0
0

Should I keep this property or sell?


 invite response                
2014 Dec 22, 4:04am   19,493 views  52 comments

by BayArea   ➕follow (1)   💰tip   ignore  

Hi guys,

In 2007 I bought a condo in the Berkeley/Oakland Hills for $405,000 (20% down, 30yr fixed, 6.75% APR, $330 monthly HOA).

In 2010 I refinanced down to 5.25% under the HARP Program and in 2013 I moved away and rented it out.

Monthly rental income is $2,000
Monthly mortage is $1800
Monthly HOA went up to $400

As you can see, I'm going about $200 out of pocket on the place each month (i'm ignoring property tax since it is roughly offset by the tax break in interest payment). Rental prices are steadily rising however.

I'm currently showing about 85-90% loan to value ratio so I can't refinance again to take advantage of the low rates unfortunately.

My options are to keep things as is or to sell for $330,000 (owe $295,000 on the loan).

Obviously if you look at the snap-shot just today, it doesn't make sense to hold onto it since I'm going out of pocket each month. But eventually I will be in the green in time.

For the experts, what would you do?
Thanks,
Luke

Comments 1 - 40 of 52       Last »     Search these comments

1   Strategist   2014 Dec 22, 4:23am  

You need to keep it. Your tax write off is every single expense, including HOA, taxes, repairs, depreciation, interest, insurance and anything else except principal, which is not an expense.
After tax write offs, you probably have a positive cash flow and not even realize it. Tax savings would go to cash flow.
You are also taking a loss. After transaction costs you will end up with nothing. You are giving up the price increases which are very likely.

2   BayArea   2014 Dec 22, 4:33am  

That's a good point.

I will crunch all the numbers and see if I am cash flow positive after all the expenses.

Will report back.

3   Heraclitusstudent   2014 Dec 22, 4:56am  

Strategist says

Your tax write off is every single expense, including HOA, taxes, repairs, depreciation, interest, insurance and anything else except principal, which is not an expense.

Really? HOA, insurance have tax write offs?

How can you consider "tax write offs" a revenue?
As far as I can tell: taxes, repairs, depreciation, insurance are all extra costs (that BA didn't account for).

If there is a tax writeoff it will cover only part of these costs.

Therefore he is much deeper in the red, essentially subsidizing for the renter.

The only thing he could hope for is capital appreciation, which is basically gambling and exactly the reason why BA finds himself in the red here.

4   Peter P   2014 Dec 22, 5:02am  

Heraclitusstudent says

Really? HOA, insurance have tax write offs?

Aren't they business expenses?

5   Heraclitusstudent   2014 Dec 22, 5:05am  

Peter P says

Heraclitusstudent says

Really? HOA, insurance have tax write offs?

Aren't they business expenses?

Ok if you rent maybe. I never rented a house, so I don't know.
Nonetheless, they are costs and not covered by tax breaks.

6   Heraclitusstudent   2014 Dec 22, 5:08am  

Not to mention if you count tax breaks, you should also count taxes paid on the rental income you receive. One more cost.

7   Peter P   2014 Dec 22, 5:10am  

Heraclitusstudent says

Not to mention if you count tax breaks, you should also count taxes paid on the rental income you receive. One more cost.

There is "depreciation" though, even if it normally appreciates. Few things are like this, only aircrafts and properties come to mind.

8   Heraclitusstudent   2014 Dec 22, 5:14am  

Peter P says

There is "depreciation" though, even if it normally appreciates. Few things are like this, only aircrafts and properties come to mind.

There is depreciation because in 50 years the construction will be a tear down and worth nothing.
Of course you can choose to hold-on to it in the meantime hoping for "appreciation".

9   Strategist   2014 Dec 22, 5:23am  

Heraclitusstudent says

Not to mention if you count tax breaks, you should also count taxes paid on the rental income you receive. One more cost.

You mistake owner occupied home with investment property.
If you are the owner of a property rented out, it gets treated as an investment where every single expense can be written off. Even advertising cost to find new tenants. Even mileage to show the home to prospective tenants.
There are limitations, but every case is different.

