WWYD: keep DC rowhouse in Shaw as investment?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:My husband and I have a rowhouse in Shaw we bought in 2011 for around 600k. Houses on our block are now selling for 900k. We have one toddler now and the house is great, but if we add to our family in a few years, we will likely need to move somewhere larger. We've got about 125k saved now for our next down payment and are saving a little more than 3k/month to that fund. We could increase the monthly savings if we needed to, so we could probably manage a down payment on a new house without the proceeds from the row house.

Would you hang on to the row house as an investment? Husband thinks we can manage it ourselves, but we are two busy working professionals and will possibly have two kids at the time, so I want to hire a property manager. It is three bedrooms with parking, I am guessing we could get around 4k in rent, mortgage is $2186. What would you do?

I'd look really hard at vulnerability to flooding.

I'd find one of those Google flood maps and show what happens to the house if a storm pushes the sea level up 12 feet, and look at what happened to the neighborhood in the worst recorded floods.

If there could ever be any flooding issues, I think you should consider selling, no matter what other analyses show.

Even if you still want to invest in residential real estate, try to trade this property for a property far from where you'll own your primary residence, to reduce the odds a bad storm will take out both houses at the same time.

I'd also look at how this might affect college aid. I have the impression that real estate assets make calculating financial aid harder than owning financial assets does.

There are a lot of points, both pro and con, being raised in this thread. It's not a clear cut decision.

This, however, is nuts. Where exactly do you think this house is?

Agreed. Even at 12 feet of sea level rise (which is probably about 100 years away), basically all of NW is fine, except for some areas down by the mall. Shaw can handle a lot more than 12 feet in sea level rise.

[Anonymous]

Anonymous wrote:Throwing this out there. If you are currently in a rowhouse in Shaw you're probably looking to stay pretty close in. Your new house will be at least 1M - so you're looking at a bare minimum 200K down payment - that's another almost 3 years of saving before you are ready to move given your current rate of saving. As someone else noted, you'll need to qualify for debt/income ratio and your current mortgage will be considered a debt (at least at first) which will be problematic for getting a mortgage unless your income is extremely high.

Not to mention that you'll have to be a landlord in DC. It's fine until it isn't and all you need is one bad tenant to end up with a ton of legal fees and an enormous hassle. I'd take the equity and buy your dream home and never look back. Not everything in life is about maximizing every single asset.

Thanks for this. Our income is high but probably not “extremely high” by standards of this board. 2018 combined salary for DH and I is $445k.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:OP, I think you’re jumping the gun on leaving. You have a HOUSE. Unless it’s 600 sq ft, you can easily have two kids thru elementary there. We live in a 2 br apt with two kids and we’ll stay there until the youngest is about 6/7. I’d keep your sweet lifestyle, build more equity, and most importantly, cash in on super convenient and free, good early education for your kids. Really. You don’t need much and neither do your kids.

This. We have three kids in a three-bedroom, 1400 sq foot apartment in a not-great school zone. We have more than enough space because we're careful about what stuff we keep. You have *at least* until your oldest is 5 (not sure what your schools are like - we don't live in DC). Stay and save save save.

This this this this

Thanks for all the ideas, everyone! Definitely not something we are planning to put on the market tomorrow so you've given me a lot of food for thought regarding staying longer than we thought we might like to or what being a landlord may entail. I appreciate the advice.

[Anonymous]

The gain is tax free now but once a rental for five years 100 percent taxable

[Anonymous]

Anonymous wrote:Surprised no one's mentioned tax issues. Up to $500,000 in profit from home sales is tax exempt for owner occupied homes sold by a couple - that is, if you've lived in it for at least 2 of 5 years before you sell:

https://www.nolo.com/legal-encyclopedia/the-250000500000-home-sale-tax-exclusion.html

So if you sell now, you wouldn't pay tax on any of the profit. But if you rent it out for more than 3 years, that benefit would disappear.

If you're at all on the fence, that should push you to sell.

Making financial decisions simply to save on taxes is idiotic.

[Anonymous]

I would have said ignoring tax issues when making financial decisions is idiotic but ymmv.

