Advice sought on renting out old house versus selling and taking the money

[spdrun]

IMO, and this is not advice, I don’t think you can go wrong holding onto investment property in San Diego. That said, given the volatility of the current economic climate, this would hold as long as you know you can afford to do so, even if there is another downturn in the real estate market, and, if you know you will not need the cash for any other of life’s many surprises.

If this holds true for the house, it will also hold true for something returning closer to 6%. So selling and buying other things in CA may not be a bad idea.

[an]

[quote=spdrun]

IMO, and this is not advice, I don’t think you can go wrong holding onto investment property in San Diego. That said, given the volatility of the current economic climate, this would hold as long as you know you can afford to do so, even if there is another downturn in the real estate market, and, if you know you will not need the cash for any other of life’s many surprises.

If this holds true for the house, it will also hold true for something returning closer to 6%. So selling and buying other things in CA may not be a bad idea.[/quote]If you sell, you have to pay RE fees. That 5-6% on a $700k house is $35-42k. So, if you sell one $700k house that’s making you 3.5% and buy 2 places ($350k each) that make you 6% (normally) wouldn’t be 6% if you count in the $35-42k RE fee. Now, if you refi out and buy more properties, that might make more sense.

[spdrun]

^^^

The OP doesn’t NEED to sell. Why not just list it in the newspaper, on Craigslist, and put a “FSBO, Brokers Not Protected (619)555-3453” sign outside?

If he manages to sell, he’ll still owe the usual transaction costs, but not a 5-6% broker fee. Remember that the logistics of the closing are done by an escrow/title firm in CA, not by a broker, and an escrow/title firm will still be involved (but for a much lower price).

[The-Shoveler]

just list it 50K over market,

who knows you may get lucky.

just kidding sort of.

But really I think right now the prime coastal areas are selling at a high premium (over peak in a lot of cases) compared to more inland and/or pedestrian areas that are still 20/30% below peak.

I am not sure that differential will hold up so now may be a good time to sell there and buy in the other area’s.

[exsdgal]

We rented the old residence when we bought our current house. The carrying cost was low, and rental depreciation was a factor. Following may not apply, generating passive income held a greater value to us than the rate of return from maintaining the property as a rental.

With the usual disclaimer – not an advice – in case you decide to rent your old house… and if the numbers work one can consider pulling equivalent of the ‘tax-free’ money from the old house to purchase a second rental (house/condo?).

Regarding the rental process it is typical to have 30-45 day turn over between tenants, unless the prospective tenant is from out of state and can move immediately. If the cash-flow supports, renting $300-$500 below market also helps in keeping the tenants for > 1 year.

Good luck with your decision.

[joec]

A lot of good general advice. My thoughts are that it really depends on what else you hold and what are you doing with your other assets.

Some things to think about for you from what I’ve seen so far:

1) You own a primary already so you will be hedged if housing goes crazy…your existing place will go up too and is a good inflation hedge.

2) You probably won’t want to keep this house considering your current place is nicer so for the wife/kids/etc, you probably won’t want to move back in for the tax free gains so you have a limited time if you want the tax free gain from selling. If you plan to sell later, I’d probably move to sell now since the tax benefit may change and houses are near peak levels right now. It can go higher, but tax free gains may change and it can go down too.

3) It doesn’t sound like you want to be a landlord and most people who keep it probably are more looking to build assets and manage the rental themselves to save on the mostly useless management companies. If you don’t want to deal with a headache, it seems like selling is the less stressful way to go.

4) Your rental is pretty high cost so it’s mostly going to probably turn over annually from families coming and going yearly. That’s sorta a pain to find tenants if the manager isn’t good and as mentioned, with the tax break, someone BUYING your home will save money vs. renting your place. I see a few in my hood where there’s a new tenant every 1-2 years since the rentals are more than buying.

5) You have no mortgage on the home to write off…This makes it so if you got a mortgage, you can have your cake and eat it too. If you sold, got the cash, get another rental with a loan, get some rental income and cash flow, but still have the left over cash to invest/do things with and write off more against your income.

Good luck with your choice…If you invest for income and don’t care if a stock moves a lot, you can do ok too…I have some intc bought for just that reason and get 3.4% yield and oh, the stock is at all time highs too.

At the end, I think the best solution is to look at all your assets/retirement holdings/pensions/real estate, etc…and fill in the hole that is lacking to diversify against anything the guv’ment and tax guys do.

[HLS]

1. Take the tax free gain NOW, before the option is taken away.
2. Buy newer property elsewhere (multi units, or 3-4 SFR)either all cash or 50% down and get $5k+ a month income.
3. Use a good property manager.

Part of the benefit of rentals is depreciation AND doing 1031 exchanges.
Your current cost basis is low. Establish a higher cost basis with the same equity.

I think it’s silly to rent out a $700K house.
You generally get more income (and potential appreciation) from 2x $325K houses.
Do not count/expect any appreciation.

When interest rates go up, it’s going to be harder to qualify for financing.
I think we’re in a bubble inflated by low interest rates.
Most people do not care what they pay for a house, they only care about their monthly payment.
If they cannot qualify for a loan they cannot buy.