10   EBGuy   2014 Dec 22, 6:02am  

Monthly expenses:
~$1400 interest
~ $420 property taxes
$400 HOA
~ $850 depreciation ($280k improvements, straigthline 1/27.5 years)
-----------------------------
$3070 total expense per month
- $2000 income
----------------------------
$1070 loss per month
* 12 months
---------------------------
$12,840 paper loss per year

Tax code allows passive losses up to $25k per year. Phaseout begins at $100k of modified AGI (and is totally eliminated at $150k).

At a federal marginal rate of 25% that puts $3,210 back in your pocket.
Out of pocket loss is $620 ($200 + $420 tax) per month or $7440 per year.
So $7440 - $3210 = $4230 loss per year ($353 per month).
Yikes. This ain't pretty by any measure. IANAA. Not tax advice. YMMV. (Did I miss anything?)

Edit: correction in bold.

11   Strategist   2014 Dec 22, 6:11am  

EBGuy says

At a federal marginal rate of 25% that puts $3,210 back in your pocket.

Out of pocket loss is $640 ($200 + $420 tax) per month or $7680 per year.

So $7680 - $3210 = $4470 loss per year ($372 per month).

Yikes. This ain't pretty by any measure. IANAA. Not tax advice. YMMV. (Did I miss anything?)

What would the cash flow be? I think that is what he is looking at to determine wether or not to keep the condo.

12   EBGuy   2014 Dec 22, 6:25am  

Strategist asked: What would the cash flow be?
Even after all the "government handouts" (IRS allowed passive losses) he is shelling out $372 per month (essentially the HOA monthly expense is bleeding him dry).

13   Strategist   2014 Dec 22, 6:31am  

EBGuy says

Strategist asked: What would the cash flow be?

Even after all the "government handouts" (IRS allowed passive losses) he is shelling out $372 per month (essentially the HOA monthly expense is bleeding him dry).

EB, I think it was you who suggested East West Bank for a stated income equity line. I checked it out, and they do have it. They would go 50% of value on a first or a second. However, they charge the full costs and half a point.
Are there any banks that don't charge for equity line, yet have stated income? I do not want to pay for an equity line I may never use. My last one ended after 10 years, and I never used it.

14   Strategist   2014 Dec 22, 6:34am  

EBGuy says

Strategist asked: What would the cash flow be?

Even after all the "government handouts" (IRS allowed passive losses) he is shelling out $372 per month (essentially the HOA monthly expense is bleeding him dry).

You have to add back the depreciation to arrive at the cash flow. He could end up adding back $3,000 per year.

15   EBGuy   2014 Dec 22, 6:50am  

His monthly out of pocket is $2000 income - $1800 mortgage - $400 HOA - $420 prop. taxes = - $620
That is too deep a hole.

16   EBGuy   2014 Dec 22, 7:40am  

All right. I did make one mistake. I remember an epic San Jose condo thread where E-man, SFace or someone else argued a point that, in this case, would put BayArea into the black. Anyone want to take a stab at it?

17   BayArea   2014 Dec 22, 8:09am  

EBGuy says

All right. I did make one mistake. I remember an epic San Jose condo thread where E-man, SFace or someone else argued a point that, in this case, would put BayArea into the black. Anyone want to take a stab at it?

I'll summarize all the numbers a little later but I think when making all these calculations, the part that people often miss is that the rental income is taxed (that's what puts some folks in the black).

18   FuckTheMainstreamMedia   2014 Dec 22, 8:19am  

EBGuy says

All right. I did make one mistake. I remember an epic San Jose condo thread where E-man, SFace or someone else argued a point that, in this case, would put BayArea into the black. Anyone want to take a stab at it?

Counting the principal paid as a profit line item

Which may or may not work for a rental. But then realtors started doing it to demonstrate how homeowners benefit over renters. And that's complete bs in situations in coastal ca where most homebuyers are trying to figure out how they swing the cost of a mortgage vs a lower priced rental.

