Evaluate my real estate situation (very long)

[SomethingClever]

Inspired by DeathDonkey's post, although this is something I've been thinking about for a while.

Before I get into specifics, here is some background you should know. My wife and I are both 28; she's in grad school and I work in advertising. When she finishes her Master's next year, I'm planning on taking a leave of absence from my job so we can go traveling for anywhere from 6 months to a year.

That in mind... we purchased our first home in Portland, Oregon in 2004 for $207,000. It's an old farmhouse in an established neighborhood. If you know the area, Mt. Tabor. The neighborhood is terrific. It's about 10 minutes from downtown, and a short walk to Mt. Tabor Park, which is actually an extinct volcano within the city limits. We love it.

The house itself is on the small side (1,200 square feet not including the basement) but it has a huge yard and is plenty big for us. Two bathrooms, three bedrooms, two stories (not counting basement).

The house was built in 1894, but everything has been updated, including new plumbing, wiring, sewer, kitchen, etc, within the last 10 years. Since we moved in, we have done a lot of work too. I completely remodeled the office (I'd post pics but my home computer isn't working) and the main floor bathroom with subway tile, vintage floor hex til, new appliances, sconces, etc. We love living there and would probably stay another 5-7 years if it weren't for other factors (more later).

What we must now decide is whether or not to sell the house next year when we go on our trip, or look for tenants to rent it from us.

Other relevant details: We took out a 5/1 ARM at a pretty dang low interest rate back in 2004. Our thinking was that we very likely would be selling the house within 7 years (which is the approximate breakeven point versus a fixed rate loan), so the ARM made sense. We also plan on having kids when we get back from our trip, and we would need a bigger place for that, so that factor was additional reason to take the ARM.

Obviously it's tough to know right now what the market will be like near the end of next summer (when we would have to decide all this), but Zillow.com says the house is worth $285,000 today.

Given all the scary talk about a market collapse, I'm tempted to just sell next year before we leave on our trip. There's a good chance we can make a tidy profit.

HOWEVER

There are a few things I've been thinking about that make me want to keep the house and rent it out.

- It's a great house. We could potentially live there with an infant up to 2 or 3 years old. So that would give us a move-out date of around 2011 or so.

- It's in a desireable location. A lot of what I heard about the real estate bubble is that these "McMansion" type homes in far-out suburban locations are going to be the first affected.... because the supply is basically unlimited, but the demand will decrease because of the interest rate. You can't build more 1894 farmhouses 10 minutes from downtown Portland, so the supply is sorta fixed IMO.

- We could easily re-fi our ARM right now through ING and get a 7/1 that runs through 2013, giving us plenty of time to sell when we need a bigger place. But of course that would mean we'd need to rent the place out while we're gone.

- Portland is undervalued compared to similar West Coast cities IMO. Houses in Seattle are approximately twice as expensive.... you can't live in the city unless you're a millionaire. I think people are realizing this.

Thoughts?

[NoTalent]

Man, that's a tough one.

It sounds like a great house in a sweet location. My buddy lived up there for a while and loved it. You are correct that they are building these shitboxes out in the burbs and they are unlimited. But everyone will feel the hit if it does happen--some more than others.

Points to think about:
-What kind of refi could you get right now?
-You say you could sell it in a year. Things seem to be heading down quickly--are you sure you can sell it for 285K in a year?
-What if you can only sell it for $250K--would you still sell in a year?
-At what price point will you hold on to the house while you are traveling.
-Is it required you rent the place out while on your trip?

[SomethingClever]

Points to think about:
-What kind of refi could you get right now?

<font color="blue"> Not sure exactly, but I think around 6% or something, with no closing costs from ING. This is for a 7/1 ARM </font>

-You say you could sell it in a year. Things seem to be heading down quickly--are you sure you can sell it for 285K in a year?

