I received an email from a reader in Santa Barbara County, Calif., regarding the sale of her house that, once selling fees and closing costs are paid out, she would have to come to the table with a check to get out of the property.
"Right now, I believe my house to be worth around $550,000. I need to move, and cannot decide whether selling at a loss, or leasing out for a couple years is the best move," she writes. "There are still many properties on the market in my town. I will only be able to recoup a little more than half of my [monthly] payment in rent each month.
"If I can afford to make up the difference for a year or two, would it be better to wait and sell when it has appreciated more? Right now, I would have to incur a loss just selling, as I would not even cover the costs of the Realtors fees. And the loss would not be tax deductible, as opposed to turning it into a rental and then deducting all losses next year or in the next few years. I am not a real estate investor, just a person with a house to sell because I am moving."
Well, there are a couple ways to look at this scenario, and I need you to follow along with me and twist your real estate investing paradigm with me.
The first step is to analyze the sale of the property. If you sell it at $550,000 and must then deduct all your cost of sale and come out in the red -- that doesn't sound like fun at all. Plus, it's a definite loss with no gain in the future. The only gain you would have realized here would be the tax deductions over the last couple of years. So, how much of a loss is it? $10,000? $25,000? $100,000? The amount of the hit may determine if you sell, tuck your tail and run, or stand firm and wait it out.
On the rental side, again, let's analyze it. What's your monthly payment vs. your projected income? If you were to take the hit each month, how much would that amount be per month? $500? $750? $1000? And can you sustain that "loss" every month for a couple of years?
Now, how much of a "loss" is that in a couple of years? $5,000? $10,000? $15,000?
As you see, I keep highlighting "loss" inside parentheses. That's because in the traditional sense of real estate investment, most will tell you that you want to have a monthly cash flow -- not cash negative (such a non-positive term). But that's assuming the only way to make money in real estate is through cash flow each month.
I would bet you don't look at your 401K in that fashion, do you? Most of us are more than willing to put in hundreds of dollars a month into that fund as a means of preparing for the gain at the time that you are going to retire. It's not a "negative" is it? It's an "investment."
But for some reason, many believe that if they are putting money into a real estate investment each month (collecting $1000 in rent, but paying out $2000 per month) that for some reason, I'm now taking a "loss" each month -- to the tune of $12,000 per year.
Consider this. If the market is turning around nationally (like I believe it is) and your property is about to increase in value each year over the next several years, then wouldn't it be prudent to put out that "negative" for a couple years if you could walk away with a huge gain later? That's exactly what we do with the stock market. (Search RealtyTimes.com for more comparison of stock vs. real estate investing.)
If that $550,000 property would grow by 5 percent per year over the next couple of years, it would result in a capital growth of $56,375 in two years. Now how does that $1000 "loss" look per month, especially when you may be doubling that money in just two years?
If you can carry it, consider these questions: Where's the economy headed in your area? Up, down, sideways? If it's headed upward (new jobs, more commercial development), then compare that against how much real estate is on the market (local inventory) and how long it will take to absorb it. Are listings headed up or down for resales? Have builders pulled out of projects? If the prices have settled and are not continuing a downward trend, it may make sense to let it ride and hope for a gain on the back side.
Above all, check with an accountant for your particular situation. It may make sense to go ahead and take the short-term hit instead of waiting out the market.
