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Primary Residence Options When Moving

I sent an email to my realtor regarding my primary residence options and asked him what he thought about me renting out my condo while I’m away in Spain. He replied with a list of good property managers and followed up with the advice that if I didn’t need the income then it would be better to just leave the condo empty.

Scores of news articles are written about how Portland’s booming real estate market has priced out many locals. Supposedly there is also a housing shortage here as well. Just like back in the early 2000’s, people are sending cold call offers to home owners, hoping to buy from even the unmotivated sellers.

This post is about what options you have with your primary residence if you are moving away. In my example, it’s a paid-off condominium in Portland, Oregon.

 

Gauging the Real Estate Market

Your options are limited to the mood of the current real estate market.

One way to gauge the market is to talk to your friends who are selling or buying. I have both – one friend is selling his house and another is in the process of buying her first home in Portland.

Selling is easy in 2018, in Portland – put it on the market and the offers just pile on. For properties up to $1M there are quite a few cash offers.

Buying is easy, too. My friend and her boyfriend are lawyers who together barely crack $100k a year of gross income. They were able to get approved for a zero-down mortgage at 5% with a 7-year ARM.

 

Selling the Condo

It would be a great market to sell in. Units in my building are selling for $170k-180k and I paid $140k for this condo.

There are a few bonus selling points to my condo which could fetch me a little more. But the most important factor remains the mood of the current real estate market.

There would be no tax involved if your profits from the sale of your primary residence are less than $250k. It’s double that for a married couple. It’s a truly tax-free profit.

At such a low price-point, I don’t have to worry too much about how hot the real estate market is. This is one of the reasons I favor buying the cheapest home possible if it’s your primary residence. This allows for more options in the future.

 

Renting to Tenants

The condo is tenant-ready. It’s been rent-proofed. I cleaned it from top to bottom. Anything that needed fixing has been repaired. Paint touch ups are complete and whatever is going to break down will be out of my hands.

Being a landlord isn’t appealing to me. I realize that it makes money but far less than what I can earn by typing into a computer screen with my MD degree.

Is real estate rental income passive? Perhaps when you have a portfolio that’s managed by a property manager or you have enough connections with handymen, lawyers, and realtors to have everything on cruise control.

If I can earn 5% on my securities investment portfolio and 6% or even 7% on a rental income property then I would choose the securities every time. Seems that the financial independence crowd is split down the middle on that.

 

Risk of Landlording

My realtor has his own rental income properties and his advice, to not rent unless I absolutely need the money, makes sense.

I am not worried about unforeseeable problems – those will happen completely out of my control. It’s dealing with problem tenants who will drag me through the court system.

Because my net worth is high I also have more to lose. I’m not sure if that’s a sound economic decision but it’s something I need to consider especially when I don’t need the money from landlording.

 

Headache of Landlording

In the end, the headache of landlording is a far bigger issue for me than the risk. Exchanging emails, getting quotes, filing taxes, advertising online, screening tenants, getting text messages, and late payments.

The diehard real estate investors say that this stuff is incredibly rare or doesn’t happen at all. Logic and personal experience tells me otherwise.

Just a month ago my hot water stopped working in the shower. I called an HOA-approved plumbing company which told me that they are booked solid for a week. I could have shopped around for others but I don’t want to deal with shitty contractors.

I ended up fixing it myself because it needed fixing – right away. A tenant would not have been okay waiting a week.

 

Seller Financing

Selling my only real estate in my investment portfolio wouldn’t be ideal, then again, it is a primary residence. Another option might be seller financing. Seller financing the condo would allow me to have income from a secured loan note.

I would sell the condo to another person who would make their mortgage payments to me instead of the bank. I can negotiate the terms with the same down payment and duration same as the bank does.

Not everything about seller financing is as easy as I’m making it out to be, but it’s a way for me to maintain financial interest through real estate in my portfolio.

I could charge a 5% rate of return but if inflation outpaces my interest charges then I would end up losing money in the long-run.

 

Need for Income

If you have a lean budget like myself and don’t need a whole lot of income to live off of then renting your primary residence makes sense. You’ll get a little income coming in every month and you will be able to write off the depreciation of the property on your taxes.

If your other investments are already making enough money and you are adequately diversified then I don’t think real estate is a necessity.

Real estate is even less important if you are someone who can move to various parts of the country or the world. This condo in Portland will only appreciate so much, and it will always tie me dow to this city.

Selling the condo and investing the money in securities allows me the location independence which I desire and that I thrive on.

 

Rental Income Math

I pay $2,000/year in property taxes and another $2,000 a year in HOA dues.

Because the property is a condominium, there aren’t a lot of maintenance expenses and I’m only responsible for repairs in my unit. It’s still a good idea to leave aside about 1% of the unit’s price – $1,500 – every year for possible repairs.

However, every few years there are special assessments which are divided among the tenants such as when the roof needs to be repaired.

I can rent this place out for around $1,200/month or $14,000 for the year. This would leave me with around $8,500/year or $700/month.

Once I factor in depreciation and taxes, my profits might be even a little higher. This calculation doesn’t take into account the time I will have to spend managing it which will vary.

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