Irvine Rental market

[dream16]

Hi

We bought a new property (3br+2bath) in Cypress Village and the closing date is in April 2016.  Due to un-forseen circumstances, we will not be able to move to Irvine.  We are debating:

1. Rent out this property as investment for at least 5 years.
2. Back out the buying transaction which means we will loose 25K.

We see that current rental market in Irvine is RENTER market; many houses are for rent.  So we are thinking of solution #2.  We are looking for your wise inputs.  Thank you.

I dont know what you bought your CV house for.  However without knowing the price you paid, I can guarantee that you will NOT cash flow and in fact will lose money by renting it out.  I just know this from looking at many homes to see if they will cash flow as a rental.  NONE of them in this area do, ESPECIALLY new builds.

My numbers may be a bit off, but lets assume 750K purchase price for a 3bed/2bath around 1700 sq/ft in size.  Rental rates here for something like this will be about $3000 a month, give or take a couple hundred a month.  Assuming a 20% down, 3.75% rate, 8.33% vacancy rate (1 month per year), about 1000 a year for maintenance, 8% paid to property manager then you will have a negative cash flow of about 15k per year.  Even if you managed this yourself, its still about 13K negative a year.  Even if there was 100% occupancy, its still negative almost 10K a year.  If there is any depreciation of this house, which seems very well possible if not likely, then the situation is even worse. 

seriously, take a 25K loss and move on.  Its gonna hurt to lose 25K but in my opinion much better to move on now.  Also its one thing to deal with the headaches of being a landlord when you are making money.  But to lose money and still have to deal with that headache???  Oh man...

Sorry but i dont agree with the thoughts above, now picture this scenario:

1.You bought a brand new 2bed/2.5 bath 1600 sq ft condo for 550k @3.75% interest rate, $315/mo hOA and $3205 Mello Roos/Year, $450/year Home Insurance and you rent it out for $2900/month and there are property managers who will keep 5% of yearly rental amount.

2. Since you are buying a new condo, repair costs can be kept at a bare minimum of $200/year.

3. With 20% down payment, your monthly mortgage inclusive of HOA+Tax+Mello+Insurance = $3200/year ==> you will end up paying 400$/mo approximate after renting and are looking at 8-10k/year negative on a yearly basis....but if you have a smart CPA, you will deduct 16k(interest)+9k (property tax) + HOA (3780) & Home Ins (450) = 29.5k ONLY for your home expenses and then even if you do standard deduction of 12,500 = 43k/year , you are looking at receiving 13-15k in returns...and in the bigger picture/longer run, you will NOT only OWN the condo BUT also build equity

Your numbers are off dude.  Trust me, it makes NOOOOO sense to rent the house.

Yes my numbers are different to show the original poster (OP) that renting his 850k house is way worse than renting a 550k condo, because even on that, i have projected a net loss of 10k/year with 5% vacancy rate, home insurance/HOA/Mello-Roos/Property Tax etc....and only smart accounting can bear some portions of that 10k loss....but there will never be a situation unless there is a size-able 100k+ condo price appreciation in next 2 years & atleast 10-15% rent increase in next 2 years to even off this 10k loss and have someone else pay your mortgage (the golden lines that every one wants to have implemented in their life)

 

[dream16]

This is a good point. You calculate the depreciation by subtracting the value of the land from the purchase price / 27.5. Suppose the Purchase price is $850,000 and land value is $100,000. Your annualized depreciation is $27,272 a year. You can claim this with negative cash flow, but your limit on real estate losses is $25,000. This $25,000 limit also get phased out starting from $100k and completely phases out at $150k. One thing to be clear about, if you make more than $150k, your losses don't just disapprear but just get carried over the next year. One way to get around this rule is to be considered a real estate professional status in the eyes of the IRS. If you spend more than 750 hours in the trade of real estate, there is no income limits for you whether you make $20k/year vs $400k a year. You are also excluded from the $25,000 rental loss limit, which means unlimited rental losses to offset your earned income. What an incredible tax advantage this is for real estate professionals. Consult with your CPA to see if you qualify.

Going back to depreciation, if you hold this rent for 10 years, your total depreciation will equal to $272,727.00. Once you sell this property, your depreciation recapture tax can potentially be $68,181 unless you 1031 exchange this property to another investment property. Many people mistakenly think that the depreciation deduction is free money which never needs to be paid back, but this is incorrect.

To never pay taxes on capital appreciation and depreciation recapture, one needs to continue to 1031 exchange and eventually can move these investment properties into an Irrevocable Living Trust. Once the property are transferred to your beneficiaries, they are free from any depreciation recapture tax which will disappear once you die.

