Advice Appreciated! I own and live in a townhome right in a booming part of Pleasant Grove. I purchased it about 3.5 years ago for a good price with an excellent rate. I owe about $145,000 on it and my mortgage plus (expensive) HOA is $1030 per month. Looking to move to a bigger place with a yard for the kids. No debt outside of this house, and I have excellent credit and a decent job. Though we live on one income and don't have money for an enormous down payment
What would you do in my situation?
Option 1: Sell it while the market is high. Some comps and neighbors have sold for $220,000 give or take. Take this money and throw a sizable down payment on a new place. I know I would be buying high -but luckily I have place to sell. Could also save some cash, build up savings, etc.
Option 2: Rent out my current place . Rents are close to $1300-$1400 in our neighborhood. I may need to spend a few thousand dollars on some appliances going out soon, but other than that it would make a nice rental.
I would LOVE to own a rental and this would be a solid one. But then I would have to find a home to buy, find a renter, scrape together a down payment on my new place, etc. Then if the market goes down, I might not be in a great spot. And my new place would be pretty pricey. If I had more cash I would just keep my townhome.
Option 3: I could sell it and take the profit. I could then find a place to rent for 1-3 years until the market calms down. Then I could jump into a purchase.
I know no one has a crystal ball - but I could genuinely use some insight here. If i chose to rent, what strategies would you use to do that? Meaning, find a renter first, contingency contacts, etc. If I sell - will I regret not holding on to this place??
@Austen Sweeten If i was starting over I would house hack. Buy a small multi 2-4 units with minimal dp. Move every year for 10 years and have 20-40 cash flowing properties. Your town house is not cash flowing with capex,repairs and vacancy added. Would you buy this property for $220k and get $1400 rent. I would sell and get your cash. You will net around $50k. If you find a small multi for $200k it will cost $10 k for down payment plus give you a reserve.
@Tim Herman has the right idea, get something that will make more sense for cash flow. I watch KSL, zillow and Realtor.com postings when I'm bored and there are duplexes posted for the area that will give you both a rental income and a yard for the kids.
I think it really depends on what your goals are with Real Estate. Do you want to be in the SF game or do you want to be in small MF? Or in larger MF? Are you hoping for cash flow or hoping to hold it longer for appreciation? We did a similar thing a few years ago where we held on to a townhouse to rent in eagle mountain and now house hack our current residence in Lehi that is on .5 acres. The townhouse appreciated well and we had solid equity in it when we sold last year. We decided to sell because while it cash flowed any repairs would wipe out several months or even a years worth of cash flow. We always had good residents, but we still didnt enjoy the property management side of the game. I realized to reach my goals of replacing my income with cash flowing real estate I needed to scale up and go bigger. I think holding on to real estate in Utah is a brilliant strategy and if it gets you on the path toward your goal then hang on to it. If selling and buying a duplex or fourplex that you could house hack gets you closer than go that route. I think getting clear on the goal is going to be the biggest thing in helping you make the decision though. Good luck with whatever you chose.
@Austen Sweeten Option 2 is the only one that gets you into the investment game, unless you would buy a multi-family property with option 1 and move into it. I have seen a lot of people that want to invest in real estate but seem to always kick the can down the road thinking they will be in a better spot later. You have no other debt and seem to be in a good place to get started, so whatever you do, take this opportunity to get started. House hacking is a great idea. You could also rent it out, then buy a home with a basement apartment and rent that out to continue saving money. Just find a good strategy to end up with a good rental in the end.
If the area where you have the townhouse is nice I would try to make it work for the kids. Many people like a large yard, but time passes really fast when you have children and they don't use the yards very much.
Larger yards and single-family homes required a lot of time and tens of thousands of dollars to maintain. I will bet that over a period of 20 years, even with HOA fees, you can save tens of thousands of dollars by staying in the townhome. Eventually, the kids grow up and think about what the money you save can do for them in the future.
I was just watching a youtube video a few days ago where Warren Buffet was saying how he still lives in the $10,000 house he purchased many years ago. He said exactly what my father told me 50 years ago when he said, "the more you own the more you need to pay for maintenance". My wife and I love the way we live. We live in a commercial building with two children, concrete floors and zero furniture with the exception of mattresses sets. My children live in offices with only a desk. It is not that we are crazy. We love living a frugal and not-materialistic life. We use the money we save to invest in real estate and to pay all the expenses for our children to go to college so that don't have to work and can focus on their studies.
I sort of liked Grant Cardone's book 'Be Average Or Be Obsessed'. He gets a little crazy in the book, but the premise is good. There are probably much better books like 'The millionaire Next Door'.
If you are going to sell your townhome and up your investing then since you already own the townhome you need to consider how well it is appreciating. I would never want to give someone advice about something you already own without knowing what the market is doing. In California properties can increase as much as $10,000 per month. If you did not already own the property then you evaluate it a different way.
The business model for many real estate moguls is to 'control' (own) as many properties as possible. At least, when the market is on the upswing. So, I guess, that means you keep the condo and buy another home, or if you want to dabble in real estate you see if you can get a better return by dumping the condo. For that, you need a good spreadsheet, or send me your numbers and I will put them in my number cruncher.
