Should I Sell This House in Austin?

Question

Bought a new build townhome for $525k just over a year ago with 20% down securing a 4.2% interest rate. PITI is $3,100.

Moving out of state in a few months.

There are still new builds identical to my model for sale going for $475k and rental comps in the area are about $2,650-$2,750.

I don't need the money now but losing $400/month is not good.

The one saving grace is is that investors are bringing $300 million go my neighborhood to turn it into the next downtown. More bars, restaurants, apartments, etc.

Hopefully I can raise rents aggressively.

Joe Scaparra · Answer

@Jonathan Marsh, Stop for a min and define your goal or at least your objective with this property.

Do you foresee coming back to Austin to live and possibly move back into this townhome?

Is this a property you would have bought as a pure investment? (my guess is NO!).  This property, bought as you did was a BAD INVESTMENT choice.  I don't think you were thinking real estate investment at the time, but if you did what investment criteria did you hit to make you think this was a good INVESTMENT.  Buying a SFH to live in with no generation of rental income is NOT an investment but a lifestyle choice.  Don't confuse them.

Have you accurately computed your holding cost?  (you say PITI 3k but what about Association fees, Vacancy @ 5%, nominal maintenance since new but still a cost.)

$400 negative from PITI.  But, if you add in vacancy cost 5% of one years rental income is $130/mo plus Association fees of $200 per Month, and a measly $100 monthly maintenance cost puts you more like NEGATIVE $830 per month or lets say 10k a year.  All these are estimates as you have not provided some of the information.

Now let's look at any positives you have.  4.2% INTEREST RATE!  Nice if you plan on moving back to Austin in the future.   Since you put down 20%, should you sell you might not have to bring anything to close.

Here are your obvious strategies options as I see it.

Rent and hope for the best.  Be prepared to take a 10k hit per year for 5 years.  Increasing rents is a wish and a prayer.  Rents have already bumped and now are stagnating.  I have 18 rental properties in and around Austin........I know. The only way I can see a rental income increase is if you furnish and rent out as a Mid-Term rental but then you would need to anticipate more vacancy time too AND would definitely need a property manager since you will be out of state. If you have never been a landlord this is one of the absolutely worst ways to start being one.  Life throws us curveballs all the time.  What happens if you go to your next job for a year and get laid off.  Now you have two situations to deal with (your current living situation and this hemoraging negative cash flow in Austin).

Sell conventionally and take a loss.  Get out now without coming up with more money to exit.  Next year you might be looking at a further decline in property values.  Analyze what went wrong and how could I have been better prepared for this situation.  You essentially took a SFH non-investment approach and now are trying to convert a SFH into an investment.  UNLESS WELL THOUGHT OUT IN ADVANCE this usually ends badly. Take the loss and be better prepared next time.  Less stress since you will not be negative each month.

Sell with Owner Financing.  This is dicey with no prior experience with owner financing.  You might get a better price on your townhome but you have to navigate a possible loan recall and a buyer who might be prone to default.

There are NO GOOD OPTIONS.  But don't go into this decision without knowing the very possible outcomes!  If I feel GREAT about not losing my job in the next five years, and I feel GREAT that all I am going to experience is a $400 loss each month and I feel GREAT that over the next 5 years Rents will get me to at least break even and if I feel GREAT that in 5 years I can then sell my townhome for more than I bought it, THEN I MIGHT consider holding this property.

Let me add this to give you some context.  I bought a brand new SFH in 1984 and AFTER living in it for 5 years could not sell it for what I paid for it ($78,250).  I then rented it out for another 5 years before I was able to sell it for $81,000. PROPERTIES don't always go up in value as you well know.  But even in 5 more years your property may not be above what you paid.  Be prepared.

Lastly, IF I KNEW I was coming back to Austin and would be happy to move back into the property then I might roll the dice to keep it.  Otherwise, I would sell and move on! Best of luck.

Tim Bratz · Answer

- First and foremost, $400 loss a month is not great, but not the worst, if all of the development will force massive appreciation.