No one has added in deducting depreciation. Not sure if you can claim that if you are cash flow negative but maybe if he/she has other properties that are cash flow positive it could help some.

A BIG THANK you Panda for sharing some deep insights. Since my spouse is going to work on in the near future to be an agent & a broker eventually and dive into real-estate market soon, scoring 750 hours of work per year (16 hours * 52 weeks = well above 750) is certainly possible and this means that we can continue to claim $25000+ losses every year from rental if they arise.

Thank you for also sharing some excellent insights on appreciation/depreciation recapture and the awesome 1031

http://apiexchange.com/index_main.php?id=8&idz=26

 

[panda]

Dream16,
I think that is a great idea for your wife to get her real estate license and transact couple of deals a year as a real estate agent to get the "professional real estate" status for your tax purposes. My wife is a CPA and she tells me the professional real estate status is an area many unqualified people abuse so it is also an area that the IRS watches carefully. For example, if you are a full time W2 software engineer and state that you spend 750+ hours a year managing your 2 rental properties nearby.... Good luck with that, but if you are a W2 employee and your wife is an active real estate agent... I think that is the perfect combo for your wife to qualify for the real estate professional status. Just make sure she has some transaction income coming in on her schedule C when you decide to go this route and please consult with your trusted CPA on this matter.

This is a good point. You calculate the depreciation by subtracting the value of the land from the purchase price / 27.5. Suppose the Purchase price is $850,000 and land value is $100,000. Your annualized depreciation is $27,272 a year. You can claim this with negative cash flow, but your limit on real estate losses is $25,000. This $25,000 limit also get phased out starting from $100k and completely phases out at $150k. One thing to be clear about, if you make more than $150k, your losses don't just disapprear but just get carried over the next year. One way to get around this rule is to be considered a real estate professional status in the eyes of the IRS. If you spend more than 750 hours in the trade of real estate, there is no income limits for you whether you make $20k/year vs $400k a year. You are also excluded from the $25,000 rental loss limit, which means unlimited rental losses to offset your earned income. What an incredible tax advantage this is for real estate professionals. Consult with your CPA to see if you qualify.

Going back to depreciation, if you hold this rent for 10 years, your total depreciation will equal to $272,727.00. Once you sell this property, your depreciation recapture tax can potentially be $68,181 unless you 1031 exchange this property to another investment property. Many people mistakenly think that the depreciation deduction is free money which never needs to be paid back, but this is incorrect.

To never pay taxes on capital appreciation and depreciation recapture, one needs to continue to 1031 exchange and eventually can move these investment properties into an Irrevocable Living Trust. Once the property are transferred to your beneficiaries, they are free from any depreciation recapture tax which will disappear once you die.

No one has added in deducting depreciation. Not sure if you can claim that if you are cash flow negative but maybe if he/she has other properties that are cash flow positive it could help some.

A BIG THANK you Panda for sharing some deep insights. Since my spouse is going to work on in the near future to be an agent & a broker eventually and dive into real-estate market soon, scoring 750 hours of work per year (16 hours * 52 weeks = well above 750) is certainly possible and this means that we can continue to claim $25000+ losses every year from rental if they arise.

Thank you for also sharing some excellent insights on appreciation/depreciation recapture and the awesome 1031

http://apiexchange.com/index_main.php?id=8&idz=26

 

[panda]

Dream1,

These are the charts that I promised to upload last night. The trulia link is a bit dated, but these charts are from 2015.

When calculating the yield for both capital appreciation and cash flow the following are the top markets for 2015.

Above is the chart showing the markets showing the lowest return when factoring in both cash flow and property appreciation.

Above we are looking at the metro city markets that is offering the best CAP rates for cash flow. The best cash flow markets do not necessarily mean that it is also the best market for appreciation. I would say in markets like Detroit and Memphis, it is a pure cash flow play as I don't see much appreciation potential in these two markets. Especially in markets like Detroit and Cleveland, these MSAs are losing population and are not good for buy and hold.

 

[dream16]

Dream16,
I think that is a great idea for your wife to get her real estate license and transact couple of deals a year as a real estate agent to get the "professional real estate" status for your tax purposes. My wife is a CPA and she tells me the professional real estate status is an area many unqualified people abuse so it is also an area that the IRS watches carefully. For example, if you are a full time W2 software engineer and state that you spend 750+ hours a year managing your 2 rental properties nearby.... Good luck with that, but if you are a W2 employee and your wife is an active real estate agent... I think that is the perfect combo for your wife to qualify for the real estate professional status. Just make sure she has some transaction income coming in on her schedule C when you decide to go this route and please consult with your trusted CPA on this matter.

