to max out all tax advantaged space for a year or two - also a good long term investment - plus keep 12 or so months of expenses liquid while you debate whether to use the funds to pay down student loans. I can totally understand your hesitation regarding the loans though. I just got married and have a lot of excess cash from an inheritance, while my husband has $68K left in student loan debt. I wouldn't want to pay off all his debt at least for awhile (plus as you said having that payment kind of forces us to live a little less high on the hog than we otherwise could/would). But if you have all that cash sitting there earning nothing and she has all those loans it'll be hard to justify that position. We refinanced his loan with drbank.com and got his rate down from 7ish to 2.75%. Other companies too focus on those with masters degrees, such as sofi.com. I highly recommend that option. We don't mind investing while we pay down his loans more slowly at that rate.
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chaz
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by chaz »

Sell. Tenants are trouble.
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swaption
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by swaption »

My initial inclination is to sell. I don't think the economics are so compelling. The only consideration that might sway me the other way is that you are currently renting. You are getting married, and while there are no rules, my guess is that you and your wife will be homeowners down the road at some point. Selling basically takes you completely out of the real estate market, so you go from being net long housing to being net short. If the market runs away from you, this can hurt when you dive back in. Not sure if this sways things at all, but worthwhile to think of risks associated with all options going in.
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wholeinone04
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by wholeinone04 »

Meg77 wrote:
That makes sense. Yes in your case I can understand the desire to sell, and I think it makes sense. I still think it makes sense as a good long term investment, but if you sell you could use the proceeds to max out all tax advantaged space for a year or two - also a good long term investment - plus keep 12 or so months of expenses liquid while you debate whether to use the funds to pay down student loans. I can totally understand your hesitation regarding the loans though. I just got married and have a lot of excess cash from an inheritance, while my husband has $68K left in student loan debt. I wouldn't want to pay off all his debt at least for awhile (plus as you said having that payment kind of forces us to live a little less high on the hog than we otherwise could/would). But if you have all that cash sitting there earning nothing and she has all those loans it'll be hard to justify that position. We refinanced his loan with drbank.com and got his rate down from 7ish to 2.75%. Other companies too focus on those with masters degrees, such as sofi.com. I highly recommend that option. We don't mind investing while we pay down his loans more slowly at that rate.
Thanks for the feedback Meg, very insightful. I wasn't sure if people would quite understand my POV but glad you commented (might make a separate thread in the future about that one). I think one of my worries is what to do with 150k in cash if I sold, that is too much to leave in a savings account. I think if I had a primary residence, the cash-out refi may work to help pay off the loans and effectively shift that debt to a lower interest rate. But it might make the most sense to hold on to the property and wait until she graduates and see where we'll be for residency. At that point, we could refi with sofi or drbank (haven't heard of them yet so thx) or even wait and see if we can get PLSF.
swaption wrote:My initial inclination is to sell. I don't think the economics are so compelling. The only consideration that might sway me the other way is that you are currently renting. You are getting married, and while there are no rules, my guess is that you and your wife will be homeowners down the road at some point. Selling basically takes you completely out of the real estate market, so you go from being net long housing to being net short. If the market runs away from you, this can hurt when you dive back in. Not sure if this sways things at all, but worthwhile to think of risks associated with all options going in.
I just got married 4 months ago and we will be homeowners but unless there's a crash/great buying opportunity not for at least 6-8 years while she finishes school/residency. That is another thing to consider since if I did sell, I likely would be out of the market for 6-8 years which is a good/bad thing depending on who you ask haha. I could add REIT's to tax advantaged accounts but not quite the same..
Immafreak
Posts: 72
Joined: Wed Oct 28, 2009 12:33 pm

Re: Would You Sell Or Continue Renting Out My Condo?

Post by Immafreak »

Hi,

I don't mean to hijack this thread but I am also in a very similar situation. If the OP decides to keep the rental for life, would you recommend he stay with the ARM mortgage or refinance into something else? I always thought an ARM was good if you plan on selling soon but if the OP decides to keep it forever then what should he do?

Thanks,

Wes
Topic Author
wholeinone04
Posts: 255
Joined: Thu May 27, 2010 12:45 pm
Location: California

Re: Would You Sell Or Continue Renting Out My Condo?

Post by wholeinone04 »

Immafreak wrote:Hi,

I don't mean to hijack this thread but I am also in a very similar situation. If the OP decides to keep the rental for life, would you recommend he stay with the ARM mortgage or refinance into something else? I always thought an ARM was good if you plan on selling soon but if the OP decides to keep it forever then what should he do?

