Student loan vs selling one property

Question

Thank you in advance for taking the time to click on my post and for your input.

I will try to get into my question in short sentences

My income is just over 100k a year.
My wife is in school and will start working next year making about the same amount of money.

Our goal is to buy a house in San Diego where we moved to live from Arizona. Average house prices here are 500 to 600k. That means we need a down payment of at least 150k.

I own two houses in Arizona. The first house I own was purchased for 78k and is worth 145k now. I am renting this house and I bring home as a profit $400 a month.
The second house we own 144k but is worth 189k. We break out even with the rent.

We also have about 40k in savings in the bank.

My wife owns about 50k in student loans.

My question is what options do I have;
Should I sell the second house and with the profit pay her student loan since right now we are not bringing any cash from the rent?
OR
Sell the house and use the profit towards a down payment for a house in San Diego?
OR
Sell the house and buy a condo worth 150k and use the profit as a down payment. That would leave me with 100k in mortgage and monthly mortgage 700 and rent the condo for 1000.

Long term goal is to keep both houses to save them as extra income when I retire. I am 30 years old.

Any input will help thanks

Answer 1

If it was me, I would consider selling both properties. Unless of course your renters from the first house are very, very good; and you have a good handy man in the area.

Managing real estate from a distance is tricky, and $400 per month is not a lot of wiggle room.

You would be taking on a lot of risk with only 40K in the bank, a 200K salary, three mortgages (one likely a jumbo) and a student loan.

Yea, if it was me I would sell both.

Answer 2

With student loans at 2%, I wouldn't pay a dime over minimum on that, and I certainly wouldn't sell an investment property to pay them off, you can get CD's that beat 2% interest.

With the rentals, you could sell the one that isn't performing as well and pay no capital gains tax if you lived in it 2 of the last 5 years (counting 5 years back from sale date). That'd be a nice chunk of money for your down-payment.

The risk of using proceeds to buy a different rental property is that you may find you don't like being a distance landlord, and then you'd lose money selling or be stuck doing something you don't enjoy for a while until you can sell without a loss.

Like you mentioned, the risk of selling either/both rental properties is that if the Arizona housing/rental markets do well you'd have given up your position and missed out.

Ultimately, I think it's about your desired timeline, if you are content to wait a while to buy in San Diego, you could have a handsome down payment, will know whether or not you like being a distance landlord, and can sell/keep the rentals accordingly. Alternatively, if you want to get a house in San Diego sooner, then selling one or both rentals gets you there faster.

If I was in your position, I'd probably sell the rental that I lived in and put that toward a down-payment on a primary residence, keeping the other rental for now and trying my hand at being a distance landlord.

Answer 3

The best answer for you is going to depend completely on your financial goals. Do you want to be debt free? Are you comfortable with the risks of long-distance rentals? Do you have good resources to take care of any issues where the properties are at?

You can't directly compare the returns of risky investments versus the risk-free "return" of paying off debt. The expected return of the property might be higher that the interest on the loan, but when you incorporate risk, there's a decent chance that you'll make less money on the property than you pay on the loan.

Other things to consider:

• Student loans are not dischargable in bankruptcy - the only way to get out of them is to die or become disabled
• There is no asset to turn in to pay off the loan, unlike a car loan or home mortgage.

Another way to think about it is: If you did not have the debt or the houses, Would you borrow money at 4% (or whatever your student loan is at) to buy a rent house in Arizona?