Buy or wait?

[Coronita]

[quote=Panderso]Edit to my last comment: I just checked the Zillow rental estimate again and apparently cash flow would be $100-$200 a month, not $300-$400.

Bewildering – yeah, we’ve considered child-care in our budget. That’s why we have a cap on what we’ll buy. It is expensive and unfortunately we don’t have immediate family in the area so no free day care. :([/quote]

I would not count on your condo being cash flow positive 100-200/month, at least for the 1-3 years. In fact, I would consider that you count just breaking even at least when you first start out as a more realistic outcome.

People move, things break, property taxes/hoa/insurance goes up, rent might come down in the future. No one ever assumes 100% occupancy. Also, you and your husband might not want to deal with being actively involved in it’s management so add another 5-8% in management fees if you want someone else to do it. Also, unless you and your husband plans on doing the maintenance yourself, anytime something breaks, in all likelihood, you will end up running negative that month. Calling a handyman to simply replace a leaky faucet will set you back around $100-200, including the cost of the faucet itself.

On one of my condos, the A/C just went out. I got lucky. The repair bill was only around $200. It could have been way worse. On another SFH rental, the dishwasher went out. And a few months ago, another condo the fridge went out. And last month, I got a $200 repair bill on something that broke on a condo that is managed by someone else. I personally don’t mind dealing with all this, because I like being a landlord, and across all my rentals, the numbers still look really good. I wanted to give you a realistic picture right when you are starting out, and you need to consider a cushion in your budget for this. This is not to scare you into deciding to not keep the condo, but I think you need to consider a worst case scenario, and plan for that to see if you are willing and able to juggle being a landlord and if it fits into your family’s financial goals.

Keep in mind also, that since it’s your primary home right now, capital gains will be totally exempt for you guys (up to $500k for joint filers) if you do sell. That’s a pretty big gift from the IRS. And with that nice chunk of cash, you could (in theory) invest it elsewhere. Plenty of ways to skin the cat. You could also try renting it out first and then decide to sell and still get your capital gains tax break, if you do so within the rules regarding the timeline…

[Panderso]

Thanks all for your thoughts. This is exactly why I like posting on the internet — folks have no qualms about telling it like it is and exploring worst case scenarios, which is important to hear.

Flu, I totally get what you are saying and luckily we’ve considered all those factors. To clarify, I don’t expect 100 percent occupancy, I just said that to give some frame of reference to the cash flow numbers. I expect negative cash flow the first few years. I’m not thrilled about becoming a landlord and that’s weighed on our decision to keep the condo. The thing is, where would we invest that capital if we sold? We ran the numbers and, assuming 2 percent annual appreciation on the condo and averaged cash flow of only $100 a month, we’re still way better off compared to having it in the stock market at a 5 percent annual return.

I do like diversified investments though … If folks can suggest a better place to park the cash I’d love to hear it.

[TeCKis300]

I was in your shoes not too long ago. Personally, I think it’s a good time to drop anchor.

Sure, there are some great points and considerations above, in regards to moneys. But there’s also the intangibles of building stability and a nest in preparation for the next phase of your journey.

These are all worth the moneys spent. I’ve seen many a stressed mom/family, 7 months pregnant, trying to tackle a huge move. Settling on a house, as there’s no guarantee the house that you want will be available if you wait. At least now, time is on your side.

With respect to rentals/housing. As long as you have a reasonable exit strategy without risking equity (which doesn’t sound like the case at all). Again, you can make those decisions when and if things change.

Also, you’re early in your career. Sounds like you already have your budget well laid out, with consideration for the big ticket items at your current household income. Your take home is likely still on a steep curve so you’ll continue to gain elbow room.

Go for it!

[Coronita]

[quote=Panderso]Thanks all for your thoughts. This is exactly why I like posting on the internet — folks have no qualms about telling it like it is and exploring worst case scenarios, which is important to hear.

