Rent my House and Go $1300 negative???

[23109VC]

I just found this site and think it’s great! I am buying into the idea that housing prices are going to come down a lot…and I wanted to get some advice.

I live in the Palm Springs Area – not exactly San Diego – but it’s So cal. I have a house that I originally listed for sale at $440k. I bought it a couple of years ago, made some equity, then refinanced to get a low fixed rate and pulled a lot of equity to pay off other high interest debt.

I have been having a hard time selling the house and have recently dropped the price down to $425k. Other homes like mine that are identical model matches are dropping to $420k. I can only go down to $400k before I’ll sell short and lose money. I’m debating between just pulling it off the market and not selling, or just dropping the price rock bottom to my lowest possible price of $399k and try to undercut my competition before all the other homes eventually reduce there anyway – which I think will happen over thenext several months.

I could just pull it off th emarket and keep it. I can easily afford my payments and the interest rate is fixed….so I could afford to ride the real estate wave – with the knowledge that I coudl be stuck in that house for a long time.

my big problem is that I am relocating – to the Temeucula/Murrieta area for work and so I really NEED to sell my house. Commuting to work is a possiblity, but at 1.5 hours each way it will get old fast.

If I rent my house, based on comps, the most I can get is $1500. So assuming I keep the gardner on so my landscaping doesn’t get destroyed by tenants who neglect it, I”m looking at about $2800/month in operating expenses. And that assumes no major problems that require $$ repairs. I can only get $1500 in rent – meaning i need to kick in $1300 a month to make it all balance out. I guess the only way that makes snese is if the market keeps going up and the likelihood of that is pretty much nil at this point. So I’d be pumping a lot of money into my house with the knowledge that I’d HAVE to keep it LONG term..like until it’s paid for. I wonder if I’d just be better off to dump my house and take that $1300 I would have put into the house and put it into the market or my 401k.

would it be financial suicide to try and hang onto this house given how negative I am? I see other people doing it all the time and I wonder if they are crazy too.

thanks.

[powayseller]

Great insights. You already answered your own question.

Sell now for a price below your competition. I can’t advise you on a price. Consider your location, view, yard size, upgrades, and price it a little less. What does your realtor recommend? I’ve been reading that in San Diego, the Sold houses were priced more agressively, and that offers are 93% of list price.

The investors with negative cash flow are pure fools. They believe their monthly money loss will be overcome by increasing appreciation. You obviously don’t believe this, so why would you consider renting it out?

Well, hopefully you’ll get more advice.

[davelj]

just my opinion, but if you want this thing to move anytime soon i’d take the lowest listed comp and mark your place’s price down by at LEAST 5% below that comp and pray that it sells. there are a lot of people in your situation and a lot more that will be coming online over the next several months. the dummies will hold out and eventually mark their prices down by another 10%, 20%, etc. i’d be aggressive NOW and not try to get too cute. otherwise, i suspect you’ll end up regretting it.

[Anonymous]

In my opinion you are evaluating your situation realistically which seems to be rare nowadays. Running a monthly negative is often typical of rental units, but that is a very large negative, and beyond what I would recommend. It becomes a matter of opportunity cost of money. What could you gain with that $1300/month by investing somewhere else for the next 5 – 7 years ?, as it will be that long before prices get back above where they are now if not longer.

Even just putting the money in a CD at 5% over the next 5 years will far outperform what residential real estate is going to do. The game is over for now in this asset class. There are tax benefits obviously to that loss, but on a cash on cash basis you are way better off being clear of it. Best of luck with your situation.

[nhamlin]

I think you are missing a very important consideration which is capital gains taxes. I get the idea that this is your personal residence. If so you can sell and take advantage of the $250K capital gains exclusion.

If you convert it to a rental and hold it for more than 3 years, you will be faced with capital gains taxes on the money you have already pulled out!!

Ask yourself how much appreciation would be required just to break even if you rent this house for the next 3 years. Also consider the advantages to selling a home that you owner occupy.

A tenant occupied property will rarely sell for as much as an owner occupied property. If you try to sell a single family rental, the tenant has a motivation to sabotage the sale. He may interfere with showing, refuse to keep the place clean and picked up, and bad mouth the property to prospective buyers. You can always vacate the property but then you increase your negative cash flow.

If you owner occupy the house, you can keep it clean and cooperate with showing.

Norman Hamlin
[email protected]

[23109VC]

i’ve talked to a CPA and got that same advice. If I keep it too long – then I pay gains on the almost $180k appreciation…which yes, I already spent. 🙂

another problem is that I earn over $100k…and the tax breaks on passive losses start to get phased out at $100k+. So even though I’d have some losses to offset the negative cash flow – I’d only get about half of them b/c I earn “too much” according to Uncle Sam.

Renting it only makes sense if I hold it long term. If I did that, and held onto it for 20 years – then maybe I’d look back and be glad I did…but I’d have to compare what else Ic ould do with that money if I didn’t convert my home to a rental.

If I rent the house, I lose much of my home interest deduction, so my effective net income goes down b/c now I”m not getting as much of a write off on my income…and at the upper levels, it’s at 33-35% between fed and state. so in reality, if I pump $1000/month into the house, it really is costing me more int hat I lose some of the tax benefits I have now while occupying it.

if I keep it 20 years, and have to pump all that cash itno it – maybe $1300 – what would have happened if I put that money into a 401k or other interest earning investment. even if I just ut it in a hole in the ground, in 5 years I’d have $75k in cash. the house may go up, it may not go up at all.

