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  • sell rental property to pay off student loans?

    Hey all. Wanted to get some advice on my situation. I'm an intern with (likely) 4.5 years of training ahead of me. Graduated last year with ~175K federal student loans at the typical 5.8%ish. In REPAYE now on the typical resident salary. Spouse and one child, another little one likely soon. Spouse took some time off but will be starting a new job in the next year at 100k. We are pretty frugal and are diligent in living like residents, saving, no CC debt, Roth, all that gold WCI stuff. Of note, PSLF is unlikely to be in my future.

    Before medical school we bought a starter house where we were living at the time, call it location A. I decided on medicine and dragged us to another part of the country, location B, where I've attended both med school and now residency. We lived in that location A house for 2 years, loved it, and have been renting it out for several years now. Buying at that time was rather impulsive in hindsight, but fortunately for us our timing was perfect and it has clearly worked out for our benefit. Luckily we have family in the immediate area and travel there often, so tending to the issues that crop up here and there has thankfully been simple. Bought the house at 240k with 30k down, and it is now worth 500k according to online estimates (take that as you will). Have about 140k left on the mortgage. We are renting it out at essentially twice the monthly mortgage and we could probably raise the rent thanks to a great market, which gives us a nice little income boost as a student and resident. This helped us keep our loan total down (though it still seems astronomical to me). My residency is in a fantastic area in terms of cost-of-living so we are able to almost pay our current rent in location B with rental income from location A. We prrooooobbably will want to settle in location A if the job market is advantageous and honestly would love to move back in to our house, but that is not 100% and can obviously change with time.

    So, the question at hand: is the smart move to sell the rental property (assuming it will sell) and pay off the huge loans immediately? This would allow a fresh start going forward free of debt with a decent chunk in my pocket, possibly for a down payment on a house post-residency if we want to go that route again.

    Or should we ride out the significant monthly returns on investment with the rental income covering the mortgage itself and covering most of my current monthly rent? My spouse will have a pretty great salary very soon (at least compared to my resident salary), and in 4-5 years I'll be in a decently high paying specialty which will give me the latitude to pay off my loans, which will have grown by then, in the first few years as an attending.

    I suppose I'm leaning toward standing pat because it has got me this far with this investment. But on the other hand I don't want to miss a big opportunity and perhaps I should cash in while I can.

    Thanks in advance for your thoughts.

     

  • #2
    If the area A property is not likely to decline and you have a remote possibility of moving there, hold on to it and pay the loans with your and wife's income. See what happens after a couple of years.

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    • #3
      It sounds like holding on is the right move for two reasons.  First the income seems to be higher than the interest rate on your loan, so it's leaving you more cash to pay your rent than if you paid off your loan with the sale of the house.

      Second and probably most important, the house I should providing you a hedge in the likely event that you return to location A. If you sell the house you take a risk that housing prices inlocation A will continue to increase and it will be difficult for you to buy a home when you move back there.

      One thing you should look at carefully is the true cost of owning the second home. Many people underestimate their expenses. To read more on the subject check out my article in Physician on Fire:

      https://resource.capfundr.com/2016/09/21/is-a-second-home-a-good-real-estate-investment/

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      • #4
        I'm torn on this, but fall on the side of sticking with the rental. Besides killing the golden goose, graduating with a reasonable loan balance may not be such a bad thing. It forces you to be cautious and monitor your big salary bump and helps you keep expenses in perspective. Of course, I'm also presuming that your home is not located in a bubble environment that is likely to burst in the next 4.5 years...
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5
          Do you like the house?  Do you like the tenant?  Do you like being a landlord?

          Do you already have a buyer?  If not, what will it cost you to sell?  Have you factored commissions, cost to market, fix for sale etc?

          If your current tenant wants to buy it for fair value, no commissions, no hassles, then it's compelling.  But having to list and sell a property in another city that's already got a tenant in it is probably a big headache, let alone a costly one.  Like Johanna said, do you really want to kill the golden goose?

          On the other hand, can you afford to make the payment if tenant moves out?

          When is  "in the next year" for your spouse's job?  Is that 2018?  Sounds like she has a job lined up.

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          • #6
            Congratulations on finding out accidentally what an awesome investment vehicle real estate is. I'll start with the investment side of the equation.

            A big key in owning residential single family real estate is the income of prospective tenants and the durability of that income.

            I don't know your area, but a house worth 500K usually does not cash flow with conventional financing.  You were fortunate that you bought when prices were lower, but the big question is, was there a concomitant increase in incomes in the area to justify the price increase that your home has undergone?

            Rental real estate is not about today's tenant, it is about how many tenants in the future are willing and able to pay increasing rent (inflation hedge) over time.  That is how you will know if you are in a bubble.  If home prices are outstripping incomes get out, that is a bubble. If there is a good balance between housing price increases in your local area and an increase in incomes, then you are in a balanced market and there is no need to worry.  You'll have tenants paying down your mortgage, you'll get cash flow (probably tax free with depreciation), price appreciation, and get to write off any repairs that you have to make. Pretty sweet deal.  You'll look up in 30 years and you will probably have an asset worth close to a million dollars with less than 100K out of your pocket over that span.

            Now the lifestyle aspect.  Because you MAY want to move back into the house, worrying about the macroeconomic factors are not as big a deal.  You and your wife will have more than enough income to make your monthly payments, and even if there is a short term decline in home prices, if you are living in the home it is of no real relevance to you.

