Home › Forums › Closed Forums › Buying and Selling RE › Sell or Hold if Mortage is roughly equal to rent?
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LookoutBelow.
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September 28, 2006 at 12:01 PM #7624September 28, 2006 at 12:18 PM #36725
sdrealtor
ParticipantIf you like the place it could be worth hanging on. Transaction costs are substantial as are moving costs which not only involve dollars but distractons to your personal and professional life. It really depends on the exact numbers, how much you like the place and your risk tolerance.
September 28, 2006 at 2:00 PM #36738powayseller
ParticipantYour mortgage is probably the same as it costs to rent, so I don’t see any benefit to selling. I sold my house to cash out equity, and also had the advantage of paying less in rent than my mortgage.
Do you have a fixed rate loan? A job that is recession proof? If either answer is no, you might be trying to sell and move at the worst possible time.
In any case, you’ve got to be mentally prepared for that condo being worth $125K in a few years. It sounds like you’re going to be underwater on your mortgage by next spring. Condos are hit the worst in any housing downturn, and the downtown condo construction is adding to more supply. You could end up with $275K mortgage on a $125K condo. It could take 15 years or 25 years for that condo to get back to $275K.
September 28, 2006 at 2:29 PM #36742mephisto
ParticipantLoan is good, job is good & wife’s job is decent. Essentially, there is zero issue with the monthly cost and if needed I could pay off the entire mortgage tomorrow.
By next Spring, I think I’ll only owe ~$210,000 on the mortgage. (When investement rates are low, I usually pay some down). So I don’t think I’ll be anywhere near underwater.
Someone posted an excellent graph of rental rates in the UTC area (props to whoever that was). Assuming a low end rent of $1,300 a month – that alone is $15,600/yr. I’d most likely rent something in the $1,800 range if I sold so that would be $21,600/yr in rent.
I guess that’s the part that’s making me think. $21,600 a year in rent adds up quickly, and if the condo price falls anywhere less then that it’s still mostly a wash.
And if prices don’t drop that much a year, and instead we are in for a LONG slow slide down mostly eaten up by inflation… that $21,600/yr rent starts to look pretty ugly. The big unknown is how this is going to correct, and how/if the government tries to bail it out.
Thanks for the input. This whole “bubble” is a royal pain for people who would just like to own a nice place to live in. I’m ready for those nice new $800-900K houses built in this general area to drop a good 40-50% already. 🙂
September 28, 2006 at 3:01 PM #36745no_such_reality
ParticipantIf condos implode downtown and in the UTC area, the rents could drop too. Operative word is could.
In the meantime, your mortgage is roughly rent, so why bother with the hassle of selling and moving. Just ride it out and keep it in decent enough condition that you could rent it out if you want to move.
Condos are the perfect example of why the math needs to work out. They are just an apartment. In the end, your PITI and HOA need to be less than rent to make owning worth the hassle of owning and eventually selling.
HOA fees also the primary problem with condos. You buy to get away from the useless expense but the HOA keeps it there. They’re just like rent. In orange county, there’s places that have HOA fees on one bedroom condos pushing $300 or more. It wasn’t that long ago that you could rent a one bedroom condo for $800 to $900.
September 28, 2006 at 3:02 PM #36746Bugs
ParticipantDespite what we THINK might happen over the next few years, none of us really KNOWS what will happen with housing prices. Five years from now it could be -50%; or it could be +10% – nobody can know for sure. Likewise, there’s no way to know what interest rates and underwriting criteria will be like in the future.
If you’re looking at your condo primarily in terms of a housing payment then I don’t see the benefit to selling right now. If you’re looking at the paper equity and are not risk averse to try timing the market to parlay that equity into more then it might be worth your while to play.
You apparently have options and about as much security as is possible to have right now, so I think the decision really comes down to your priorities.