- When is all of that development taking place? Is this within 12 months? Or within 10 years?

- It could make sense to run the property as a short term rental in the mean time, then either continue to run as a STR if it is working well, or transition to long term leases. I would see what AirBnB rates look like in your area, then assume 25% occupancy worst case scenario, 60% occupancy best case scenario.

Maxim Son · Answer

hey Jonathan, just sent you a DM

Aaron Gordy · Answer

I think more info is needed to offer solid advice. For example, I would take a loss, if it put me in a lower tax bracket that would actually save me substantially more money than the loss. Also consider that the values and rents would likely rise. There will likely also be very little maintenance costs for years to come as its a new build. In the real estate game, one can lose on a monthly basis but win substantially on a yearly basis given all the other tax benefits with real estate investment such as depreciation.

Ryan Kelly · Answer

@Jonathan Marsh hold it for sure. You would take a $50k+ loss now AND lose a property in Austin with a 4% interest rate, which we may not see again. You’ve stated you believe the neighborhood has a lot of future upside, so keep it and take full advantage of it. Your strategy today is to do everything you can to reduce expenses and maximize rents until you get to break even again. That’s my recommendation.

V.G Jason · Answer

This really depends on your financial situation. How much alternate  debt do you have, how many dependents do you have, how's your W2, etc.

Assuming you can weather $500/mo payments. You realize selling this will be underwater, so you'll have to cover that plus 5-6% in agent fees. Math tells you, to recoup you'll be paying that monthly payment up front for the range of north of 60 months. By holding, within 60 months, you'll likely be breaking even if not in the money given the Austin area and the expected development.

Behaviorally, $500/mo needs to be assessed with your personal finances. To most, this unacceptable. But also to most $700/mo in a car note is acceptable, as is $300/mo in credit card interest fees, and withdrawing from savings to cover excess spending and student loan notes due. To the well positioned investor, $500/mo isn't the best situation, but the coupled rent appreciation + home appreciation in Austin is too good to tap out and cover the cost of exiting at a 60 month payment due today.

I would hold, assuming your personal finance position lets you. If it does not, rob peter to pay paul to hold or pick up 4-5 shifts a month to subsidize. You will regret selling this. I am usually the buyer in these situations, and to me the fact you'll tap out is just my opportunity.

Billy Daniel · Answer

It's worth noting that the $400/month you're eating only covers your PITI.  You'll have repairs and maintenance to cover as well.  There's also a solid chance you're going to have vacancy while you wait for the market rents to get where you need them to be.  In reality, I would assume it's going to cost you about $600/month or more if you end up needing a PM.  However, like others have said, Austin has a bright future so it may be worth holding it if that doesn't land you in the poor house.

John McDonald · Answer

Austin has a fantastic future. There's hundreds of billions being poured into the tech sector and, long term you'll likely make out very well. If you can afford to eat the $400/month in the short term given that it's a new building with low maintenance. The market will bounce back shortly and rents will jump.

Cheers

Travis Timmons · Answer

Hang on to it. Focus more on creating or saving an extra $400 a month over selling. If it makes a good mid term rental, maybe you can find a way to increase rents enough to cover your costs. If I were in your spot and in a jam (not saying that you are), I'd drive for uber or do extra work to make a little cash to cover that gap before I'd sell it.

I think that you're more likely to regret selling than not selling. I had a good friend in a similar spot with his house in Seattle 7-8 years ago. Lived there for a year, didn't have any walk away equity, his wife got a promotion that took them to another market, they rented the place out at a small loss but decided to keep it. Fast forward to 2024 and it's worth 2x what they paid for it. Granted, 2020-2022 were strange times, but the concept holds. If you have a property that you like in a good location, just hang on to it unless you have enough walk away equity to pursue a better option.

Jonathan Marsh · Answer

I do have another one that cash flows $250/month so it doesn't sting as bad I guess

Should I Sell This House in Austin?

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