Need help. Crossroads

[thomsoad]

Here is my scenario:
Bought my house 2006 (height of bubble). Affordable but absolutely hate my house...bad neighborhood, no garage, etc...place just sux.
Spent last 8 years investing and have just over $160K now in my NON retirement stock account.

I really want to move into a much nicer area (250K -300K range).
I am presently about 35K under water and 85K from paying this house completely off.

Here are IMO my choices I have available to me:
1) Pay down the house just enough to sell it and put the rest as a down payment.
2) Turn it into a rental property and refinance it to where the rental income would be 2X the mortgage and insurance (almost the same amount as paying it down to sell it).
3) Rent it out without paying it down at all and use the 160K as the downpayment.
4) Pay this house off entirely and enjoy being mortgage free in a house I don't like and keep saving.
5) Pay this house off completely, rent it out, put down a smaller downpayment, get use to a larger mortgage payment but with extra rental income.

thoughts?

[BadSaver]

Math

The single largest bad decision my wife and I have made was during the housing crash. We had saved 20 years before we bought our home (notice not house) in 2003. A $180k home, putting $80k down. The home soared to $350k, at which point I asked my wife if she wanted to sell, because I knew a housing crash was coming. She said, "No." Because it was our home. So we road out the crash, lost our jobs and sold the house (no longer home) for $110k.

I agonize over the bad decision to stay with that house daily. I know, sunk cost. Now with a better job and a new house (with larger payments) we're taking a run at financial independence (retirement)again. We lost a decade...

Whenever there's change, there's opportunity. Someone wins and someone loses. Actions determine what camp your in. I had read a book years ago which stated to not consider your home part of your investments, after all, it said, you have to live somewhere. Now I know, everything is about personal finance!

The advice I would offer is to turn it into a math problem and leave all emotions out of the decision. Hopefully the math will leave you with one clear path.

[autoxer]

Is it a good rental house?

Do you really want to be a landlord?

[thomsoad]

Is it a good rental house?

Do you really want to be a landlord?

The area is now mostly rentals. Its an area with IMO very few actual homeowners. During the crash most were bought out by investors.
Id honestly pay a commission to a company to manage it.

[BadSaver]

Schedule E

Perhaps this will provide you another piece of the math puzzle. There's numerous expenses you can write off on Schedule E:

http://www.irs.gov/pub/irs-pdf/f1040se.pdf

I've not seen a rental that was paid off. Mortgage interest expense can be written off (line 12). Also, you can depreciate the structure (line 18) over time, but not the land.

[autoxer]

So the house is worth $50K? How much would it rent for? How much cash flow would it provide after paying all costs?

[corn18]

The advice I would offer is to turn it into a math problem and leave all emotions out of the decision. Hopefully the math will leave you with one clear path.

^^^This. It will cost you $35k to sell it. It might cost you $35k to keep it and live in it (depends if the value goes up). It could cost you nothing to rent it. Seems like a no brainer to me. Rent it, keep $35k in a liquid investment in case you change your mind. Go buy a new "home" with the rest of the money. Easy peasy.

[thomsoad]

So the house is worth $50K? How much would it rent for? How much cash flow would it provide after paying all costs?

Yes...MAYBE 60k. Zillow has it for 63K but I don't know accurate that is.
Mortgage/Taxes comes to $500.
HOA covers Blanket Insurance which is $180.
So Im looking at $680 a month not including some kind of renters insurance.
IMO I believe it would rent out for $750 a month.
So minus management commission its probably a break even as it stands now.

[autoxer]

When you add in maintenance costs and subtract for vacancy, then the cash flow will be negative. As a rental it doesn't sound like a good investment.

[BadSaver]

And, in the end, it is an investment. As a cash flow, $35k is roughly $116 dollars a month invested at 4%.

Generally speaking... If the rental costs you $116 a month, you've effectively lost the benefit of the 35K invested elsewhere.

[doingitallwrong]

Maybe a break-even monthly but don't forget the tax benefits, as mentioned above. Mortgage interest, taxes, insurance, HOA, the commissions you pay, repairs, maintenance, etc. are all deductible expenses against your rental income. Be sure to check the phase-out amounts, though -- if you make a relatively high income you might not be able to claim the losses.

[thomsoad]

And, in the end, it is an investment. As a cash flow, $35k is roughly $116 dollars a month invested at 4%.

Generally speaking... If the rental costs you $116 a month, you've effectively lost the benefit of the 35K invested elsewhere.

That's all fine and dandy but what do you recommend I do then? As I mentioned it would take that much just to get rid of the house.

[TBH]

I personally like having having a rental property because it diversifies my income streams. But since you'll only be breaking even here, you will have to keep a larger emergency fund to cover repairs and vacancies. it doesn't sound like the rent will give you enough of a cushion for those things. But I don't really like that idea. If you're adjusting to having a new, bigger mortgage and a new house to maintain, it seems scary to just be breaking even on the rental. It would be pretty painful to have to cover the mortgage+HOA for a few months if you couldn't find a renter right away, just when you're getting settled in the new house.

So I would probably for my peace of mind do the following:

1. Do a cash-in refi now, bringing yourself up to 20% equity given today's values. Doing the refi now while it's your primary residence will mean you can get better rates and better terms. (For an investment property, you can often only finance 75% instead of 80%.) That means your cash position will be lower but at least you'll have some wiggle room on the rental property's income and expenses every month.

2. Once the refi is done, I'd buy another house in the area you want IF you can afford it. If you can't afford to do that yet, stay where you are and save until you can. You don't want to get overextended. Make sure you keep a really solid emergency fund in cash because owning two houses means twice as much stuff can go wrong.

That's what I'd do, personally. I hate the idea of selling and losing $35K. I like the idea of having a rental property. I think if you can do this carefully so you don't expose yourself to too much risk, in 5 years you will be in a comfortable home that you like, and you will be enjoying profits from your rental property every month. Over time by collecting rent you will recover the money you lost when the market tanked. Win-win.

[Weird Tolkienish Figure]

Here is my scenario:
Bought my house 2006 (height of bubble). Affordable but absolutely hate my house...bad neighborhood, no garage, etc...place just sux.
Spent last 8 years investing and have just over $160K now in my NON retirement stock account.

I really want to move into a much nicer area (250K -300K range).
I am presently about 35K under water and 85K from paying this house completely off.

Here are IMO my choices I have available to me:
1) Pay down the house just enough to sell it and put the rest as a down payment.
2) Turn it into a rental property and refinance it to where the rental income would be 2X the mortgage and insurance (almost the same amount as paying it down to sell it).
3) Rent it out without paying it down at all and use the 160K as the downpayment.
4) Pay this house off entirely and enjoy being mortgage free in a house I don't like and keep saving.
5) Pay this house off completely, rent it out, put down a smaller downpayment, get use to a larger mortgage payment but with extra rental income.

thoughts?

If you have the money, leave. You can make more money if you want to, you'll never make more time. You'll never get back the time you spent living at a place you hate.

Just my opinion.

[MonkeyMama]

Do you really want to be a landlord?

I think this is the only question that really matters. I am all for math and logical decisions, BUT that only makes sense if you don't completely despise being a landlord. It may be a way better emotional decision to just put those whole property behind you and to move on with your life.

I'd personally go with #1 but if you don't mind renting it out and waiting out the market a bit then I would go with one of the rental options. I'd probably pay down enough to not be upside down but would not put ALL the money into the new house. You'd want to have some cushion for repairs and vacancies, as mentioned.

P.S. I think it's awesome that you have saved up and have options. Good for you for turning around a bad situation.