As for problems renting your townhome, if the market for rental is okay I would not worry much about finding a tenant. You need to read a hundred hours about all the real estate rental laws in your area and read about how to deal with tenants. You can enjoy being a landlord if you educate yourself, first. If not, you will hate every tenant with a passion like a high percent of the landlords I deal with every day.
We had this decision to make a year ago. Our 2 St George properties had gone up jn value and made selling them exciting.
1031 exchange them into more properties.
We did just this and wow. Best decision we have made in RE investing so far.
We made 100k on each and bought a few LTR in Huntsville AL.
And a few Short term rentals in E TN.
Net income has more then been 10 times
@Austen Sweeten Sounds like you're in a pretty good spot. Let me preface this by saying that you will find a lot of advice on these forums. Not all of it is good for you. I'm not referencing any specific advice up to this point on this thread mind you. When I say it isn't good for you I mean, YOU, specifically. @Account Closed alluded to this when he said he was hesitant to give advice because he doesn't know your market. Because of nuances like this, and the many others unique to real estate, I'd encourage you to take any advice you get with a healthy dose of critical thinking as no one knows your personal situation like you do. And no one is responsible for knowing it either, except you. That being said, here are my thoughts. HaHa. :)
I like what @Amy Kendall said. Option 1 doesn't get you into real estate investing unless the property you're buying is income producing. I guess you could argue that buying a primary residence could be considered a good first step to buying an investment property but seeing as you already own a primary residence I don't think this option helps you accomplish your goal. Plus, the longer you put if off I believe the less likely it is to happen.
In my opinion, Option 3 is not a good idea for a few reasons:
- 1. If you sell now but don't buy another property (investment or otherwise) you will be taxed on the capital gains. In other words, the appreciation your home has accrued. However, if you put that money into a similar investment within a certain amount of time you can avoid the tax hit until you truly cash out and just keep the money. This is called a 1031 exchange and is what @Rhonda Blue was referring to. I’m still learning about these, so someone can correct me if I’ve over simplified that or if I'm just wrong.
- 2. This relates to my previous point but if you’re just going to sit on the money for 1-3 years you may as well stay in your current place and let it continue to appreciate and not pay the capital gains tax because…
- 3. The Salt Lake market isn’t going to calm down anytime soon. At least not in the next 1-3 years. You’re in Utah Valley so you probably know better than most that it’s getting a lot more crowded down there. All the big players in Silicon Slopes have been saying that there is a shortage of skilled tech workers in Utah which is why they are heavily recruiting people from out of state. Not to mention that a lot of the major markets surrounding Utah are way more expensive so in comparison, Utah has some screaming deals for both investors and the working class.
Which leaves Option 2-renting the townhome. It sounds like you may have a decent amount of equity in your home. I would reach out to multiple lenders (think credit unions, local banks first before you go to the big banks) and ask about home equity loans and home equity lines of credit. You may be able to borrow the against the equity in your current home to help purchase your next property. However, I would only recommend that if the numbers make sense. For example, I wouldn’t do that if you are just going to buy a primary residence that doesn’t make you money. Otherwise, you’ll have a new mortgage and you’ll have to pay back the home equity loan as well and it doesn't sound like your anticipated townhome rent amount can do that for you. However, if you buy a rental that you can house hack, and the income from your new rental and the townhome is enough to cover all your expenses and allows you to pay back the home equity loan, then I would explore that route.
Anyway, that’s my humble opinion on your situation. I hope it helps but to echo what I said above, no one knows your situation like you do so do your due diligence and take everything you hear with a grain of salt. ;)
Best of Luck.
Not sure where that weird number formatting came from in my post so just go ahead and disregard that.
@austin sweetn and @David Fairall Option 3 should be exempt from capital gains because of Section 121 (Primary residence for at least 2 of the last 5 years) Of course consult your accountant and all the normal disclaimers. Another option is a hybrid of #1, 2 and 3.
You could rent your place out AND move in to a rental yourself. That gives you a chance to rent your place out (while preserving your Section 121 exemption ... insert disclaimers) for a year and then decide if you want to do #1, #2 or #3.
However, I don't like the numbers and agree you probably wouldn't buy this at market rate for cash flow. However, your CAPEX will be lower than SFH because your HOA is responsible for a lot. You also get increased depreciation benefit because condo's are nearly all depreciable. Still, if you can find a house hack small MF that works for you, that is DEFINITELY the way to go. I don't know your area so that is a big IF you need to determine.
Another option would be Short Term Rental on your place in the hybrid. That might be much better cash flow if legal in your community and HOA ...
The best news - you are thinking about this and asking all the right questions.
Thanks for the clarification on the 1031 exchange, @Dave DeMarinis .
There is a lot solid advice on this thread, and I am getting in on the game a little late here I know. In my personal goals, I want the units I have to cash flow at least $150/month after everything including repairs, capex, vacancies, and property management. As long as they do that for me then I feel like it is worth keeping. There is a great article by @G. Brian Davis about whether you should keep or get rid of your first purchase. Here is the link. 2 months later you have probably already decided what you will do, but for those stumbling on this thread I hope you glean plenty of knowledge!