I want to buy a house, should I sell or rent my townhouse?

Question

My husband and I would like to buy a single family home in the next 5 years or so for our future children.

We live in the San Diego suburbs, and the house prices are finally dropping here.

We will have our 3 bd/3 bath townhouse paid off in a few months and have no equity loans, car loans or any other debt.

We have great credit and $50,000 in savings for a downpaymnet on a new home.

Should we sell our townhouse and use the money towards a new house?

Or should we rent out our townhome and use the rental income towards a new loan?

Would it be best to keep the townhome for retirement income?

What is most beneficial for my family's future?

Any advice?

Answer 1

How to value a property for investment during market downturn?

Housing market continues to slump. Now we can calculate true value of a property easily. As price decline, we don't need to guess and factor in the potential price appreciation while calculating home value. Without the guesswork, figures are more accurate.

Let's use following example:

Today, a typical 15 years old, two bedrooms condo/townhouse is priced around $500,000 and $550,000 in Sunnyvale, California. Rent for similar condo/townhouse is $2000/month.

If you are a home owner, $2,000/month in rent means $20,000 a year in profit ($24,000 per year in rent, minus $4,000 maintenance costs). A $20,000 income is equilevant of owning $400,000 bonds or CDs, because current yield of 30 Years U.S. treasuries are 5% (5% of $400,000 is $20,000). Bank CDs have similiar yields.

In our example, the two bedrooms condo/townhouse is 20% to 25% overpriced. They should be priced at $400,000.

It is interesting to note that if we redo the calculation from buyer's perspective instead of seller's perspective, the figures are even more shocking.

Mortgage payment consists of two parts: mortgage interests and mortgage principal. The interests portion is similar to rent. If you pay interest, it disappears and doesn't add equity to the property. To fully simulate characteristics of renting, we assume buyer will apply for a zero down, interest-only loan.

It turns out that rent of $2000/month is equivelant to mortgage payment of a $340,000 loan at 7.0% APR. And comparing $340,000 loan to $500,000 or $550,000 price tag, from buyer's view, the two bedrooms condo/townhouse is 30% to 35% overpriced.

One may ask, why is there a discrepancy between two perspectives of the buyer and owner?

The discrepancy is a result of 2% differences in interest rate that buyer borrow comparing to yields of bonds and CDs that owners would get. We understand that buyer would always pay more. That is the premium of buying to own. However, looking from home owner's perspective, current housing market is probably 20% to 25% overpriced. We recommand investors to wait for a better entry point.

Answer 2

2

Answer 3

Rent it if at all possible.

Get the new house and a fixed-rate mortgage on it.

If your finances makes this make sense later and particularly if rents go up in the area a little at a time, refinance the townhouse to get some of the equity out; put a chunk of that money on the house you've living (refinance). This would reduce your payments and increase the equity in your primary home, leave the townhouse with the rental income paying all of most of the mortgage on that property (provided your timing and terms etc. were aimed at this goal). Your month mortgage would be lower, leaving you with more of your money for additional investing (or at least leaving open the chance that that situation would arise later).

Set aside money as a cushion in the event the renter doesn't pay for a couple of month or in the event the property goes without a tenant for a little while.

It seems to me that by using the townhouse as a source of equity for your primary property you can accomplish your aim of increased equity while at the same time keeping the townhouse and leaving open the chance that it may later not only pay for itself but provide an income.

Of course, all the numbers and timing of what gets done when would have to be worked out with consideration of whatever your financial situation is - but above is what I'd aim for.

I think any time you have property you should keep it if possible as long as it doesn't cost you money; and even if it is never does anything but break even you (and your kids) will have the security of the option of living in it or selling it when it is clear that selling it would make sense. Even if the rent doesn't give you an immediate income, property values do go up; so letting it sit and appreciate in value makes keeping it worth it regardless of anything else.

With the refinancing of the properties you get to keep both but increase how secure your primary property in a relatively short period of time (couple of years maybe). The price of real estate may be dropping some right now, but it probably isn't going to drop to "zero" in the near future.

