rent vs sell? north of seattle

[Ryan M.]

I;ve been agonizing over the math on  rent vs sell of our primary residence that we plan to leave. Any ideas would be appreciated.  I currently have two rentals doing well in other states and have experience with one flip.  

The property was purchased for 310K, 20% down 3.5%interest mortgage (~240K). Over two years in the house, so no capital gains; it will sell for about 360; . Mortgage and tax/insurance escrow is ~1500 and it will rent for ~2000 so cash flow of 500. It is  near a good school so it should rent with some ease.  So on one side I have my 60k sunk in it plus 40K tax fee on sale or 500 cash flow with ~500 per month pay down on the debt?  Not sure where to go with this one. 

Thanks everyone!

Ryan 

[Marcus Auerbach]

@Ryan M. it is important to consider all aspects of your investment, not only cash flow. Generally your have 3 sources of income/wealth:

1.) cash flow

2.) equity (mortgage principal pay down)

3.) appreciation (forced and natural)

Some people will mention tax shelter as a fourth one. Personally I always look for investments that are well balanced in all three categories. Cash flow has been hyped up too much on BP. While it is a vital non-negotiable for an investment to make sense, it never amounths to much in terms of wealth. Do the math. Wealth is created from #2 and #3. And I think your property may have a good chance to perfrom very well in both. I can't speak to your local market and neighborhood, but do some research, make some reasonably conservative predictions and then run the numbers through a BP calculator. Real estate needs time to really unfold - look at the numbers at the 10 year, 20 year and 30 year mark. 

You have a loan with an interest rate I would walk miles to get it - 30 year fixed rates are up in the 5,125% range now. Commercial ARMs (my only option at this point) are approaching 6%. At 3.5% you are almost at the rate of inflation (and will be less than inflation if my outlook is correct). Once you sell the property you will not be able to acquire dept at this rate anymore.

I disagree with John on the doom and gloom outlook for the housing market. Residential real estate is very local and the US market as a whole does not care what houses in China sell for. Milwaukee does not even care what San Francisco or even Chicago sells for. Residential real estate is also somewhat disconnected from the stock market (short of a black swan event of course). 

Fundamentally we have two main factors that wil determine SFR housing prices:

1.) Supply shortage. We have not built enough homes from 2008-2018 to keep up with population growth as a result of the housing bubble and builders and trades going out of business. We are short about one million homes and while new construction is up, we are producing on a maintenance level, not on a catch up level. Until that chnages we are short in supply for SFRs.

2.) Cost of Existing homes vs new home: we have a 31% price gap between new and existing. Historically this was much less, about a third. Cost for new construction is unlikely to come down (I have just completed a spec home, ask me about my budget), so existing homes are too cheap. With an absorption rate of 2 months in the Milwaukee market (6 months is normal) demand will keep pushing prices up until we narrow the gap enough to cause more people to build new. Which finally will then resolve the current conundrum and inventory shortage issue. 

Now, markets like the Bay Area have to be looked at in isolation. Existing home prices are so high that new construction seems dirt cheap (if you could only build). The second issue is that the compounding effect of appreciation is pushing the limits of reality. You can't take a $1.5 million starter home and expect it to go up 20% year over year, so it will be over 3 million in four years from now - that is not going to work and prices have to cool down there. Like I said what happens in a costal market with prices does not mean it has to hapen everywhere. The next downturn will not look like the last one - as we had banking collaps ALL housing markets were impacted more or less equal (the high flyers a bit more than the more modest cities).

I am generally bullish for my local market for the next 2-3 years and expect prices to continue to grow. Existing homes are just too cheap in Milwaukee compared to replacement value (ask your insurance guy).

I have posted recently about the numbers for Milwaukee and the market is currently choked by supply shortage. A lot of my clients dont want to put their house on the market, because they dont know if they can find one to buy. So they stay put and make the inventory situation worse. If our market would slow doen a bit and we would see more inventory, it will be a signal to many sellers who want or need to sell that they can now list their home and expect to find a new one.