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Real Estate! To Sell or Rent? WWYD?

October 31st, 2011 at 04:37 am

I am back from another long hiatus and I'd like some perspective from the seasoned savers.

A fun fact to keep in mind: I live in Georgia.

In 2007 I inherited a $1300 sq ft condo in Foster City, California. It was my parents place when they first got married and the mortgage was paid off long ago. (I found paperwork showing they bought it for $40k!)

Since the early 1980's, the place has been rented out. I inherited the place and left it alone because the tenant had occupied it for almost 10 yrs and had no plans to leave.

She was paying $1750 a month, and I pay almost $500 month in HOA fees. The taxes are $1000 per year.

Last year the tenant was laid off and the rent was reduced to $1250 month for 6 months while a job was found.

The 6 months turned into 8 months, and now it will be 12 months and we have agreed that the tenant needs to find somewhere else to live in January because they are still unemployed and cannot afford the actual rental charge of $1750.

So in January I have a big decision. Sell or Rent?

During the day I am inclined to rent out the property and tell myself that "real estate is at the bottom and this is the time to stay in the game if I want to get the full value of the property someday."

To rent it out, I figure I'll need some renovations, a trustworthy property manager, and some luck.

My currently unemployed husband (another blog for that story) and his contractor friend are planning to fly out to CA in January, and complete the renovations. They would put in builder grade materials and update the kitchen cabinets, countertops, bathroom tiles, vanity, maybe shower, and carpeting. And paint. We are hoping this can be done for $10,000. in 2 weeks. (Sounds like an HGTV show...)

Then we would use a property manager to rent it out for...$1900 a month? maybe $2000? But I'm sure 10% would go to the property manager, and then $500 in HOA fees, so I would clear about $1300 a month.

My fear with this scenario is that the property manager would be useless or unreliable and essentially steal our money. (I have heard scary stories!)I dont have any contacts out there so I would be hiring based on websites, phone conversations and gut.

And I fear that the place would be a merry go round of tenants who only stay a year and move, stay a year and move. So the $1300 a month would be spotty.

The pro of the idea is that I get to keep a completely paid for asset in one of the highest real estate areas in the country. (Though I'm also afraid an earthquake will take it down. It's insured...but you know how insurance companies are.)

Or I can sell it. This is the plan I formulate late at night (like tonight) when I am unable to sleep because of pending bills.

I am guessing I could net $420,000 for it as it is now. I could pay off some debts I have accrued and still have $366,000 to bank.

But where to bank it? In a bank for 1% interest? I have less faith in the stock market than the real estate market so it's not going there.

If I bank it for 1% interest I am getting about $3,600 a year vs the $15,600 a year that the rent would potentialy bring in.

I could pay off my primary house mortgage with $150,000 of the $366,00 and that would eliminate $1380 a month bill from my life.

Then I would have $216,000 to bank at 1% interest but the only debt I would have is a rental property that pays double its mortgage every month.

So it seems like $150,000 of the $420,000 would eliminate a $1380 bill that I was planned to have for 28 years. So that will actually put $463,680 in my pocket. Plus I would have $216,000 left over from the sale of the property.
...right? Am I thinking this out correctly?

So does it seem like the right choice is to sell it while it is at the bottom of the market and use the money to pay off (affordable) debts? Or to rent it for a nice monthly cash profit and wait for the real estate market to come back?

(I said "affordable debts" because we can make our monthly payments on our current debts.)

I want to do the right thing for long term sucess. Not short term gains. It's just hard for me to see the forest from the trees right now. I need perspective.

10 Responses to “Real Estate! To Sell or Rent? WWYD?”

  1. baselle Says:

    WWID? I would choose the situation that would enable me to sleep at night. For the next couple of nights - I'd let my mind play all permutations on the sell side. What if I sell, what if I get x$, what if the housing market suddenly shoots up (unlikely, but that's my opinion), where would I put the proceeds, etc? Do you fall asleep?
    Next night try the what-ifs on the rent side. Do you fall asleep?

    Personally, if I lived in GA, I would want all my holdings close to me. CA is too far away for me to keep an eye on things.

  2. mamasita Says:

    If you want my opinion: I would continue to rent the property out. There are good property managers out there, just do lots of homework. This way you will have cash coming in each month, and you will still have the equity in your house. I would be a wreck if I had to sell a house in CA right now, and would avoid it if all possible.

  3. MonkeyMama Says:

    I think this kind of question is hard to answer without the big picture.

    I seem to recall that you inherited a lot of real estate. Don't you have several properties? Or is this the only one?

    Did you consider the income taxes from selling the property? It doesn't change my answer, but just wanted to make sure you didn't forget the taxes.

    Personally, I would sell the property. Rentals are risky, and you are right, you will have a merry go round of renters.

