Advise for beginner, to sell or not to sell?

Question

Hello all,

So back in October 2021, my wife and I decided to move to closer to my family, in Austin Texas. So in November, we put our Miami apartment up for rent, and it has been rented since (cash flowing about $500 right now, rented at $2000, with $1500 expenses including mortgage), and we've been living at my parent's second home (in Austin, while they also transition from Miami).

Long story short, we had a change of heart, and are no longer interested in living here in Austin due to family issues. So we will most likely be living overseas by my wife's family (in Argentina), renting an apartment in the city.

However, back in October 2021, we put a $6,000 hold fee on a new constructions, price locked at 385k for a 3/2 1500sqft right outside of downtown Austin. The house is scheduled to be delivered and closing mid September 2022.

I looked at Zillow rentals around the area, and bigger houses are being rented at $2,500 tops. Mortgage and taxes alone (with a 40% down payment which I originally wanted to put down) would have been around $2,500, so I would be breaking even, coughing up $160,000.

With the recent market turmoil, I've seen the same house from the same builder (in the norther part of town, about same distance from downtown Austin), listed at $485k – so $100k more than what I locked my price at.

My question is... should I not buy it and lose the $6k? Should I keep it as a rental even though it wouldn't  cashflow? Should I just sell it as soon as I buy and invest my money elsewhere? Just trying to figure out what's best for us.

Thanks so much for your advise in advance!

Pavan Sandhu · Answer

Just, amazing and how exciting for you. This truly is the beauty of real estate. YOU HAVE OPTIONS!

A few things:

Sometimes it is ok to buy an asset and have negative cash flow. That said have a plan to improve that cash flow.

Losing 6k would suck but small in the grand scheme of things.

That anticipated equity you have is only good if you are able to tap into it. Can you do a 1st and a second at the same time. Get the second in the form of a HELOC so you regain some of that 160k downpayment you have.

My goal is to acquire more assets. Never Sell and Refi till you die.

;)

Aaron Gordy · Answer

If you don't want to be exposed to Austin's long time market boom then sell it. I have bought many sfh's that were negative cash flow initially that turned out to be big winners. The rent increases eventually made it cash flow positive. More importantly to me is that the property values went up ALOT. You could always flip it once its completed if the prices have gone up by 100k since the time you put it under contract. Some builders are nervous. You may want to see if the builder will be willing to negotiate the price too. Additionally, you may want to consider the tax implications by keeping it for one year.

Joe Scaparra · Answer

@Guillermo Rozenblat this is not as hard a decision as it looks.  Let's break it down.

1.  You bought a house in Austin that you planned on living in it.  A brand new built at that!  Great, you locked in a price in October and almost a year later it will be move in ready.

2.  Due to new circumstances, you no longer want to live in Austin, what to do, lose 6k walk away, buy it and rent it or buy and sell it.

Before I give you my opinion ask yourself this question.  If I were to buy a property for the sole benefit of renting it out, would I buy a new SFH new built?  My answer to that is absolutely not.  As you are finding out it is harder to cash flow positive on a new built SFH than an existing small multifamily duplex.  Not to say in the Austin metro that you would be positive with a duplex but you would likely have a better chance to be positive with a duplex.  The other issues are many when it comes to renting a new built home.  You are getting a very nice home that renters will definitely abuse.  Are you ready for that.  Smaller duplex units are easier to keep up and thus rented.  It is far easier to find two, $1200 renters than one $2400 renter.  Lastly you might have HOA issues as well, don't really know, but since renters are not overly concerned with HOA rules you might be having some issues with the HOA.   Sounds like you are not very experienced with renting to tenants and that is a whole new can of worms at this point, especially if you plan on moving overseas.  I would definitely rule out renting.

Now, do we lose the 6k or buy and sell.  Usually this is an easy decision as most cases trying to sell a brand new built and compete with builders on their own product is very difficult to due............unless the market has blown up from the time the contract was executed and the acquire time has experience a huge appreciation.  In your case you might be lucky that this is the case.  The easy thing to do is just walk with the 6k loss, but if I had significantly more to gain by selling then I would sell.

You might not even half to wait for the house to be built.  You might start looking for a buyer now.  I don't know if the builder can prevent you from marketing the contract but if allowed I would start investigating sell it and walking away with some extra $$$.  If not start marketing 45 days out from expected closing and sell if you reasonably expect to make a profit.  If after trying to sell it becomes a bigger issue then before the house is finished give up the 6k and walk away.  We are entering a new phase with this market and it might not be as bad as some people are predicting or it could be worse but you hold he options to either buy and sell or walk away.  Make the decision that nets you the most money or if you are a non-hassle person take the 6k loss and walk.  In the big scheme of things 6k loss is not a big deal.

Remember to include the cost of selling which includes the cost of getting your loan AND the cost of selling too.  You probably need at least 10% more on the sell side to break even.  Above that it may be best to buy and sell, below that I would walk away.   Good luck!

Theresa Harris · Answer

Why not see it through and then sell it?  You can live in it until you decide what you want to do-move to Argentina or elsewhere in the US.

Joe Gonzalez · Answer

You might have accidentally stumbled upon a niche strategy.

I know of investors locking up new builds early on since they projected that prices would increase once the housing development (and nearby commercial developments) were completed.

It's risky in the sense that it's pure speculation but it seems like it worked in your favor in this scenario. Personally I would ensure that the numbers were correct, this includes making sure there is no artificial inflation due to this current market. If I determined that there was truly equity built through appreciation then I would 100% close and resell, it would just be another business dealing for me.

If you are relying on the 160k for other projects then take the 6k loss as a lesson and move on - that money can always be recovered.

Carl Davis · Answer

Never hurts to try or look if it's an option to benefit someone why not try?

Just giving up on something without even trying seems pretty lame to me.

Jordan Moorhead · Answer

@Carl Davis there's almost a 0% chance that is allowed in a new build HOA neighborhood here in Austin

Carl Davis · Answer

Another option would be to look to see if the Austin home would cash flow as a STR or MTR.

This happened to us in Tucson when we bought a brand new home and 6 months later had to PCS to Utah. Decided to put it on AIRBNB just to see and it's been the best decision.

If it doesn't flow there and you don't want to put the energy into keeping it you can sell, IMO.

Malgorzata Sadowska · Answer

Sell Austin & Miami (before Miami condo market dips.... We've had double digit appreciation in condo prices since you purchased - that's the first market that will soften).

Jordan Moorhead · Answer

@Guillermo Rozenblat I wouldn't buy it if it doesn't make money. Also, are you able to renegotiate with the builder maybe you can make it make sense? Or maybe you could close and sell it at a profit?

IMO don't buy real estate that doesn't cashflow.

Advise for beginner, to sell or not to sell?

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