input sought

[elzocalo]

Hello all,

Old time lurker – first post. Seeking input on whether to sell as husband and I are contemplating a temporary move overseas (1-2 years). Here is the abbreviated story:

(1) bought fixer in 01 for 210k (80/10/10) – sweat equity + judicious budgeting + lots of luck allowed us to sell FSBO in 7/05 for $440 (converted to rental after living there/improving significantly over 2 years).

(2) bought second home in 03 for 405k (4 bedroom/2.5 bath with pool in established neighborhood – serra mesa). Very well mantained home purchased from original owners (built 61). Could use some upgrading but otherwise in excellent shape with 7k lot, cul-de-sac, walking distance to elementary school, great central location.

(3) current considerations: (a) mortgage (and our only debt) just about 300k, fixed for 30 years at 5.375 – comps at about 550-580 at the top of the market – realistic sale price today approx 480k (current comp listing not moving at about 530k but think aggresive pricing would yield a sale); (b) cash savings about 200k; (c) could be easily rented to cover costs, including taxes & insurance (may need a subsidy of less than $100 month for maintenance purposes – like i said in very good shape and we have upgraded plumbing which cost about 2k).

Our dilemma is to sell or keep as rental (not afraid of logistics as the support is there and willing to pay mgmt company). We love the house and intend to come back to SD. I think the best choice is to keep the house as i am wary of having all of our chips in one basket: cash. I think keeping the house serves as a hedge against inflation and keeping our existing cash reserves as a hedge against deflation. Much thanks to Rich and everyone else for the “free” education. Any input welcome and happy labor day!

[VCJIM]

It looks to me like you’ve answered your own question, keep the house! You have a great mortgage, don’t need to sell, cash flow positive as a rental, want a place to come back to, like the house, etc. It may be worth less (how much less is subject to a lot of conjecture) when you return, but that mortgage will appear miniscule in two years. It is a nice hedge against inflation, especially since you are already holding a lot of cash.

[SD Realtor]

I would agree with the VC… Actually Jim I always thought VC was Venture Capitalist as well until it was cleared up a few years ago.

I think that if you have run a spreadsheet and figured out it can be a positive cash flow rental, and you like the house so much that you could live in it, I like it as a hedge bet as well. You financed it correctly, and you will be able to use it as a nice tax shelter with your depreciation expense.

[technovelist]

I would sell. I think the downside risk is too great considering that the $180K or so that you would clear by selling now would almost double your current savings. As for worrying about inflation from holding too much cash, I agree that is something you should handle, but luckily since you are going overseas it shouldn’t be hard for you to set up a hedge in the form of a foreign-currency bank account. And of course there is always gold, which is inexpensive to store and highly liquid, unlike real estate.

[VCJIM]

I checked into foreign currency banks, they do not pay interest (CDs) anything like in USA. While it may help if the dollar plummets, the bid / ask ratio and low interest make it undesirable.

[no_such_reality]

Keep it. You’ve got a good rate, you like the house, and you’re planning on coming back.

To come out ahead, selling, the following needs to be true.

1. housing has to fall significantly both in real terms and nominally. I think this will happen, however, you need more than a 35% fall before you get to breakeven on selling costs and original price. That’s getting steep.

2. Rates have to fall another full percentage point after they’ve already fallen 1%.

3. You have to actually get it sold if you want to sell.

4. What you buy when you come back has to be in comparable shape to what you have today. I don’t think that’s likely.

[technovelist]

The bid/ask spread should be a fraction of a percent at a big bank. As for interest rates, they are higher in countries with shakier currencies. The question is which will have a better real return, not just a higher interest rate. I’m betting the dollar won’t do too well in the next few years.

[VCJIM]

Technovelist, I think you just made my point. For most of us non-professional investors, investing in a shaky currency for a higher interest rate involves too much risk and research. Investing in the relatively non-shakey Euro at a European bank would yield 2-3%, according to my research. I am also very concerned about the dollar, but as yet have not found a better, safe alternative.

[(former)FormerSanDiegan]

I’m (almost) in the same exact boat.

Make sure to consider all the costs of selling …

It’s important to consider the costs of selling versus keeping. I am in a similar boat with a house purchased in 2002. It breaks even and I could sell for about the same gain as you have. I also sold my personal residence in SD in June 2005.

I would have sold the rental but my selling costs would total ~ 20% of the homes value due to commissions and CAPITAL Gains taxes. That’s a guaranteed 20% loss on top of the 10% or so already factored in.

Did you live in the house in two of the last 5 years ?
If so, and if you sell after 7/07 (2 years after previous sale of personal residence) you can take the gains tax-free (minus paying some taxes on any amounts that you depreciated if it was rented out).

If your gain is 180K, the capital gain would be ~ 27K. Not huge enough to make the decision to keep or sell, but large enough to consider. Make sure to take this into account.

In our case we decided to keep the house because of the following financial and non-financial reasons:
1. Cash reserves nearly enough to pay off the house.
2. Positive cash flow.
3. Central coastal SD location.
4. Desire to return to San Diego in the future or use as vacation home in 15-20 years
5. Other diversified investments.

BTW – Your screenname reminded me of the restaurant (Zocalo) in Old Town. Great Food. I miss it.

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