19   javco   2014 Dec 22, 8:54am  

Hope for a Greater Fool and Dump It NOW.

It's an albatross.

20   EBGuy   2014 Dec 22, 9:01am  

dodgerfanjohn said: Counting the principal paid as a profit line item
dfJ for the win! BAs mortgage is around $1400 interest and $400 principal. Add the principal paydown to his $352 loss and and he's $48 in the black per month. YMMV.

21   javco   2014 Dec 22, 9:02am  

Sorry for the duplicate post.

22   FortWayne   2014 Dec 22, 9:18am  

Unless you feel that a place is going to go up in price through the roof, sell.

Just go off TANSSAAFL, can your money make you better return elsewhere if you were to sell and reinvest in a long run? Sounds like you just locked your money up and it's not really making you anything, and won't make you any kind of money for a long time.

P.S. I'm not a RE investment expert.

Don't forget that you'll have to fix some things at some point in order to keep it as a rental. I've seen a lot of landlords who forgo maintenance as long as they can, and just try to dump the place to some sucker in a sale, but that doesn't always work out well if one can't sell.

23   lostand confused   2014 Dec 22, 10:17am  

Wow-the huge run up in prices in CA didn't lift all boats?/ I thought most places exceeded the last peak???

24   bubblesitter   2014 Dec 22, 11:38am  

LOL @ that first tax write off comment. Get out of this hole, sell it ASAP.

25   Strategist   2014 Dec 22, 12:12pm  

Don't listen to the bears Bay Area, if you sell you end up with nothing. If you hold, you have a good chance of coming out ahead.

26   LarryPatrickMaloney   2014 Dec 22, 3:46pm  

Whoa. Back the truck up....

You used HARP to get a LOWER interest rate on a RENTAL property?!?!

HARP was created for 'struggling" home owners.

I didn't know you could get subsidizes home loans on non-owner occupied properties.

HARP = Home Affordable Refinance Program...

A rental property is NOT your home!

Anybody else feel un-comfortable with this?

27   LarryPatrickMaloney   2014 Dec 22, 3:50pm  

Yup, sure enough, here are the "eligibility requirements":

HARP Eligibility
You may be eligible for HARP through your existing lender or a different participating lender if you:

Own a 1- to 4-unit home as your primary residence, a 1-unit second home, or a 1- to 4-unit investment property.
Are timely making your mortgage payments.
Choose a fixed-rate mortgage or an adjustable-rate mortgage for your new mortgage. If you choose a fixed-rate mortgage, you can refinance the entire amount of your existing mortgage regardless of the value of your home, but if you choose an adjustable-rate mortgage, you cannot finance more than 105 percent of your home's value. A fixed-rate mortgage may be refinanced into an adjustable-rate mortgage as long as the refinance results in a reduced monthly principal and interest payment.
Choose a mortgage solution that can improve the long-term affordability or stability of your mortgage with the refinance.
Mortgage insurance is not required if your existing mortgage does not have mortgage insurance, regardless of whether the loan-to-value ratio (ratio of the amount being borrowed to the market value of the property) is greater than 80 percent on the new mortgage.

28   tatupu70   2014 Dec 22, 8:17pm  

LarryPatrickMaloney says

You used HARP to get a LOWER interest rate on a RENTAL property?!?!

Read the OP again. He used HARP when he lived there in 2010, then he moved out in 2013.

29   BayArea   2014 Dec 23, 12:38am  

LarryPatrickMaloney says

Whoa. Back the truck up....

You used HARP to get a LOWER interest rate on a RENTAL property?!?!

HARP was created for 'struggling" home owners.

"struggling" home owners... too funny.

HARP was created to help stabilize a real estate market that was drowning in foreclosure by allowing owners that had LTV between 80-125% refinance their existing loans and prevent them from walking away like so many were doing at the time. Whether the owner was struggling or not had nothing to do with it. And as was stated above, I refinanced under HARP when it was my primary residence.