Of course I also would have noticed 2 or 3 people had already raised that issue.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Surprised no one's mentioned tax issues. Up to $500,000 in profit from home sales is tax exempt for owner occupied homes sold by a couple - that is, if you've lived in it for at least 2 of 5 years before you sell:

https://www.nolo.com/legal-encyclopedia/the-250000500000-home-sale-tax-exclusion.html

So if you sell now, you wouldn't pay tax on any of the profit. But if you rent it out for more than 3 years, that benefit would disappear.

If you're at all on the fence, that should push you to sell.

Making financial decisions simply to save on taxes is idiotic.

Well it can be a savings of 5-6 figures so it’s idjotic to NOT take this into account.

If OP rents her house out for four years and then sells she may have capital gains of 60k. This could erase ALL of the profit she just made renting! In fact it may mean she LOST money renting!

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Surprised no one's mentioned tax issues. Up to $500,000 in profit from home sales is tax exempt for owner occupied homes sold by a couple - that is, if you've lived in it for at least 2 of 5 years before you sell:

https://www.nolo.com/legal-encyclopedia/the-250000500000-home-sale-tax-exclusion.html

So if you sell now, you wouldn't pay tax on any of the profit. But if you rent it out for more than 3 years, that benefit would disappear.

If you're at all on the fence, that should push you to sell.

Making financial decisions simply to save on taxes is idiotic.

Well it can be a savings of 5-6 figures so it’s idjotic to NOT take this into account.

If OP rents her house out for four years and then sells she may have capital gains of 60k. This could erase ALL of the profit she just made renting! In fact it may mean she LOST money renting!

Yeah - if you think you're going to sell it any time in the next decade or so - you should just sell now and take the tax benefit. Otherwise you'll really have to stick it out for a long time to make up for that "free" profit.

[Anonymous]

You'd be dumb to sell it; the rowhouse is a damn cashcow. Keep saving for that next downpayment, as this will require you to live below your means and buy an affordable house.

Also, 25 years down the road when you're retired you will have a fantastic source of passive income.

In my experience, when people have a large windfall down-payment that comes from a fast equity gain, they tend to over-buy when they trade-up. You'll buy a more reasonable 2nd home when you've scrimped that money together through your own hard work of pinching pennies. Ymmv.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I would just because the cash flow is so positive on it to start. I know people who've kept their first house in DC to rent when the rent was just barely covering the mortgage at the beginning, and they look like geniuses 5 years down the line.

You can always sell it later if you find it's too big a hassle.

This is the OP. I am not sure what this means "the cash flow is so positive on it to start". I am new at the investing and finance game but trying to learn. Thanks!

If you can get $4k/month in rent, you're clearing almost $2k/month in cash flow. You won't actually make $24k/year, because you have to budget in repairs, vacancies, etc., but you're starting from a very good place.

Does your mortgage payment include insurance and taxes? If not, you're not making such great money on it...

[Anonymous]

Anonymous wrote:

Anonymous wrote:I’d keep it but not use the management company. They take a huge amount of the profit and some charge you for things like finding a handyman- which means profit you thought you have, You don’t. They list on Craig’s list just like you would.

Disagree with this. I rented a unit of mine without a mgt company and regret it. First off, there’s a lot of work involved. I think going through a mgt company means you get more normal tenants. Tenants seem less likely to try and mess with someone with the backing of a company. It shouldn’t work that way, but it does. You’d be surprised how challenging having a rental can be.

Yes, a million times. Hire management company, worth every penny, but find a reliable one. Mine handles all communications with tenants, any repairs, any complains. She does 6-month inspections to check-up on the property. She had a lot of good suggestions throughout renting process, a lot of additions on the rental agreement that I didn't think.

When my family was about to take off for vacation at the airport and i got a text that the house got flooded, she dropped everything and dealt with it. What would i do if i didn't have a manager? No idea. Get a property manager, especially if you have little kids.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I’d keep it but not use the management company. They take a huge amount of the profit and some charge you for things like finding a handyman- which means profit you thought you have, You don’t. They list on Craig’s list just like you would.