<font color="blue"> Not sure. I just don't know how the overall economy would fuxor with the Portland market. </font>


-What if you can only sell it for $250K--would you still sell in a year?

<font color="blue"> Again, I have no idea. We'd like to get back into a place right away when we return, so we don't have to rent or stay with relatives. If we can't capture much profit by selling next year (250k is close to where I'd be pretty undecided), we'd be more tempted to rent it out. If it looks like things are going this way, I'd be more tempted to re-fi now, so we have longer to ride out the market downswing. </font>

-At what price point will you hold on to the house while you are traveling.

<font color="blue"> I don't know what this means. Once we're traveling, we either will have the house rented or sold. We won't be making decisions on it while we're gone. </font>

-Is it required you rent the place out while on your trip?

<font color="blue"> Not necessarily, but I don't want to blow a ton of money paying for an empty house all year. </font>

[LinusKS]

Well, it sounds like a great house to me. No way I'd sell it - but that's me.

If you are going to sell it, I'd sell it now, not later. Especially if you want to go take a trip somewhere.

Yeah, you might be able to rent it to someone who'll take care of it while you're gone - especially if you've got a friend or someone you know who wants to stay there. But the nightmare scenario is a busted pipe and a renter who doesn't take care of it. Or worse yet, someone who just trashes the place while you're gone.

What you're looking for is more of a house-sitter than a typical tenant. You need to be clear about that before you go, or you're liable to be in for some unpleasant surprises when you get back.

[DesertCat]

I would keep the house. It's difficult to time the market, esp. when you don't even know your own future plans. And you will be incurring signifianct transaction costs. If you are happy and can stay for three or four more years you are probably best staying put.

As far as the loan is concerned, don't refinance unless it's a lower rate. You have 3 more years on your existing loan, why pay more for 3 years just for the possibility of saving some money in 2009? Money in 2009 is not as valuable as money today. You should have a higher income, there will be inflation, etc.

Lastly, I don't know how much things have changed since I moved (3 years ago), but PDX has always been a horribly expensive place to live. House prices were lower than CA and WA, but the average income is also substantially lower, so on house price to income ratios, PDX usually does very poorly. I moved to PHX and got a substantially larger and more expensive home for 1/3 the RE taxes, while cutting my income tax by more than half.

The good news is unless Metro smartens up and removes the urban growth boundry to make housing affordable for everyone, you own something that's going to stay in limited supply, a single family home in PDX. PDX is much less likely than PHX to suffer from a housing bust. Here they can just bulldoze a few farms and build 10k new homes any time they want. You like PDX, you like your house, I'd sit tight, live frugally, and see what you and your wife want to do in three years when your ARM adjusts.

[SomethingClever]

Thanks for the reply, DC. I've been reading your posts of late in this forum and you seem extremely well-informed.

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As far as the loan is concerned, don't refinance unless it's a lower rate.

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The rate would not be better, but it would group our regular loan with our HELOC which would have the effect of costing about the same per month (our HELOC is only 1/5 the size of our 1st, but the rate is higher).

I'm thinking this might make sense, because there are no closing costs through ING and, even though we wouldn't be saving any money on a month-to-month basis, we would have the flexibility of staying longer.

[ QUOTE ]
The good news is unless Metro smartens up and removes the urban growth boundry to make housing affordable for everyone, you own something that's going to stay in limited supply, a single family home in PDX. PDX is much less likely than PHX to suffer from a housing bust.

[/ QUOTE ]

This is reassuring... and along the lines of what I was thinking when we bought the house. It sounds good to hear from someone else, though. Everything I read these days is scaring me. (On a side note, I never really understood how the UGB keeps costs high. We still have suburbs with virtually unlimited space...)

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Lastly, I don't know how much things have changed since I moved (3 years ago), but PDX has always been a horribly expensive place to live.

