Friday, August 17, 2007

Why I Have Two Houses

I have in my possession every single piece of real property I have ever owned.

Which is to say, I own a two bedroom, 900 square foot, single family residence in a dying coastal timber town four hours away from the urban center where I've lived for the past 16 years. And I own (OK, I'm buying) the home in which I've resided for the past 14 years.

The coastal home is paid for. It is tax assessed at $136,000. I could probably get a little more for it because it is in a good neighborhood. However, since I've been renting it out and taking depreciation for the past 14 years, the capital gains will be substantial. It was my first home, purchased in 1976 at age 28 for the huge sum of $ 16,900. I had to assume the first mortgage and come up with a second one just to cover the down payment. I recall struggling with the question of home ownership and whether it was worth that kind of expense.

In 1990, with both parents now deceased (they lived just blocks from my home) and children who needed more than the small town school system could offer, I moved to the big city. My mother's death had left me with a small inheritance, which I used two years later as a down payment on the home in which I now live.

So, I hung onto my first home. It is easily rented. I've had four renters in 16 years, and every time one left, they brought me the next tenant. My current tenant is the son of the previous tenant, who was the best friend of the tenant before that. They have all been handy and willing to make repairs as needed.

This year, and probably part of next year, I'll be running into some expenses. The tub and enclosure in the bathroom needs to be replaced, as do most of the windows in the home. The exterior needs painting. I'm probably looking at about $10,000 to cover everything. The rent definitely will not cover that--in fact, the rent will not cover half that once I pay for taxes and insurance for the year. I intend to free up as much money as I can to pay these costs on an as-needed basis. Yet, realistically, at some point, I will have to access my HELOCC. That means my debt is going to go up.

So why keep the home? NCN of No Credit Needed asked me that question when I first started this blog. (Read his comment here.) I have no real answer. Or rather, I have answers but they are all emotional. I love that house. It was not only my first home, but it was and remains perfect--small, well-planned, energy efficient.

When I first moved, I was unsure of my new job, unsure if I'd like living permanently in a city, unsure how it would be for my children. Then I was seduced by urban living.

Now, it's just that I like knowing that I have a fallback position should my world suddenly go crazy. I can live mortgage free in that house if I have to. I don't imagine my life will ever come to that, but I find it hard to give up the safety net.

The house itself is not going down in value. The town's timber industry may be dying, but tourists to the coast are driving up prices everywhere.

I'm the kind of person who saved all the dolls I played with as a child, and have journals going back to fourth grade. Why can't I save my houses, too?


Anonymous said...

You left out the most important PF Blogger detail! Is the house making money?

I recognize this is a nasty calculation involving taxes to cash it out, real estate broker fees (BOO!), property taxes, upkeep, etc.

Anonymous said...

Fair question. The house has been earning about 7% per year over the past 31 years, though most of that increase was in the past two years. For the 16 years that I've had the home rented, I have made money every year except one where I had to replace the carpeting and furnace and do some interior painting. I have not, however made scads of money. Most PF folks think homes should be rented for 1% of their value per month. I gotta tell ya, there's nothing residential in that small town that rents for $1360 per month, certainly not a two bedroom, one bath house!

Engineering My Finances (EMF) said...

From an investment point of view, a 7% return might not be too bad. That is if it's 7% net after paying property taxes, insurance, and repairs. After paying all the expenses, if you're left with 3-4%, not so good. As far as the repairs, if you took out a loan against the rental property and spread the repayment over 5 years, would you still have a positive cash flow? If you sold the house, your gains would be long term and taxed at a 15% rate.

From a personal point of view, perhaps in a few years when you really do retire, you could sell your house in the city and move back. The gains on your city house would probably be tax free, if below the IRS limit. I don't know what the tax implications would be on moving back into a house you've rented out and depreciated, but I suspect that they wouldn't come into play until you actually sold it.

But with the current credit crunch, you probably would not be able to sell it for the current tax appraisal.

Anonymous said...

I have all the journals I've kept since I was seven. My doll's are in my parents' attic, waiting to move to the house I want to buy one day. And when I'm able to get a second house, I'm not selling the first. It's a buy-and-hold mindset that I have. Since the house is making money, I think you're doing the right thing.