            So on balance I would say keep the rental, you will probably realize in short order that it will be one of the best investments that you will ever make, and I highly recommend that you look to put more real estate (not necessarily single family homes) in your investment portfolio.

             

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            • #7
              Thanks for the fantastic replies and for taking the time. I'm glad to hear it isn't a landslide one direction or the other and that I was right to hesitate before making a move at this point. To offer clarification and answer a few of the questions...

              I would say the property A location is unlikely to be a bubble situation. I don't have a crystal ball, nor am I particularly well-versed in such things, but it was essentially a cheap-ish area within a historically pricey suburban locale that had remained affordable for a variety of reasons. Massive upgrades in the area (new park, quicker access to interstate) has made it more desirable and now the property values are coming in line with the surrounding areas. Frankly we loved the area before and we love it more now. Who knows what the future really holds. But I'm not worried about major depreciation in the near future.

              @jfoxcpacfp Your point about a possible psychological advantage as a by product of retaining loans is an interesting one. I hadn't thought about it from that angle. A silver lining. However, I 'd still rather be debt free and cautious than 200k in the red and cautious
              I do love the house and have been lucky to have 2 tenants in ~6 years, both excellent. The one time we had to find a new tenant we had >20 applications within hours. We recently increased the rent (when switching tenants) 10% and are still a tad under the "market" value for the area. The rental market is competitive and we sacrificed about 5% of monthly rent for a longer lease with great tenants. If we did move back we would likely spend about $20-25K on personal renovations we had planned on before, but aren't as necessary for a rental.


              I don't particularly like being a landlord, but it has been tolerable and absolutely worth the minor headache here and there. As far as selling costs, no, I don't have a buyer and haven't really explored that option in depth. I suppose I should. Spouse's job will start in May of this year.


              The question of income vs rent ratio changes is interesting. Admittedly I'm not sure. My gut feeling without doing the research is that local income was already higher and the growth we've seen over the last 5 years has been the housing market in the area coming back up after 2008. We do have quite the cushion though, so dropping the rent 30-40% or so would still keep us about even when taking into account mortgage, property tax, maintenance, etc.


              With a fortuitous start like this it will be hard to stay away from real estate as an investment vehicle in the future! Like hitting the jackpot with your first quarter on the slots and consequently turning into a degenerate gambler.

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              • #8
                Reviving this thread for an update 3.5 years later!

                We ended up keeping the rental in HCOL location A and have had the same tenants this whole time. The value has gone from ~$500k to ~$700k in that time and we owe a little over $100k on the mortgage. At the same I've been paying the minimum on my student loans during training (refinanced 3.5%) and they have gone from ~$175 to ~$198k. The rental income has covered our mortgage as well as our current rent in our LCOL location B. Spouse part time income $70k, total net worth ~$600k.

                I signed a contract a few months ago to move back to location A next year as I finish training(!!!). NOW the question becomes: again, what to do with the rental/starter home? Would love to hear your thoughts. A quick breakdown:

                Option A: move back in
                - Very cheap mortgage, perfect location, convenient, decrease capital gains on a potential future sale as primary residence
                - However if we choose this we would like to update things, likely minimum $15k (repairs, carpet/flooring, appliances, bathroom etc) vs possibly $30-50k (minor kitchen renovation/add-on bedroom). we do have some experience with this.
                - perhaps for 3-5 years until buying something else
                - potential perhaps for major renovation in future to make it "forever home"

                Option B: rent something else until job stable enough to buy
                - Save the costs of renovation above; continue to collect rental income; have our "choice" of house; easier to be a landlord locally; rental market continues to be great for owners
                - however very HCOL area

                Option C: sell the rental now, and buy a house to live in
                - cash out while price is high... though not sure we are stable enough to buy something else while starting a brand new job. Though this is our hopeful forever location.
                - spouse feels strongly about keeping it regardless, for investment purposes
                - WCI would be so disappointed in me if I buy a house right out of training

                Thanks in advance everyone! And thanks for the good advice 3.5 years ago.

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                • #9
                  A. definitely not C. You dont buy a NEW house until you know your job fits. And renting something in a HCOL area while renting out something for yourself in the same area just why bother? the rent you collect will cover your rent? makes no sense. Unless its a slum apartment. You know your house that you own, you wwuld have to make those repairs anyway to keep good tenants/in between tenants/etc, and why would you want to waste your time fixing someone else's toilet while waiting for someone to come fix yours? Plus not knowing how good option B housing really is (what leaks, neighbors, etc).

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                  • #10
                    Option A

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                    • #11
                      Let’s see...the house cost $240k and is now worth $700k? Your decision comes down to avoiding ~$500k in capital gain versus paying tax on (to repeat) FIVE HUNDRED THOUSAND DOLLARS or thereabouts. If you are both willing to move back in and you are as comfortable as you can be that the area will retain its value (house is not significantly overvalued, iow), then this is a no-brainer to me.
                      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                      • #12
                        Definitely A, not even a debate.

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                        • #13
                          A

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                          • #14
                            Hard agree with A.

                            Also, not sure if your refinanced loans are on variable pay, but rates are insanely low right now. I'm usually one to slay debt, but I'm tilting more towards investments and paying the minimum on a 5 year variable.

                            From what you are saying about this home, you guys can do some serious upgrades/add-ons and still come out ahead in terms of what you owe vs worth. Good situation to be in.

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                            • #15
                              A. No question.

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