If you could work out the numbers with the idea that housing prices will most likely rise again (and with the idea that if they just drop and drop "forever", which is unlikely, you'll re-think your plan); you should be able to figure out some wise plan. You have to be ready to be flexible and make wise choices if/when any big changes seem to be occurring in the market, but I think I'd aim for this type of thing first and re-think if necessary later.

Just my opinion and what I'd do if I had to choose..... My reasoning is: Aim for the thing that would give you the potential of most growth and security first and adjust later if it appears that the plan is going in the wrong direction. It may involve more risk than selling the townhouse would in the short-term, but the likely long-term benefits, in my mind, far outweigh the risk. Can you lose in some way? Yes, but I don't think its likely; and by the time it were to become evident that you may lose you would probably have the time to do something to head off any big loss.

Answer 4

Alot depends on your financial picture today and what it is likely to be in the future. Also, have you given serious consideration to what a landlord's responsibilities are? And what that entails? Owning real estate is the american dream. The more you own, the better your financial picture. Drawbacks are finding and keeping good tenants, being called in the middle of the night for repairs. No rent for months and it cost you to have the proper paperwork drawn up to have them evicted... On the other hand, this market will turn around at some point in time and having real estate could improve your equity finanically. You could use the equity in the TH to buy something else. The nice thing is you have options, you just need to see how they will work best wtih your financial situation. Good Luck!

Answer 5

No doubt, it's a buyers market. So buying now is a greta idea.
Traditionally, at least in our market (Las Vegas), the slow time of year is the last quarter, and later the market picks up in January again. Bilders already have homes cheaper for December delivery than January delivery. Again Here, you can save yourself up to about 60,000 from the original price and about 35, on the same house for january delivery.

If you don't need the money, hire a company that specializes in rentals, those that recomend you do it yourself obviously haven't had to deal with an eviction, or the tecnicalities of it. The gains in value, and loss now will continue to be seen in the rental as well as your primary residence, not counting the additional income it will generate that you can use to pay of faster the home your considering buying.

Good luck,
If you need apre-screened REALTOR in your area let me know.

I have some free reports on my site that may interest you, just e-mail the # on the report and I'll send it to you.
http://www.cbwardley.com/frankbecerra

Answer 6

Since the townhouse will be paid off soon, you should keep the townhouse and rent it out. The rent that you'll receive can be used to pay the mortgage for the new home.

Answer 7

Rent it out. It's of my personal belief not to sell property unless that's what you were planning on doing when you bought it.

I am a Licensed California Broker. I can help you rent it out, manage the property, get you a new loan and buy you your next home. I'm a one stop shop and I am very knowledgable in real estate and in real estate investing. I also give cash back when purchasing a home. Please contact me if I can be of any assistance.

Regards

Answer 8

As a mortgage professionaly myself, I would rent that sucker out for as long as it takes for the real estate market to rebound. You may not have any interest write off's from the property, but you will still love the other write off's you get.

Let me know if you need any help with anything. I am licensed in your area and have a great reputation.

Answer 9

oh you should def. rent it out and then one day you will have 2 houses which in years down the line you could sell if you wanted and have that extra money for your retirement or a house for your kids. Good Luck with whatever you do!

Answer 10

Your entire tax position should be reviewed for the most accurate answer. However, it appears you are looking long term for this move. As such, keeping your current condo for a source of retirement income or college tuition is very wise. Depending on your purchase price of the new home, you may benefit with a larger down payment to at least make 20% down. You would then get the best long term financing on the new home. When I review these scenarios, we often look to balance the benefits of a new loan on the rental (current home) before you move against the down payment and loan balace on the new home. With passive loss rental rules, AMT, and other tax issues, I would definately want to review your entire portfolio and future plans before giving devising a full plan. If you have additional questions, feel free to contact me at http://www.slarson.com/contact or [e-mail]