[Coronita]

One thing I didn’t consider all is the income taxes… Maybe someone could chime in on this, because I’m too lazy to look things up.

Suppose someone has a household income (couple) of
$150k in W2 salary
$40k in long term capital gains from stock sales

Person is now considering selling primary home for $300k profit…

What are the tax implications?

1. I think the W2 salary income $150k still gets taxed the same regardless of one sells the home or not.

2. The $300k gain from the primary home sales is tax free, due to primary home capital gains exclusion of up to $500k for a couple

However,
3. Would $40k long term capital gains from the the stock sales end up being taxed at 20% instead of 15% ( since the household’s AGI > $450k) ? Someone correct me if I’m wrong…

4. Would the $40k in investment income then be subject to the 3.8% medicare tax surcharge (which kicks in on the any “net invest income” for folks with an AGI >$250k/household)?….

If #3 and #4 is true, then I guess the solution would be don’t sell any stock that year if your normal AGI isn’t already hitting those thresholds…

[bibsoconner]

Thanks for your latest comments flu. Not sure I quite followed them though. Our household income is roughly $220K/yr gross. We have no stock dividend/interest income to speak of. We sold all the stock to buy the new house. Our mortgage+taxes+insureance on the new house is around $5500 which is quite a bit more than $0 on the old house, and does keep me up at nights.

I’ve taken all the comments here to heart but it looks like we’re leaning towards renting because the boss (wife) thinks it’s a good idea. She might be right. She’s much smarter than me. It concerns me that the cap rate is only 4.3% or so. I based this on $650,000 price, and took into account monthly rent, management fees, prop taxes/insurance, gardener BUT NOT maintenance or down time (time between tenants, etc.). As I said before, it’s by no means clear that one can get 4.3% in other investments. Certainly I have dividend stocks in my retirement account that pay well now, and they may even go up by 100%. Or they may do what my GM and WAMU stock did a while back and go to 0.

To answer another question, no we don’t need the money right away. So if prices went down a lot, we could ride it out. Of course if house prices dropped 25%, I’d expect to see rents drop too! Given the huge capital gains advantage of selling right away, it sure seems like we better be willing and able to rent for a long time. Realistically, I don’t see us moving back in for 2 years to lock in new tax advantages.

Thanks to all,
Dave

[Coronita]

[quote=bibsoconner]Thanks for your latest comments flu. Not sure I quite followed them though. Our household income is roughly $220K/yr gross. We have no stock dividend/interest income to speak of. We sold all the stock to buy the new house. Our mortgage+taxes+insureance on the new house is around $5500 which is quite a bit more than $0 on the old house, and does keep me up at nights.

I’ve taken all the comments here to heart but it looks like we’re leaning towards renting because the boss (wife) thinks it’s a good idea. She might be right. She’s much smarter than me. It concerns me that the cap rate is only 4.3% or so. I based this on $650,000 price, and took into account monthly rent, management fees, prop taxes/insurance, gardener BUT NOT maintenance or down time (time between tenants, etc.). As I said before, it’s by no means clear that one can get 4.3% in other investments. Certainly I have dividend stocks in my retirement account that pay well now, and they may even go up by 100%. Or they may do what my GM and WAMU stock did a while back and go to 0.

To answer another question, no we don’t need the money right away. So if prices went down a lot, we could ride it out. Of course if house prices dropped 25%, I’d expect to see rents drop too! Given the huge capital gains advantage of selling right away, it sure seems like we better be willing and able to rent for a long time. Realistically, I don’t see us moving back in for 2 years to lock in new tax advantages.

Thanks to all,
Dave[/quote]

I think you can ignore what I said about taxes. Never mind….Brain fart..,.

Please ask someone who is an accountant.

..But I think the exempted portion of capital gains from sale of primary residence I don’t think counts toward what is used to calculate the 3.8% tax surcharge….

This I think explains it..
http://www.realtor.org/small_business_health_coverage.nsf/docfiles/government_affairs_invest_inc_tax_broch.pdf/$FILE/government_affairs_invest_inc_tax_broch.pdf

Even more reason why from a tax efficiency standpoint, there is a huge advantage of selling a primary home versus any other sort of investments..

Also, the new 20% capital gains tax rate also I don’t think applies to you either, if you don’t have any all capital gains elsewhere…

http://www.marketwatch.com/story/taxmageddon-may-wallop-home-sellers-1344975382108

Anyway, do some research on the 3.8% medicare tax surcharge and the 20% capital gains tax rate… If it’s not applicable to you now, it’s very possible it’s very applicable to you in the future, if you don’t plan on selling your primary home, which gets special treatments….

Gee. I’m jealous

[(former)FormerSanDiegan]

[quote=bibsoconner]
So if prices went down a lot, we could ride it out. Of course if house prices dropped 25%, I’d expect to see rents drop too! [/quote]

When prices dropped 25% + in the last downturn, rents barely declined.

[The-Shoveler]

[quote=FormerSanDiegan][quote=bibsoconner]
So if prices went down a lot, we could ride it out. Of course if house prices dropped 25%, I’d expect to see rents drop too! [/quote]

When prices dropped 25% + in the last downturn, rents barely declined.[/quote]

That’s what happens I guess when you have CPI tied to rents instead of owning.

[Author]

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