    I remember you also mentioned before that your husband was so upset that you didn't sell *high* and now real estate is *low,* and I strongly disagreed back then. You are not selling low AT ALL. Real estate in the Bay Area is still significantly higher than it was even a decade ago. I am sure you could have sold it for more at the very peak, but please stop saying you are selling LOW. That is ridiculous. Real estate is sky high! I'd personally take the money and RUN. It really has nowhere to go but down. The only reason home values rose any higher at the peak was due to very questionable loans. The truth is without questionable loans, the market is pretty much at its peak. People simply can't afford more.

    This is also the problem with owning property very far away. You are convinced you are selling at the bottom, and will get encouragement *not to sell low.* I live here and wonder what you all are talking about! Wink

  4. gamecock43 Says:

    Thanks Monkey. I was hoping you would weigh in because you live in the area-ish and have a good feel for the market.

    The property appraised at 600k when I inherited it, so any sale on the property that is under 600k will be no capital gains tax.

    Income tax...I'm not sure. Does that mean that if it sold for $420, the whole $420 would be an income in that year and I would be placed in a high tax bracket and have to pay a huge amount of taxes on it?

    I dont have a lot of properties..but a few. I have the CA condo, the Duplex in GA and my primary SFH in GA.

  5. creditcardfree Says:

    I think I'd sell, simply because of the distance factor. You could alway reinvest the money into local real estate in your area. Some CD's are at higher rates than 1%. You'll need to put the money into different banks to keep your money under the FDIC limits. I wouldn't rule out putting a portion into the stock market. Over thirty years time, your money WILL grow.

  6. Analise Says:

    I agree with Monkey Mama.

    I would sell for a variety of reasons. 1) You will not have capital gains and you should not owe income taxes on the net proceeds. 2) The Bay Area real estate market is not going to make significant increases in the next few years, so the odds of having the condo back to being worth 600k are slim. Also, your condo HOA fees will continue to rise and you would have to deal with tenant issues.

    By selling and using some of the proceeds to pay off your SFH loan you will increase your monthly disposable income about the same amount as if you rented the CA condo. PLUS, you will have 216k to invest or bank closer to home.

    In August we sold our CA condo in a city not far from yours, and I wish we'd done it sooner. Ours was not a rental but a seldom-used second home and although we sold it for less than we paid in 2003, our cash position has greatly increased and we have one less headache to deal with.

    Rentals can be a pain even if they are not far away. Our rentals are in the same city where we live and we have to deal with issues on a regular basis, despite having most of them with a property manager. Sometimes the property manager is the problem.

  7. MonkeyMama Says:

    Okay - so there are no income taxes to consider. From the info you shared. (Capital gains tax is the type of income tax with a rental property).

    I also like the idea of paying off your mortgage with the proceeds.

    Don't get too caught up in short term interest rates, either. Either you want to invest in something more aggressive, or you want to keep it safe. If you want to keep it safe, don't let the interest rates sway you. They will go up again at some point. Start thinking more long-term.

    But, paying off your mortgage is probably your best bet, as far as securing a decent rate of return on that money. That said, I don't have a real good big picture feel and might advise otherwise if I knew more about your financial situation.

    I thought you had more real estate than that. Heck, sell the property and buy a home in Sacramento. You would get a MUCH better deal. ($200k home, rents are at about $1700/month, no HOA, property taxes just 1% of purchase price). Basically, if you want to invest in real estate, there are far better values out there. The return you arr getting on a property you can cash out for $420k, is not that great. 4%? With a whole lot of risk?? My Sacramento example has many of the same risks, but an easy 8% rate of return, at current.

  8. gamecock43 Says:

    Thanks Monkey. Your ROI argument was the same one I was given years ago when people were advising me to sell the CA property. The rent return was less than interest rates at the time but I was not hearing it. It takes everyone their own individual amount of time to get a feel for what they are comfortable with and letting go of things that have sentimental value. But I am at that point now where I dont have attachments that cloud my head.

    I just double checked with a financial advisor, no tax reprecussions from selling the property.

    BB and I are going to go out there next month and see the place to be sure its the right thing to do, and meet with realtors.

    What commission % are they charging out there these days? Would 4% be reasonable to expect to pay?

  9. Ima saver Says:

    Gamecock, I think you should sell the property. I am pretty sure that the realtors commission is at 4%. If you are willing to tie up some of the money for 5 years, Melrose Credit Union has C.D.'s paying over 2% I have one at 2.9% and one at 2.8%. Anyone can join. I have been real pleased with them. Glad to hear from you.

  10. Jerry Says:

    I agree that the distance factor probably has to lead into the equation, but baselle's got a point that the determining factor could probably be whatever allows you a sense of peace about it! If you have some insurance of reliable, long-term renters, then that is one thing... but a carousel of short-timers could be more trouble that it is worth. Good luck with whatever you choose!
    Jerry

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