September 28, 2006 at 3:12 PM #36747(former)FormerSanDiegan
ParticipantMy advice is to not sell your place. You’ve locked in your “rent” for as long as you want to stay there. Since you “could pay off the entire mortgage tomorrow” if you needed to you have plenty of other assets to ride out job losses, equity losses, etc. What would you do with the proceeds, anyway ?
I would consider powayseller’s outline of the price low a worst-than-worst-case scenario. Here’s why :
If the place would currently rent for 15K/year and the price dropped to 125K in 5 years. Assuming rents were flat over those 5 years, the property would yield 12% cash-on-cash. That’s ridiculous in today’s interest rate environment and would only make sense if rates were in the 10% range (for competing income investments). If rates are up in the 10% range, then that would mean inflation is much higher than current and that rents would be rising (with inflation) and not flat.If rates were in the 10% range you could take your external funds (that you “could” pay off the mortgage tomorrow with)and pay the mortgage with interest from a CD or other instrument, with some money left over to buy bread and water.
You are in “way under your head.” Stay the course.
The only fly in the ointment IMO is that when the time is right to buy a SFR, you won’t be able to get much out of your condo (condos leave the party early and arrive late as powayseller alluded), so you may have to rent it out for a couple years after you buy your SFR at future discount prices.
Plus, if we are wrong about a price plunge and values flatten out at 10-15% below peak prices you’ll do OK in that scenario as well. It’s about surviving/thriving across a range of unpredictable future scenarios. Your combination of low-rate loan, assets outside your property, and current monthly cost benefit versus renting puts you in position to survive and/or thrive in most reasonable scenarios.
September 28, 2006 at 6:00 PM #36777powayseller
ParticipantFormerSanDiegan, that all makes sense, and it leads me to question the whole rent/home price ratio. If the condo drops 50% from the peak price of $350K to $175K, then reasonable rent would be $1458/mo ($1458 x 12 = $17,500; $17,500 x 10 = condo price). Is it hard to imagine his condo will rent for $1458/mo in 5 years? What is the rent now in that building?
I’d like to again give my opinion on who should NOT sell. Do not sell if you meet these 3 conditions:
1. Your mortgage payment is less than rent (i.e. your place is so cheap or you bought so long ago, that your mortgage is under $2K/mo). Renting would increase your monthly expenses.
2. You won’t be forced to sell in the downturn, because
a) you can afford your mortgage (it’s fixed rate or you can manage the payment shock)
b) your job is recession proof3. You don’t mind that your house could possibly maybe lose 30% – 50% of its value.
September 28, 2006 at 9:29 PM #36790sdrealtor
ParticipantGood sound advice
September 29, 2006 at 8:21 AM #36812(former)FormerSanDiegan
Participantpowayseller –
mephisto estimated low-end rent at $1300, which is consistent with today’s rental market for properties in the 300K range.
Rent at 1458 in 5 years would represent a total increase of about 12% (2.4% per year), which is feasible but probably on the low end.
If we see inflation at 2.4% per year, then that rent growth is reasonable. HOWEVER, if inflation is at 2.4% then bonds and cash flow investments would likely be in the 5% range. If the property value fell in half as you suggest, the cash-on-cash return for this property would be 10% minus expenses. That seems awfully high in a 5% world. In that scenario, I see more like a value of around 230K (13.3x annual rent instead of the 10x you used for equivalent yield of 7.5%)How much have median household incomes risen in San Diego in the last 5-6 years. I saw in another post (by DrHousingBubble under the “UCLA Anderson Forecast” thread) That level of income gain (~6%) per year would support more significant rise in rents.
September 29, 2006 at 10:32 AM #36831powayseller
ParticipantFSD, I don’t know what the rental multiplier should be. I am going by other posts on piggington. I believe it was 4plexowner who suggested a 10x multiplier, but I’ve seen it as low as 8 or as high as 13.
In any case, I think rents will have downward pressure, as more people leave San Diego, condo conversions are reverted to apartments, and the new glut of condos and unsold homes will be rented out. Thus, I believe rents will stay flat starting next year, for several years. (Decline in real terms).