Flu, I totally get what you are saying and luckily we’ve considered all those factors. To clarify, I don’t expect 100 percent occupancy, I just said that to give some frame of reference to the cash flow numbers. I expect negative cash flow the first few years. I’m not thrilled about becoming a landlord and that’s weighed on our decision to keep the condo. The thing is, where would we invest that capital if we sold? We ran the numbers and, assuming 2 percent annual appreciation on the condo and averaged cash flow of only $100 a month, we’re stillwont way better off compared to having it in the stock market at a 5 percent annual return.

I do like diversified investments though … If folks can suggest a better place to park the cash I’d love to hear it.[/quote]

I am not going to recommend where you should park your cash because what works for me might not work for others. And it’s always something I ask myself anyway.

Sometimes the best investment is no investment if it just doesn’t feel right imho.

I personally don’t think we will see 2% appreciation each year for the next few years unless the banks start to relax lending standards imho. But who knows.

If I were in your situation, I like dealing with rentals so I would probably keep the condo as a rental because for me, all else being equal, I get more satisfaction with money earned from a tangible asset than on paper so I wouldn’t mind the pita factor. But I am weird.

If you are going to be starting a family, there’s probably things you’ll want to do there, and plus you’ll also want some emergency funds in cash there’s ever a job loss in the future(knock on wood). You probably have already thought about it so I won’t go there that’s your business.

It is probably ok if you have to wait for the right investment to come along too. So you just need to figure out if you want to be a landlord or not.

One thing I’ll bring up too is about passive losses on real estate. You might already know, but if you have a rental loss , you may or may not be able to deduct the complete amount. If your household modified agi is greater than $100k ( which it probably is if your husband is a techie) , how much you can write off of your rental losses against income you have elsewhere will get limited, with the write-off completely gone if your modified agi is $150k or higher I believe. The exception would be if one of you guys are a “real estate professional” as defined by the IRS. If you can’t write-off your losses, it gets carried over to the next year to offset any rental income gain that year and/or offsets your gain when you sell the property. I am not a tax guy or accountant, just an engineer…so talk to an accountant or read publication 925 I think from the IRS regarding passive activity.

[mixxalot]

In same boat and have decided to wait. Prices are sky high right now and inventory supply poor. I don’t see much under 800k in decent areas.

[bewildering]

[quote=mixxalot]In same boat and have decided to wait. Prices are sky high right now and inventory supply poor. I don’t see much under 800k in decent areas.[/quote]

From your post history you seem to have waited for the past 6 years, which in hindsight seems a mistake. We can get caught up with monetary value too much forget about life. The OP wants a bigger place for a family, can afford the new place easily, and will be settled.

It is hard to time the market unless there is an really obvious overvaluation (2005-2007). And we are homeowners, not investors. As Rich has pointed out, the market might be 10% overpriced at the moment, but it is nowhere near like 2005-2007. If the OP is staying forever then 10% extra today is meaningless over 15-30 years.

ps To the OP. We have two kids. It is about 1000/month for each child. San Diego is actually very cheap for daycare/preschool. My friends in Boston are paying 2000 for one child.

[sdsurfer]

I’d have to agree with Harvey and recommend you go for it based on your “forever” comment. I think the timing will never be absolutely perfect. If prices are low then rates are higher if rates are low prices tend to be higher so there is always give and take.

As far as the condo…I really hate to disagree with Rich since he’s probably waay smarter than me, but I’d probably keep that too as an investment if it’s in coastal SD as long as it’s breaking even. I’m still curious what rents might do with this correction that seems to be coming at some point. My gut says that as long as demand stays strong if prices did start to fall then rents would get even more crazy from a demand standpoint because less people would be able to or want to buy. With more people choosing/being forced to rent it would push prices up (my opinion of course). The only curveball in my opinion is if demand starts to fall due to some circumstance. Could happen I guess, but does not seem to be happening now or anytime in the recent past.

In addition to my belief that rents might increase over the next couple years regardless of prices I’m not sure where I would put the money if I sold. Say the rents go up only 3% per year (past few years have been waay more than that as you know) then at least your keeping up with inflation. There was some talk about daycare and kids and maybe the cash flow from that condo ends up paying for one of your children’s college education someday 18-20 years from now in exchange for managing the property until then. Then when they are done with college it goes back to you each month.