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I grew up here, but have lived in Seattle, then Pasadena, then Manhattan/Redondo Beach in LA. So Portland still seems cheap to me. [img]/images/graemlins/smile.gif[/img]

Another question for anyone who cares to answer: Our homeowner's insurance currently only covers something like $180,000 to $200,000. Is it smart to increase our coverage to something closer to market value in case of a catastrophe? Or is this something people just don't worry about?

[DesertCat]

It's my experience all loans have closing costs, I'd double check with ING. There has to be title insurance, an appraisal fee, doc fees, etc. They may not be charging points, but that's another issue.

And don't confuse monthly payment size with cost. If you are paying 1/4 percent more on the big loan to save 1 percent on the small loan, you are paying more in interest (1/4*4/5 &gt; 1*1/5). You want your total interest costs to be lower, so you can pay for the title insurance, etc. If total interest costs are lower, what's the payback period? If it's 10 years, it's probably not worth it. If it's less than one year it's definitely worth it.

Remember, you currently have a 3 year option on a lower rate. I.e. if interest rates come back down next year, you might find yourself with a refi that makes much more financial sense. Of course, the odds of this might be low, given the trend in interest rates and our national debt growth. It really depends upon how concerned you are about higher interest rates. A 7/1 gives you 4 more years, but if rates are only slightly higher those 4 years, you didn't get much benefit. If interest rates shoot up to 9.5%, it was totally worth it.

Homeowners insurance just pays for rebuilding a similar structure. Your land is a significant part of your value (in my case they estimated the land at 30% of my total appraised value). Talk to your insurance company and ask detailed questions about what is covered. Even $180k is $150 per SF, which seems like a pretty good budget to me, but I'm not a building contractor.

[IronFly]

[ QUOTE ]
The neighborhood is terrific... We love it

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[ QUOTE ]
it has a huge yard and is plenty big for us

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[ QUOTE ]
We love living there

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[ QUOTE ]
and would probably stay another 5-7 years if it weren't for other factors (more later).

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[ QUOTE ]
It's a great house. We could potentially live there with an infant up to 2 or 3 years old. So that would give us a move-out date of around 2011 or so.

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It sounds like the "other factors" you mention is that you want a larger house when you have kids, is that right?

The house sounds great, and it seems that you and your wife really like it. I'd stay.

Also, have you considered doing a "house swap" for your vacation? I've never done this but alot of people are enthusiastic about it.

GL,
IronFly

[SomethingClever]

Update:

Well, it's been a year, and we still haven't fully decided on this.

Our travel date is coming up (target: Sep 1) and we are trying to figure out whether to rent the house or sell it.

I still would like to rent to friends or family, but we're running out of options. I do have one friend that might be a possibility.

- He just moved back into town with his wife and is renting a home for $900 in a significantly worse neighborhood than mine.

- Our house is significantly nicer (and bigger) than his.

- He wants to buy a place... but not for 6-12 months.

The only roadblocks are that we need to rent our place for at least $1200, and preferably more like $1400. And having just moved (in Jan/Feb), he may not be quite ready to move again.

I think we could find renters on craigslist that would be happy to pay $1400, but then we have to make sure we're getting good renters, and put someone in charge of collecting payments and managing the house (repairs, maintenance) while we're gone. It seems a little stressful.

On the flipside, we had our house appraised. Our agent thinks $349,000 is a good list price. Factoring in commission and everything else, we could walk away with about $140,000 tax-free.

It's pretty tempting.

We still like living in the house, and would probably stay there another few years (2 or 3 to be exact) if we weren't going traveling.

So... does renting it out still seem like the best option?

[SteveOMS]

My first impression is that renting it out would be better for you. The transaction costs of selling now and then buying something when you return would not be worth it, especially if you still really like living there and would like to return in a year. Also think about storage costs for your stuff if you sell it, rent costs when you coming back and need to find a place etc... I also wouldn't do business with your friend in that situation, especially if he can't afford it. Find market rate renters, take deposits and hire a professional management company to look after it while you are gone

SteveOMS