Thanks,

Wes
No worries, it's all related, and this is something I'll have to figure out too if I keep it forever. I picked 7/1 ARM bc I wasn't sure what I was going to do with this property. I think locking in 30 year rates are so overblown it's beyond belief. How many years have people been saying interest rates have to go up? I'd say about 5-6 and they have actually been going down, not up! Avg homeownership is 7-10 years so most people are making the wrong choice going 30 yr fixed, so you should ignore what 'most' people say.

That being said, what's done is done. So going forward, I'm probably going to wait until the ARM expires and see what rates are like. If they are still low, great, I'll just pay whatever interest rates are or I could refi to a 15 year fixed depending on rates. If rates have gone up, then my options are to sell (probably won't do this due to massive taxes/depreciation owed), pay down principal, do nothing.

What are the terms of yours and pertinent data points?
Immafreak
Posts: 72
Joined: Wed Oct 28, 2009 12:33 pm

Re: Would You Sell Or Continue Renting Out My Condo?

Post by Immafreak »

I bought my condo in 2010 for 340k and real estate agent told me i probably could get 375k from it. I moved out and rented it in August 2013 for 1900 a month. I have 112k left on a 5/1 ARM at 3.75%. Looking at your rate of return, I really feel like I overpaid. It was my first purchased home so I learned some lessons there. I did the math and the rental is bringing in about 4% return. People say real estate is such a good investment but I don't see it in my case...maybe i'm not seeing it right.
madbrain
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Re: Would You Sell Or Continue Renting Out My Condo?

Post by madbrain »

wholeinone04 wrote:If rates have gone up, then my options are to sell (probably won't do this due to massive taxes/depreciation owed), pay down principal, do nothing.
If rates have gone up, the price may well have gone down, so you may not have massive appreciation anymore. But you would still owe taxes on depreciation recapture upon sale.
Topic Author
wholeinone04
Posts: 255
Joined: Thu May 27, 2010 12:45 pm
Location: California

Re: Would You Sell Or Continue Renting Out My Condo?

Post by wholeinone04 »

Immafreak wrote:I bought my condo in 2010 for 340k and real estate agent told me i probably could get 375k from it. I moved out and rented it in August 2013 for 1900 a month. I have 112k left on a 5/1 ARM at 3.75%. Looking at your rate of return, I really feel like I overpaid. It was my first purchased home so I learned some lessons there. I did the math and the rental is bringing in about 4% return. People say real estate is such a good investment but I don't see it in my case...maybe i'm not seeing it right.
Hmm not sure your numbers add up. Only 10% appreciation over the past four years is too low, that should be higher. Are you in the final year of your ARM? If you only owe 112k, you must have paid off principal pretty aggressively. And 4% actually seems high for your return.

Subtract 6% from 375k = 353k and that leaves you with 241k of equity. So you have to be making $800/mo in order to get a 4% rate of return (after expenses, vacancy etc which I usually assume at 20-30% of monthly rent for a condo).

Either way though, if you are at 4% that's probably borderline of whether you should sell/continue renting. It's tough to turn a primary residence into an investment property in HCOL areas. All the stars kind of aligned with my purchase which is why I'm at a little higher return (~6%) but at the same time you may not want to sell your place without buying a new one to avoid being short the housing market.

People 'saying' RE is a great investment is somewhat of a myth. There was a huge article that basically disproved this and showed how poor the returns are when accounting for inflation over the past 100 years. I can't seem to find the article now, but maybe someone else can link to it. But with that being said, there is no denying that the RE market is highly inefficient compared to stocks. A good RE investor can be rewarded for finding properties and investing in them, not the same with stock picking.

The numbers don't seem great on your prop, I'd try and sell and buy an investment property somewhere else. RE is a great investment but it does require work. I just look at the 5-10 richest people I know and they are all involved in some capacity with RE, enough evidence for me.
madbrain wrote:
wholeinone04 wrote:If rates have gone up, then my options are to sell (probably won't do this due to massive taxes/depreciation owed), pay down principal, do nothing.
If rates have gone up, the price may well have gone down, so you may not have massive appreciation anymore. But you would still owe taxes on depreciation recapture upon sale.
Right that's why I likely won't sell if rates have gone up, I'll probably just pay down principal or do nothing if the property is still making money.
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