Hello all! This is my first post here. Looking forward to getting involved with the community. I've listened to many podcasts, read several blog posts, and want to eventually start working on real estate investment deals on the side (perhaps starting with BRRRR). But first, I would love to get YOUR opinion on how I should proceed with my specific situation I got myself into *before* starting my self-education on real-estate investing,.
I'm currently living in the Seattle area, where I purchased my first SFH a year ago as my primary residence. It was an extremely competitive market back then and I got into a bidding war and ended up overpaying pretty significantly for my home by buying at the top of the market in a desirable neighborhood for a turnkey house.
A year later, I've accepted employment in the Los Angeles area and I'm relocating. So now I have to decide if I want to rent out my home, deal with a property management company cross-country, be cash flow negative for a while, or sell the home at a loss and reinvest the money elsewhere.
3b/2.5ba 1915sqft SFH in zip 98029
Purchase price: $865,000
40% down -> 499k 30 year fixed mortgage @ 4.5%
Remaining mortgage: $489k. PITI: $3172 / month.
I bought at the very top, home has depreciated about 50k over the past year :-(. I put 25k into updates before moving in (new floors, carpets).
Clearly this was a bad investment from the get-go and I have experienced tremendous buyers remorse about this. It has been a nice place to live however, but now that I'm moving:
If I sell, I probably couldn't get more than $820k for it, putting my loss at 100k or more. But I get the rest of my down payment back out and could invest in something smart, or a better deal on a primary residence elsewhere.
If i rent, I would be hard pressed to get more than 3k / month. Even if I could rent it at $3172 (break even), I'd be losing ~$317 / mo to the property management company, + any expenses that come up like repairs or vacancy (we're in an in-demand neighborhood). But, I'd get the tax break, and maybe if I rent long enough it will start to appreciate again?
Would you sell or rent the home and why?
How much of your mortgage payment is principal?
Do you need the equity in the current home to buy a home in LA?
How much does negative cash flow effect your personal situation? Can you swing losing $500 or more a month? Or will it make your financial situation very difficult?
@Peter Wilkins - I'm from the Seattle area, sold a few homes in that Issaquah/Sammamish area. (Currently in Kitsap County). Happy to give you a more accurate assessment of the current value. PM me with your email address if you like.
Principal + interest = 2528.36
If I was to purchase another home, it would be at least another year. I would not strictly need all the equity from the current home to do this, although it would help. I was considering a cash-out refinance to get some of the equity back out as 40% is a lot.
I can swing losing $500 a month for the next year, but it's not a tenable long-term situation. Given that in order to be break-even we'd need rents to keep going up, it seems like this is a bad investment as a rental property.
@Megan Shay Thank you for the offer. I've had multiple comps ran, and I've been keeping a very close eye on the market here. I'm confident that the home is worth around ~$820k-$850k right now.
What’s the principal part of that $2500?
And next year when you buy your next house, do you need the equity from this one?
@Thomas Cummings Approximately $691 principal. I wouldn't strictly need that money back out to buy another place, although it would help. I was considering a cash-out refi to pull 20% out.
So that $700 principal paydown needs to be factored in. If cash flow isn’t that important, the $700 washes it out and you are actually ahead by $200.
If you don’t need the equity to buy the next home, and you are lukewarm or better on the market, then it’s worth considering keeping it.
You have a good loan too.
I’ve done this successfully more than once; but long term you need to take the equity out to buy future homes.
@Peter Wilkins Another option would be to use a property manager just for the placement of the renter and lease renewal. If it's a relatively easy property to manage, you may not need the property manager during the rest of the year. A common practice to keep the nickel-and-diming maintenance requests is to have the renter responsible for any repairs under $50. Hope that's another consideration to make holding on to it and not taking the loss a possibility!
@Peter Wilkins So, right now you have a house worth $820,000. What you paid for it and what you put into it is irrelevant. Let's pretend that you didn't buy the house...and you see it for sale for $820,000. Would you buy this house as a rental property right now in your current situation?
If the answer is no then you should sell the house and move on.
@Kristel Knittel thank you, this is good advice if I decide to rent.
@Scott Jensen Thank you Scott, this is the kind of analytical tool I'm looking for to help me decide. The answer is no: I would not purchase this house as a rental investment OR as a primary residence if I had a do-over. The best case scenario for rental income is 3.7% / month of the purchase price. I think getting as much of my money back out as i can and then deploying it into either a smart rental investment where the numbers make sense, or another primary residence if/when the time comes that I actually want to be in is the way to go here.