Getting back on track, I'm hoping that someone could clear something up for me (so I can accurately finish crunching my numbers). For the rental depreciation, my tax bill shows the following:

Land: $61,500
Improvements: $143,000
Total Real Property: $205,000
Gross Assessment and Tax: $205,000
Homeowners Exemption: $7,000
Net Assessment and Tax: $198,000

How much exactly can I depreciate (1/27.5)? Is the depreciation based on $198,000 or more?

Thank you.

30   BayArea   2014 Dec 23, 12:44am  

lostand confused says

Wow-the huge run up in prices in CA didn't lift all boats?/ I thought most places exceeded the last peak???

Unfortunately no.

The latest data I've seen shows that nationally we are still 10% away from 2006-2007 peak, on average. I'm not sure how the bay area compares as a whole, but from what I've seen (at least in the East Bay), that number is higher than 10%.

31   BayArea   2014 Dec 23, 2:09am  

Ok guys,

I’ve included a summary below of what the numbers look like. Please let me know if I am making any mistakes or overlooking anything:

INCOME:
- Rental Income: ($1950*12) = $23,400

EXPENSES/DEDUCTIONS:
- Mortgage Interest: $16,098
- HOA: $4,800
- Property Tax: $4,134
- Repairs/transportation: $500
- Depreciation: ($198,000/27.5) = $7,200

All the annual expenses add up to $32,732, but as I understand it, my wife and I have a combined MAGI that exceeds $150K so we can't take advantage of the fact that our loss exceeds our passive rental income?

So what’s the bottom line? In terms of what I am getting back, that’s $23,400 – ($16,098 + $4,800 + $4,134 + 500) = -$2,132. This $2,132 is my annual out of pocket loss, or $178 I’m losing per month…

Do you agree with the numbers or am I missing something?

Thanks a lot guys!

32   Heraclitusstudent   2014 Dec 23, 3:45am  

Strategist says

Don't listen to the bears Bay Area, if you sell you end up with nothing. If you hold, you have a good chance of coming out ahead.

...bought in 2007 and is underwater. Did you learn anything yet?

Stop expecting constant appreciation in an economy where incomes are flat.
Stop expecting new entrants will be made to pay through the nose to bail you out.
Stop speculating and start investing.

33   Strategist   2014 Dec 23, 5:47am  

Heraclitusstudent says

Strategist says

Don't listen to the bears Bay Area, if you sell you end up with nothing. If you hold, you have a good chance of coming out ahead.

...bought in 2007 and is underwater. Did you learn anything yet?

He does not benefit by selling. He gets nothing out after transaction costs, and he roughly break even right now. Just hold on, the next phase of the bull market is about to begin.

Heraclitusstudent says

Stop expecting constant appreciation in an economy where incomes are flat.

It will change. Flat incomes are not forever. That will make the prices jump.

Heraclitusstudent says

Stop expecting new entrants will be made to pay through the nose to bail you out.

It's California. New entrants just won't stop coming.

Heraclitusstudent says

Stop speculating and start investing.

So far I'm doing good with the investments. I was lucky to catch the real estate at the bottom, and stocks just hit another new high.
I speculated on the Spurs winning that game on Friday, and lost $20.00.

34   Strategist   2014 Dec 23, 5:51am  

BayArea says

Ok guys,

I’ve included a summary below of what the numbers look like. Please let me know if I am making any mistakes or overlooking anything:

INCOME:

- Rental Income: ($1950*12) = $23,400

EXPENSES/DEDUCTIONS:

- Mortgage Interest: $16,098

- HOA: $4,800

- Property Tax: $4,134

- Repairs/transportation: $500

- Depreciation: ($198,000/27.5) = $7,200

All the annual expenses add up to $32,732, but as I understand it, my wife and I have a combined MAGI that exceeds $150K so we can't take advantage of the fact that our loss exceeds our passive rental income?