[4plexowner]

If you are serious about selling, drop below the 400K price point. If you are really lucky you might get more than one buyer and you could get bid back up over 400K.

I have had two condos for sale off and on for the last year. Lots of months with little or no activity until I dropped below the 400K level.

Now I have one condo in escrow at 395K and getting some showings on the other one.

By the way, looking at comps in my area, I am at least 100K below any resale condo that has sold in the last 6 months and I am 150K below comparable new construction condos.

[lewman]

Let’s put some numbers together and see if that’d “scare” you into action. I think it pays to ask the question “would I buy this investment ?”

Let’s assume you can rent it out rather quickly so the monthly loss is capped at $1300. We’ll also assume uncle sam doesn’t want a part of the rental income. Let say your investment horizon is 3 years and that’ll add up to a $46,800 loss. Rent may actually drop if prices do go down but hey let’s not sweat the little stuff.

Then let’s assume a relatively modest decline of 5% per year. So in 3 years time you take off another 15% x $400k = $60k.

I’m not counting your equity buildup as it sounds like you just refinanced so I assume most of the payment over the next few years goes to paying down interest anyway.

So it seems to be a pretty sure case this investment will lose $100K+ over the next 3 years, at least on paper. And that’s not counting the personal income tax increase you mentioned.

Obvious counter arguments are:
1. some of the above assumptions are wrong … sure they can be … if you flip that around your house has to gain at least 10% for the capital gain to even out the $46,800 loss … likely or unlikely ?
2. you can hold out for 20 years … but my friend, one thing that’s constant in life is there are changes. I’m happy to hear that you earn a $100K+ income and the $1300 hole per month is not an issue for now. But judging from the fact that you had to take out equity to pay off a loan with higher interests sound to me you’re not exactly sitting in a pile of cash. You didn’t say what you do for a living but if you’re like most of us there’s always a risk of losing your job, and I don’t know how old you are and whether you’re just getting into the prime years or you’re reaching the peak.

Basically, you were fortunate that the bull run in the past several years did wonders to your financial position. It’s time to take profits and get out. I would consider offering a $10K cash bonus to the buyer to get out now.

Good luck my friend.

[davelj]

the fact that you’d be $1300 in the hole renting it out tells you all you need to know: your house is currently eggregiously overvalued.

even assuming that some level of lunacy remains after the bottom falls out of the rotting foundation of this housing market, your home would only be worth $250K-$275K on a cashflow basis. my bet is that that’s where the price is headed over the next five years unless rents increase dramatically in your area or rates come down substantially. remember: pigs get fed, hogs get slaughtered.

[LookoutBelow]

This IS EXACTLY how the “race to the bottom” gets started.

I certainly wouldnt put it in your 401K or the market in general, thats a rigged game too, Lots of very smart people are expecting some SERIOUS declines by year end…I mean real serious declines. CD’s if anything.

Did it ever occur to you during the last refi or even during the original purchase, that its WAY over valued ?

I sold everything I owned in SD real Estate in 2003, I happily rent now. In my book and at my age, ANYTHING that seems too good to be true…..Usually IS.

[powayseller]

Can you elaborate on the expected decline in the equities market? I know the P/E is at a historic high, and the recent runup (last few years) has been historically high as well, so a period of flat or declining stock prices is reasonable. I haven’t been following the stock market, but just letting the index funds ride… Any insights would be appreciated.

[lewman]

At 2006 prospective PE of 16.5x, it can’t be considered cheap. Reason for the runup is Alan Greenspan who pushed rates way down after the tech bubble bursts. Now rates have come back up and the economy’s slowing down. And the market’s rebounded strongly since 03. One begs the question, how much more can it go ?

I’m holding on to funds I bought since 1995. But I’m not really adding to any US equities position.

[Anonymous]

Sell as quick as you can and then rent. You will lose some on the sale but after a year or two renting you will be way ahead in what you pay for your next house.

[davelj]

the market’s P/E is a reasonable starting point for valuation but you also have to consider profit margins. after all, as a guy i once worked for used to say, “it’s only got a low P/E until the “E” goes away.”

after-tax corporate profit margins are running at 7.2% here in the u.s., which is in the 90th percentile of profitability performance over the last 80 years – the average over the period is 4.9%. the reason is principally because consumers have levered themselves and over-spent relative to their incomes. consequently, as all companies have some degree of operating leverage, this incremental spending bolsters corporate america’s bottom line disproportionately.

aggregate profitability in corporate america is THE single most consistently mean-reverting time series in finance. which makes sense – after all, if profits don’t mean revert, then capitalism is broke.

thus, even if the market’s P/E stays at 16x-17x, mean reverting profitability alone could easily hit stocks for 20%-30% over the next few years. just something to keep in mind.

[Anonymous]

powayseller

The biggest reason for a expectation of a decline in equities by people in the know is the negative divergence with the bond market that is occuring. P/E ratios are not anywhere near historic highs, and even if they were there are several valuation measures that are more predictive of future prices than P/E anyway.

There are many valuation measures that indicate the market is actually undervalued at this point. However, interest rates are the largest driving force of stock market moves. Almost every major stock decline in history has been triggered by a rise in interest rates that has preceeded it, just look at some weekly charts of SP500 with a chart of the 30Yr bond underneath it. The lag can be as much as 6 months.

[Author]

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