This is a good point. You calculate the depreciation by subtracting the value of the land from the purchase price / 27.5. Suppose the Purchase price is $850,000 and land value is $100,000. Your annualized depreciation is $27,272 a year. You can claim this with negative cash flow, but your limit on real estate losses is $25,000. This $25,000 limit also get phased out starting from $100k and completely phases out at $150k. One thing to be clear about, if you make more than $150k, your losses don't just disapprear but just get carried over the next year. One way to get around this rule is to be considered a real estate professional status in the eyes of the IRS. If you spend more than 750 hours in the trade of real estate, there is no income limits for you whether you make $20k/year vs $400k a year. You are also excluded from the $25,000 rental loss limit, which means unlimited rental losses to offset your earned income. What an incredible tax advantage this is for real estate professionals. Consult with your CPA to see if you qualify.

Going back to depreciation, if you hold this rent for 10 years, your total depreciation will equal to $272,727.00. Once you sell this property, your depreciation recapture tax can potentially be $68,181 unless you 1031 exchange this property to another investment property. Many people mistakenly think that the depreciation deduction is free money which never needs to be paid back, but this is incorrect.

To never pay taxes on capital appreciation and depreciation recapture, one needs to continue to 1031 exchange and eventually can move these investment properties into an Irrevocable Living Trust. Once the property are transferred to your beneficiaries, they are free from any depreciation recapture tax which will disappear once you die.

No one has added in deducting depreciation. Not sure if you can claim that if you are cash flow negative but maybe if he/she has other properties that are cash flow positive it could help some.

A BIG THANK you Panda for sharing some deep insights. Since my spouse is going to work on in the near future to be an agent & a broker eventually and dive into real-estate market soon, scoring 750 hours of work per year (16 hours * 52 weeks = well above 750) is certainly possible and this means that we can continue to claim $25000+ losses every year from rental if they arise.

Thank you for also sharing some excellent insights on appreciation/depreciation recapture and the awesome 1031

http://apiexchange.com/index_main.php?id=8&idz=26

Thanks Panda for the encouragement and to top it off, she will be an Army Reserve Veteran too + an IT company owner or 55% share-holder (minority woman owned business enterprise license is what we will get) -so i believe we are looking at significant tax benefits considering army and real estate mixed.

 

[dream16]

The POT culture in Colorado seems to have shot the market rental prices off the roof on those rental incomes, perhaps the folks following the news on marijuana being legal made tonnes of money by buying in CO in 2013 and reaping the benefits with the pot legalization from Jan 1,2014 (there's a phenomenal documentary on it@Netflix, forgot the name..10 episodes ...worth every minute)

I am kind of surprised at Dallas offering so many returns, as housing is darn cheap in there...so its kind of a hidden gem and having worked/lived in Detroit for 7 months back in 2009, its one of the worst places to buy a property (broken glasses/abandoned homes = a deadly ghetto)

I think i should buy something in Florida as there are 3 cities in the top 10 in there and since i hate snow, after CA, FL seems to be the next best bet.

Ironically, Irvine is a negative cash-flow area from a rental perspective and if the condo's did not have a 100k+ appreciation in the next 3 years here, i might be looking at a potential bad investment if i don't get to live in it

 

[Cornflakes]

HI Everyone

Again thank you for all the replies.  One biggest reason that we are still lingering to option #1 which keeping the Irvine house and rent it out for AT LEAST 5 years because eventually even when we retire, we plan to live in southern CA.

1. We plan to enroll our kids into Irvine district school because we heard the schools there are good.  Where we are right now, the kids would have to go private school (public schools are very bad).  Even the situation right now that our kids are in kinder garden; POTENTIALLY when things change we can move to Irvine for middle and high schools.
2. We like Southern CA because Irvine is closed to Laguna beach and other beaches.
3. So the strategy is:  rent it out until the situation changes.  The worse case is 5-10 years, we will have a place in Southern CA for good schools and beaches to go to.
4. We have 20% down and can tolerate loss 1k a month.  We are not in real estate investment; so take that 20% down elsewhere in US to buy house is not an option for us.

You have legit points. However, you might want to re-check your numbers. With 20% down, you'd be looking at approx. $5000 a month out of pocket (PITIA+MR). If your fair rental value is $3k, which sounds about right, then you are looking at negative cashflow of $2k each month. Sure, you will build some equity out of that 2k expense, but you can't touch that money until you sell/refi.