So what’s the bottom line? In terms of what I am getting back, that’s $23,400 – ($16,098 + $4,800 + $4,134 + 500) = -$2,132. This $2,132 is my annual out of pocket loss, or $178 I’m losing per month…

Do you agree with the numbers or am I missing something?

Thanks a lot guys!

Nice. You are saving on taxes. If you run the numbers that negative $178 will become little profit.
If I had 10 condos in the exact same situation, I would be telling my wife "Honey, we are future millionaires"

35   BayArea   2014 Dec 23, 6:45am  

Strategist,

Thank you for sharing and that is my point.

I'm taking a small loss right now ($178/mo) but soon I will be raising the rent and/or refinancing.

At the current market value, if I walk away now, I really have nothing to show for it after realtor expenses. If I keep it, I'm more than likely going to go into green soon.

And that's really the final point... The longer I hold it, the more likely I am to come out on top given that it's a 30yr fixed loan.

I'm still hoping that someone can confirm my numbers above to make sure I'm not missing anything.

36   EBGuy   2014 Dec 23, 7:48am  

BA said:
Land: $61,500
Improvements: $143,000
Total Real Property: $205,000
Gross Assessment and Tax: $205,000
Homeowners Exemption: $7,000
Net Assessment and Tax: $198,000

How much exactly can I depreciate (1/27.5)? Is the depreciation based on $198,000 or more?
Try getting a straight answer from one of the pros on this site. I get the feeling that many may handwave when it comes time to determine FMV used as the basis for depreciation. At any rate, I would go conservative and use the value of improvements ($143k) from your property tax bill. Also, I can't say it better than the IRS: Because land is not depreciable, you can only include the cost of the house when figuring the basis for depreciation.. If you want more depreciation expense, you should get an appraisal for FMV. You could try to use your tax bill from when you bought the place, but it may get dicey if the IRS can show that the current FMV is lower. Also, you'll want to remove the homeowners exemption from your property tax bill as you're no longer living there.
You have a decent amount of passive losses. You may want to investigate generating passive income to soak up your passive losse. Not financial advice. YMMV.

37   lostand confused   2014 Dec 23, 9:33am  

Interesting. Now that I bought a house and enjoying it , am thinking of buying some rental property/properties.
Now where I am, it is actually a good investment in terms of income-appreciation is moot. I think if you get the price you paid for-that is great. The house I bought, I bought at a discount to what the owners paid 11 years ago.

But rental income-though not high b y cA standards-is very good when compared to the price.

I am just starting to look and will be a few years before I do my research, market conditions etc etc. I sold almost all my stock a while ago and at these prices-do not want to get back in to the market for a bit. Now what is this about the 150k rule-you can't take passive losses if you have above that income??

38   Strategist   2014 Dec 23, 9:46am  

lostand confused says

Interesting. Now that I bought a house and enjoying it , am thinking of buying some rental property/properties.

Now where I am, it is actually a good investment in terms of income-appreciation is moot. I think if you get the price you paid for-that is great. The house I bought, I bought at a discount to what the owners paid 11 years ago.

But rental income-though not high b y cA standards-is very good when compared to the price.

I am just starting to look and will be a few years before I do my research, market conditions etc etc. I sold almost all my stock a while ago and at these prices-do not want to get back in to the market for a bit. Now what is this about the 150k rule-you can't take passive losses if you have above that income??

Show the numbers. The Mid West does not normally have above inflation appreciation rates, but if you have a cap rate of 10% and interest rates are 4%, it can still be a good investment.

39   zzyzzx   2014 Dec 23, 10:34am  

I would sell.

40   SFace   2014 Dec 24, 3:22am  

Raise the rent to market. (Presuming not rent controlled). If it is vacant. Put it in the Market for both rent and sell. Don't be afraid of vacancy as it is a good thing.

Your issue is the rent is too low and interest too high. Those are not permanent problems. Get those fixed and you will have a more sustainable investment

Comments 1 - 40 of 52       Last »     Search these comments

Please register to comment:

api   best comments   contact   latest images   memes   one year ago   random   suggestions