Disagree with this. I rented a unit of mine without a mgt company and regret it. First off, there’s a lot of work involved. I think going through a mgt company means you get more normal tenants. Tenants seem less likely to try and mess with someone with the backing of a company. It shouldn’t work that way, but it does. You’d be surprised how challenging having a rental can be.

We have many rentals: an office building, a townhouse, a condo and 3 homes. What was the work involved that you had to do?

- list on Craig’s list
- show the unit (scheduled to happen with many people coming the same time and day)
- run credit check of applicant (get application online, credit check is paid for by them)
- get lease (online)
- let utility co know you have a tenant if necessary
- open bank account/create llc thru scc
-get security deposit
- change locks
- give key to tenant, walk thru (walk they list from online), get first month’s rent, sign lease, give garage door opener
- if tenant calls with problem: Plummer, electrical, etc - join nextdoor and get recommendation. Tell tenant who worker is and have them schedule it themselves. Tell tenant to pay, send a bill copy to you and deduct it from rent OR have worker call you to pay by credit card

This is pretty much it. Have money available for repairs.

This is horrible advice. First off, knowing DC rental laws this probably isn’t even legal. Your tenant is in no way obligated to coordinate and approve repairs to your unit. Most renters will balk at this for good reason. One of many reasons to rent is you don’t deal with repairs.

Second, having anyone spend your money and later send you a bill is a recipe for a disaster.

Agree with this.

[Anonymous]

Anonymous wrote:My husband and I have a rowhouse in Shaw we bought in 2011 for around 600k. Houses on our block are now selling for 900k. We have one toddler now and the house is great, but if we add to our family in a few years, we will likely need to move somewhere larger. We've got about 125k saved now for our next down payment and are saving a little more than 3k/month to that fund. We could increase the monthly savings if we needed to, so we could probably manage a down payment on a new house without the proceeds from the row house.

Would you hang on to the row house as an investment? Husband thinks we can manage it ourselves, but we are two busy working professionals and will possibly have two kids at the time, so I want to hire a property manager. It is three bedrooms with parking, I am guessing we could get around 4k in rent, mortgage is $2186. What would you do?

I would NEVER be a landlord in DC eith their tenant laws and I say this as someone who owns an multi unit building. Not a chance in hell. Nope nope nope.

Right now might not be a bad time to sell. Lots of economic uncertainty. If you're gonna sell,now is the time.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:I’d keep it but not use the management company. They take a huge amount of the profit and some charge you for things like finding a handyman- which means profit you thought you have, You don’t. They list on Craig’s list just like you would.

Disagree with this. I rented a unit of mine without a mgt company and regret it. First off, there’s a lot of work involved. I think going through a mgt company means you get more normal tenants. Tenants seem less likely to try and mess with someone with the backing of a company. It shouldn’t work that way, but it does. You’d be surprised how challenging having a rental can be.

We have many rentals: an office building, a townhouse, a condo and 3 homes. What was the work involved that you had to do?

- list on Craig’s list
- show the unit (scheduled to happen with many people coming the same time and day)
- run credit check of applicant (get application online, credit check is paid for by them)
- get lease (online)
- let utility co know you have a tenant if necessary
- open bank account/create llc thru scc
-get security deposit
- change locks
- give key to tenant, walk thru (walk they list from online), get first month’s rent, sign lease, give garage door opener
- if tenant calls with problem: Plummer, electrical, etc - join nextdoor and get recommendation. Tell tenant who worker is and have them schedule it themselves. Tell tenant to pay, send a bill copy to you and deduct it from rent OR have worker call you to pay by credit card

This is pretty much it. Have money available for repairs.

This is horrible advice. First off, knowing DC rental laws this probably isn’t even legal. Your tenant is in no way obligated to coordinate and approve repairs to your unit. Most renters will balk at this for good reason. One of many reasons to rent is you don’t deal with repairs.

Second, having anyone spend your money and later send you a bill is a recipe for a disaster.

Agree with this.

I actually think its a brilliant, if illegal, solution. The tenant is far less likely to spend an absurd amount of money on a repair when they are footing the bill initially. Thanks for the tip PP.