Should I Take The Hit Now or Rent My Honolulu Home?
October 16th, 2009 categories: For Sellers
A Forbes on-line article started me thinking about selling a home when it is not worth the value the owner paid for it. The article makes it seem really easy to rent it until the price of the home rises to the point that the home can be sold at a profit.
“Before Chris decided to rent her house, she weighed the options, which included doing a short sale, foreclosure and renting the house. She notes that foreclosure shouldn’t be an option except in extreme cases and short sales take time in which the homeowner could be losing equity on their house. Renting, on the other hand, provides an income that you wouldn’t have otherwise.”
CLICK HERE TO READ THE ENTIRE FORBES ARTICLE
Because of the high cost of Honolulu real estate and current rental rates, the choice may not be that cut and dry. In fact, you may be better off selling now. Let me lay out a scenario of a home that cost the owner $850,000.
Original Purchase Structuring
Purchase price-$850,000
Down payment-$170,000 (20%)
First mortgage-$680,000
Monthly payment-$3,861
Projected Structure Of A Sale Today
Sale Price-$750,000
Cost of sale-$56,250 (7.5%)
Cash Before Paying Off Mortgage-$693,750
Mortgage Payoff-$680,000
Net Cash To Seller At Closing-$13,750
Net Loss-$156,250
Projected Cash Flow If Rented
Monthly Payment On $680,000 @5.5%-$3,861
Monthly Property Taxes-$200
Monthly Management Fee-$270
Monthly Repair Allocation-$100
Total Monthly Costs-$4,431
Monthly Rent-$2700
Monthly Cash Flow-$1,731
Negative Cash Flow Over 5 years-$103,860
Sale preparation cost-$25,000
Total Cost Over 5 Years-$128,860
Here is the dilemma, once you add in the cumulative 5-year negative cash flow and the cost of sale (7.5%) you arrive at something that looks like this.
Original Acquisition Cost-$850,000
Negative Cash Flow And Cost of Sales Prep-$128,860
Sub-Total-$978,860
7.5% Cost Of Sale-$73,415
Price Necessary To Break Even In 5 Years-$1,052,275
Amount of appreciation necessary to break even $302,275 (1,052,275-750000) or in percentage terms you will need the home to appreciate by 40% over the next 5 years. That is an 8.1% per year appreciation rate. Add to this dealing with a managers and tenants, vacancy and the myriad of issues that come from being a landlord and you may want to consider taking the hit now.
Finally, when I moved back to Hawaii in 1991, I was faced with a similar decision with my home in Newport Beach. Happily I decided to cut the loss by selling at at the current low market prices. Not only did I not make money, I had to write a significant check to close the sale. Here is what I purchased by losing all of that money, the peace of mind of not having a money losing investment peck me to death. Think about it.
If you would like to discuss your real estate needs, feel free to call me at 808-737-2093 or toll free at 877-737-2093. You can email me at keahi@lava.net.
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