All the permanent WFH’s announcements for tech workers are making me nervous in anticipation for real estate rental market after 3-4 years.
We have a history…lol…We bought our first house in FL in 2007 and lost our jobs in 2009 recession and had to move to bay area. We couldn’t sell or adjust our 6.75% mortgage rate (wellsfargo opted out of bailout) or refinance due to lower appraisal. We rented it out and were negative for many years. Luckily that property was only 300k and we could afford to cut our losses. The cherry on top, it’s still underwater.
Fast forward to current situation…We upgraded a couple of years of ago from our second house in fremont and rented it out. Our rental house is about 2100sqft with 6000sqft lot and is in a good schooling district and fetches 4k rent. The house mortgage+real estate taxes cost us around 3.5k. So far, we have been $500 cash positive every month. Our original intent is to have this property as nest egg.
The house is completely upgraded and very much in line with the current trends and is estimated around 1.2 to 1.25 mil based on redfin and zillow. Our current tenants might not vacate for another year or two.
We were running scenarios when they eventually vacate after a year or two, what if the property is vacant for several months and will need to reduce the rent drastically to match market rate. It will be too late to sell as the price falls and we can contribute only about 1K out of pocket towards the mrtg+taxes and cannot afford to rent below 2.5k rent.
Given the situation and changes, my spouse and I are very bearish. Fremont might only be as charming as Mountain house or Sacremento. Given our florida house experience, spouse is considering selling this before the golden moments melt away. While we can still take benefit of the bay area housing boom and capital gains. At the same time, I am thinking this is all a stress response and if we hold tight we will be fine in the long run.
I understand none of us have a crystal ball. But, I appreciate some discussion and your knowledgeable opinions.
I don’t think rent will fall to $2500. I believe rents have never in history fallen that significantly. Not after 9/11/, not from covid19.
To make rents drop that much, you would need something like a 9.0 earthquake with power outage from Sacramento to Tijuana lasting nine (9) months… or an EMP attack.
Rents don’t explode like real estate purchase prices (purchase gets financed and price goes up with cheap rates, but rent needs to be earned from a job), but rent also won’t collapse as fast as a price can.
I think by the end of this year, rent for your 4BR may fall from $4000 to $3500, but that’s it. I doubt that your tenant will ask for a rent reduction.
Tech workers are only a percentage of the work force, right?
Edit: I did not answer your question. Looks like you net $500*12 = $6k a year, and have probably $600k+ equity. That’s less than 1% return cash on cash. If you factor in repairs/ maintenance, it would be a fraction of a percent. I personally would not keep it, but my opinion is the minority here.
First, you can not compare bay area with Florida on property valuation perspective. Fremont is an excellent hub, even with all WFH or reduction in workforce etc. Even if there is a dip in value, it must be inline with entire bay area and will resume when market goes up.
As long as you are comfortable holding the property, keep it as is. No need to speculate (IMO).
My take is not to sell Fremont property except for the following conditions.
You hate real estate rental business and rental over-head work.
You need money urgently (sell it when you need money).
You are about to retire and do not like to hold lot of mortgages, get rid of it and free up from financial issues.
I could not calculate it. I had to guess it. But if PITI is $3500, likely it’s a $600k mortgage.
The loan is “a few years old”, maybe 8 years? Loan balance could be $500k.
Property value is $1200k+?
That would be $700k equity.
Spot on estimation! We have loan amount about 550K and equity around 650K. Purchase price was 670k and we spent around 130k on upgrades.
Thank you for clearing up the rents trajectory. Definitely something to think on.
Thank you Jil!
We don’t need money right away or retiring soon. We are in our early 40’s and late 30’s and enjoy working. It’s one property and not so much of a trouble.
I guess, It’s all about if we can sustain the down periods and hold it long enough.
Both of us don’t do stocks or have any inclination. Typical traditional w2 tech household and didn’t know where to park our savings and enjoyed working on fixer uppers. All 3 houses we bought so far are fixer uppers and we remodeled them slowly after moving.
In other words, we became accidental landlords of 2 sfh homes one in FL and 1 in Bayarea . Our current home is just 3 miles away to the rental and is not a big hassle to take care of in physcial supervision unlike our FL property.
If we account principal payment (20k/yr???), it does not look as bad in term of long-term investment (since the OP don’t need money right now)
Am I missing anything here?
When you say you guys don’t do stocks, I hope you mean you don’t do individual stocks and you’re still investing in your 401k’s and IRA’s with broad index funds.
Landlording in California is tough and Bay Area is even tougher. But still, the tide is against you here. The risk is potentially too great for just one place.
Scale up with more rentals or sell and move on, IMO.
Just 401k’s and NO IRA. I am leaning towards spouses proposal to sell for benefiting from capital gains and eventually move to another prospect Project (fixer upper home)
There is some kind of rent control in fremont. I was mistaken since I don’t have much experience in the city. I’m more used to the nightmare that is Oakland.
And I’m trying to pound a reply while I’m at the dump smh
If you are sweating over real estate, whose price hardly moves at all, you will sweat even more in the stock market with its second by second moves. I think real estate investing could work better for you.
Sheer inflation is on your side here. 10 years from now rent would at least be at the same nominal level as today. Chance of it falling from 4k to 2.5 is really slim. If it does there’s some kind of huge depression going on and your stock investment would have suffered an even greater loss.
. Our current home is just 3 miles away to the rental and is not a big hassle to take care of in physcial supervision unlike our FL property.
FL house. Free $ for more flipping in BA.