Just my opinion and what I’d do…good luck to you!

[mixxalot]

I disagree. Renting allowed me to move to Bay Area and work there a few years to rake in a lot of cash before moving back to SD. It’s way less expensive now to rent than buy. It’s another bubble.

[FlyerInHi]

I find it very interesting that there is no talk of a regular recession or a Fed induced recession as many would call it, where there are job losses and rent decreases like we saw in the 90s.

I too believe that the economy is on solid grounds. I would buy. AN put it well on his post.

But whatever happened to the cries of a huge recession is coming because of debts and Fed manipulation?

[treehugger]

We own a rental condo and my husband and I file taxes separately, so I take the house he takes the condo, he makes a nice chunk on tax deductions from the rental, we pretty much break even with the renters.

We are toying with selling the condo and putting money into a SF that we could eventually downsize into once kids off to college, but everything is sooo expensive the more I think about it the higher the prices get, gets so bad I wish I had done it last month and each month gets worse and then I get scared that this insane cycle must end….and I hesitate some more.

Just had house appraised for refi and value has doubled over what we paid in 2012, absolutely amazing!

How are people affording this?? I felt like we were reaching in 2012!

Tough decision, Good luck!

[(former)FormerSanDiegan]

If I were you I would sell the condo within the next 2 years to qualify for tax free gains.

Buy your home this fall.. prices are typically flat from midyear through December historically in San Diego.

Sell your rental in before Spring of 2018 or hold it forever.

[Rich Toscano]

[quote=FlyerInHi]
But whatever happened to the cries of a huge recession is coming because of debts and Fed manipulation?[/quote]

What the fuck does that have to do with this topic?

[Rich Toscano]

[quote=sdsurfer]
As far as the condo…I really hate to disagree with Rich since he’s probably waay smarter than me
[/quote]

I wouldn’t be too sure about that…

[quote=sdsurfer]
but I’d probably keep that too as an investment if it’s in coastal SD as long as it’s breaking even. [/quote]

Just to be clear, I don’t really have an opinion on the condo. I just didn’t understand why the OP wanted to keep the condo in addition to a new house, given that her concerns about SD housing valuations were serious enough that she posted this in the first place. I just meant it as something to think about.

Similarly, OP, I realize that the article I pointed you to didn’t have any clear answers. It’s all meant to just be food for thought as everyone’s situation is different.

Take this with a grain of salt, as I don’t know much about your situation, but I think it makes sense to buy a forever home right now. Rates are so low that the monthly payment is very reasonable despite high prices. What I think makes less sense is to get in a situation where you depend on appreciation, or would be in trouble if the price went down. But in a forever home, that’s not the situation.

At the same time, it’s not like it’s crazy to rent, by any stretch. Either can make sense depending on the situation. So, take your time and look for places, and if you find something you love, go for it… but if not, keep looking and taking your time. That would be my generic thinking, again, without knowing the nuts and bolts of your situation.

[Myriad]

[quote=Panderso]
I’m not thrilled about becoming a landlord and that’s weighed on our decision to keep the condo. The thing is, where would we invest that capital if we sold? We ran the numbers and, assuming 2 percent annual appreciation on the condo and averaged cash flow of only $100 a month, we’re still way better off compared to having it in the stock market at a 5 percent annual return.

I do like diversified investments though … If folks can suggest a better place to park the cash I’d love to hear it.[/quote]

I would agree the major factor to owning a rental is work associated with becoming a landlord. As for where to invest otherwise, the stock market with dividend reinvestment is higher than 5% historically. Of course who knows what it will be in the future.
Another factor to consider is concentration in real estate (and in SD for that matter) as well as taxes.
401k, Roth IRA, and After-tax 401k defer your taxes out until you retire (or none for roth). Also 529 can be a good investment for a future kid.

[quote=treehugger]
Just had house appraised for refi and value has doubled over what we paid in 2012, absolutely amazing![/quote]
Where the heck has house prices doubled in SD since 2012?

[Coronita]

[quote=treehugger]
Where the heck has house prices doubled in SD since 2012?[/quote]

near SDSU

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