So, at the end of 5 years, your negative cashflow will accumulate to 120k. Say, you built the equity of 60k by then (it's a stretch), you are short 60k. For simplicity, I am ignoring the rent increases, vacancy periods, tax issues etc. What you are betting on is, 60k wager that this home will appreciate at lease twice as much to eek out any profits for you after selling costs. Now, put the probability of any appreciation/depreciation of home value in 5 years.

If you put 2k each month in T-bills for 60 months, you'd come out pretty ok even if April 2021 is worse than March 2011 (which was the bottom I think).

Not discouraging you from anything, just giving perspective. As long as you make informed decision, that's all that matters.

 

[hello]

HI Everyone

Again thank you for all the replies.  One biggest reason that we are still lingering to option #1 which keeping the Irvine house and rent it out for AT LEAST 5 years because eventually even when we retire, we plan to live in southern CA.

1. We plan to enroll our kids into Irvine district school because we heard the schools there are good.  Where we are right now, the kids would have to go private school (public schools are very bad).  Even the situation right now that our kids are in kinder garden; POTENTIALLY when things change we can move to Irvine for middle and high schools.
2. We like Southern CA because Irvine is closed to Laguna beach and other beaches.
3. So the strategy is:  rent it out until the situation changes.  The worse case is 5-10 years, we will have a place in Southern CA for good schools and beaches to go to.
4. We have 20% down and can tolerate loss 1k a month.  We are not in real estate investment; so take that 20% down elsewhere in US to buy house is not an option for us.

You have legit points. However, you might want to re-check your numbers. With 20% down, you'd be looking at approx. $5000 a month out of pocket (PITIA+MR). If your fair rental value is $3k, which sounds about right, then you are looking at negative cashflow of $2k each month. Sure, you will build some equity out of that 2k expense, but you can't touch that money until you sell/refi.

So, at the end of 5 years, your negative cashflow will accumulate to 120k. Say, you built the equity of 60k by then (it's a stretch), you are short 60k. For simplicity, I am ignoring the rent increases, vacancy periods, tax issues etc. What you are betting on is, 60k wager that this home will appreciate at lease twice as much to eek out any profits for you after selling costs. Now, put the probability of any appreciation/depreciation of home value in 5 years.

If you put 2k each month in T-bills for 60 months, you'd come out pretty ok even if April 2021 is worse than March 2011 (which was the bottom I think).

Not discouraging you from anything, just giving perspective. As long as you make informed decision, that's all that matters.

Multiple people have explained the same thing, but I think the OP really wants to rent this out. 

 

[eyephone]

HI Everyone

Again thank you for all the replies.  One biggest reason that we are still lingering to option #1 which keeping the Irvine house and rent it out for AT LEAST 5 years because eventually even when we retire, we plan to live in southern CA.

1. We plan to enroll our kids into Irvine district school because we heard the schools there are good.  Where we are right now, the kids would have to go private school (public schools are very bad).  Even the situation right now that our kids are in kinder garden; POTENTIALLY when things change we can move to Irvine for middle and high schools.
2. We like Southern CA because Irvine is closed to Laguna beach and other beaches.
3. So the strategy is:  rent it out until the situation changes.  The worse case is 5-10 years, we will have a place in Southern CA for good schools and beaches to go to.
4. We have 20% down and can tolerate loss 1k a month.  We are not in real estate investment; so take that 20% down elsewhere in US to buy house is not an option for us.

You have legit points. However, you might want to re-check your numbers. With 20% down, you'd be looking at approx. $5000 a month out of pocket (PITIA+MR). If your fair rental value is $3k, which sounds about right, then you are looking at negative cashflow of $2k each month. Sure, you will build some equity out of that 2k expense, but you can't touch that money until you sell/refi.

So, at the end of 5 years, your negative cashflow will accumulate to 120k. Say, you built the equity of 60k by then (it's a stretch), you are short 60k. For simplicity, I am ignoring the rent increases, vacancy periods, tax issues etc. What you are betting on is, 60k wager that this home will appreciate at lease twice as much to eek out any profits for you after selling costs. Now, put the probability of any appreciation/depreciation of home value in 5 years.

If you put 2k each month in T-bills for 60 months, you'd come out pretty ok even if April 2021 is worse than March 2011 (which was the bottom I think).

Not discouraging you from anything, just giving perspective. As long as you make informed decision, that's all that matters.

Multiple people have explained the same thing, but I think the OP really wants to rent this out.

I'm still trying to figure it out: Change of heart, cold feet, economy, job related, family

The Op never explained why

 

[qwerty]

Divorce.