September 29, 2006 at 12:05 PM #36848(former)FormerSanDiegan
Participantpowayseller –
On this board we look behind the numbers of median price reporting, carve up other statistics reported in the media, and hinge our positions on ratios of median income to median home price. Why should we blindly take someone elses rule-of-thumb multiplier of 10 or 8 or 13.3?
Let’s look at what that multiplier or Scale Factor means.
AnnualRent * ScaleFactor = PropertyValue
or in notation AR*SF=PV.Solving for SF
SF=PV/ARIf you want to consider the gross return on investment in the property you could compute
GR=AR/PV *100. So The percentage of return (gross) is the inverse of the ScaleFactor.
A ScaleFactor of 10 implies 10% gross return
A SF of 8 implies a 12.5% gross return
A SF of 20 implies a gross return of 4%This is why you need to consider what investment return rates on alternative investments yield when making an estimate or expectation of property value and determining what scale factor to use. (You also need a crystal ball to predict where rates will be 1,3,5 and 10 years from now)
If a single family home falls to the point where the scale factor is 8, but bond yields are at 4%, guess what happens ?An investor in that property will collect collect 12.5% gross rent, which might be >10% net after expenses. In an 4% world that is not sustainable and would likely lead to a significant increase in the price of the asset.
As far as the direction of rents. I believe that over a five year period they will at least track the rate of income increases. If you think incomes will stagnate than you will be right.
September 29, 2006 at 3:01 PM #36856powayseller
ParticipantFSD, you mean SF of 20 implies gross return of 5, right? Isn’t return the inverse of the SF? It makes sense that you would want SF of 8 – 13 (giving you 7.6% – 12.5% return). I don’t know where that came from. Maybe the landlords can explain. I guess you have to add the maintenance costs and property taxes too, and the cost of vacancy. What SF do you use for your rental property? I have never bought rental property, so this is all new to me.
September 29, 2006 at 3:43 PM #36861(former)FormerSanDiegan
Participantps –
Yes, SF of 20 implies gross return of 5%. (1/20=0.05)
Think of it as a Price-to-earnings ratio for housing.The scale factor in the range of 8-13 (and the corresponding gross return of 7.6% to 12.5%) reflects people’s opinions of where they would buy or hold property. Again it is relative to other investments that matter.
A range of 8-13 is a huge range. (60% difference)
Why is this important ? If I think that homes will drop to 8x annual rent, but they only drop to 13x annual rent (because competing investments are in the 5% range), then my prediction for price lows will be off by ~60%.Property owners don’t determine the SF, the market does. Right now it is in the 16-20 range for SFR in San Diego(OUCH !)
I wholly expect this to correct to the 8-13 range. Does that mean that I expect a > 50% drop in the price. NO. If the ratio drops to 8 (12.5% gross yield), then inflation must be running high and the bulk of the drop in ratio would be due to rental increases. If the ratio drops to 13 (7.6% gross yield), then inflation must be low and the bulk of the drop would be due to price decline, but would be less of a decline.
September 29, 2006 at 4:11 PM #36865PerryChase
ParticipantIf I were you, I’d sell.
1) Condos in the UTC area are all pretty much the same so you could rent and your lifestyle would not change much.
2) By selling you would insulate yourself from the downturn and you buy a similar unit when prices crash.
3) Your mortgage being about the same as rent, you’re not “saving” any money by owning rather than renting, while still maintaining your lifestyle. I would keep only if the mortgage was 1/2 of the rent. Say that the condo drops another $100k, you will loose that money without “saving” anything from owning.
For example if your mortgage is $1k (interest, property tax, HOA) but comparable rent is $2k, then, in my mind, you’re saving $1k each monthly when you own. Every year, you could have a 12k yearly loss in equity and still be “even.” That’s only if you take lifestyle into consideration, otherwise any reduction in wealth is a net loss.
Just my personal opinion.
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