Indefinitely Period of Travel - What to do with $400k home

[Eli Kallison]

Athe end of the year, I'm quitting my job and booking a 1-way ticket overseas. I'm going to try to freelance and make some money while traveling to make this as sustainable as possible for a long period of time (probably to Chiang Mai or Australia first). I want to live frugally, but be comfortable while I'm traveling.

My main concern right now is what to do with a home that I own. I have about $400k in equity in a home in Los Angeles that I rent out for $4k/month. The mortgage is $2.5k/month and there seems to always be something to fix. Average costs have been about $800/month (I don't expect that this would continue, as this includes a complete AC and ducting install and retiling of the bathroom that was peeling).

What would you guys do with the home? Sell and invest the money? Sell and do something else with the money? Rent it out and hope for the best? Maybe try setting up AirBNB?

Any thoughts would be much appreciated!

[Matt Huber]

Eli, I always think the worst question is asking someone else to tell you what to do for your financial situation.  I understand you want guidance and it is wise to ask for help, but the first thing to do with EVERY decision in life is to first gather the facts.

For anyone to help guide you they need more information.  What are your savings?  What are your expected monthly costs?  Do you need monthly cash flow from the house to survive or do you expect to generate enough to live wherever your going?  Do you expect appreciation from the house or perhaps depreciation (since a financial crisis is not out of the question in my mind)?

If you expect appreciation and the cash flow from the house is sufficient to pay the mortgage AND pay your monthly bills you may want to keep if PRESUMING you have no other assets or cash flow.  If you have other assets or cash flow, you may not need to keep it to pay your monthly bills.

Have you lived in the house 2 of the last 5 years so you can sell with the federal exemption where you can make a $250,000 (as a single) tax free gain?  If the answer is yes and you wait too long that gain will no longer be tax free.  If you qualify for the tax free sale, you may want to take it while you can.

If you are afraid of a financial crisis the $400K equity could quickly deteriorate.  That would be a good reason to sell.  Taking a profit is always a safe strategy (as long as you don't do something stupid with the money).

Do you think you'll want to come back to that area and own there again?  If so, are you afraid prices could take off where you won't be able to afford to buy in the same area since you will have left an apparently high paying job for life enriching reasons, but will not qualify for a loan in the future? (You WILL NOT qualify for a loan until you've been back on a high paying job for at least 1 year and more likely 2 years.)

One possibility, depending on your aggressiveness and understanding and comfort level, could be to sell your own house with owner financing.  You will be breaking the due on sale clause but that is rarely enforced (like less than 1 in 1000) since interest rates aren't going anywhere.  You can sell above market with a higher interest rate to parties that don't qualify for bank loans using a wrap mortgage, just make sure you get a good sized down payment (say 10 - 15%).  Perhaps one big reason NOT to do this in California is foreclosure laws.  I don't know how long it takes to get a house back in California, but I do know California is NOT investor friendly so this may not be a good strategy in California as it could take too long to get the house back where you have to pay the underlying mortgage and are not receiving payment yourself.

The safest strategy is to sell, however if you are not adept at creating income from your cash/equity it could well be best to keep the house as a rental if you are getting both cash flow and principle pay down. (I don't know what your cash flow is because you did not mention taxes and insurance and perhaps HOA payments. I may not keep it unless I was getting enough cash flow to fund my travel adventure.) There are a lot of questions you need to answer for yourself first, before going one way or the other.