Question: I was a victim of FOMO during the real estate madness and bought a house for $200,000 over the asking price. Now real estate prices are coming back to reality and I feel like I’ve lost my hard earned money. I don’t know what to do as I live with constant stress and think I’ve made a big financial mistake and I’m not sure I should consult a financial advisor for better decision making and long term investment planning to obtain. (Are you also looking for a financial advisor? This tool can help you find a financial advisor that fits your needs.)
My wife and I are in our 30s, work in the Bay Area and collectively make about $320,000 a year. We live an average life and we care about every dollar we spend. We bought our first condo in an average neighborhood in 2016 as we didn’t have kids at the time and we wanted to stay close to work as we both had to be in the office almost every day.
In 2021 we had a child and thought we needed more space. We wanted a good/safe neighborhood, good schools and a good work-life balance with a hybrid work option. I started looking for a place with these needs as I knew the housing market was crazy and we had to go over the asking price. We found a house (nice neighborhood and schools, but very far from where we work and not as big as we wanted) and made an offer $200,000 over the asking price (we were disappointed as our previous few offers were not selected ). We closed the deal in March 2022 and went on holiday because we really wanted to recharge.
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After returning from vacation we didn’t move into the new house because I wasn’t sure if I would be going so far away from my job and our current circle of friends. We decided to continue our stay in the condo we bought in 2016 and we rented the house we bought this year (the monthly mortgage is $4,450 including everything but we only get $3,250 in rent). I feel like I made a very bad financial decision and have doubts about my ability to manage finances/investments effectively. What should we do?
Answers: First of all, know you’re not alone: This has happened across the country as forced bidding wars with scarce supplies. And kudos for knowing it’s time to take on the music and figure out what to do next — by taking a look at what’s going on and considering hiring a financial professional who she advises. (Are you also looking for a financial advisor? This tool can help you find a financial advisor that fits your needs.)
The first step is to “do a full financial assessment of the house,” says certified financial planner Chris Chen of Insight Financial Strategists. “It’s a business now, so what about profit and loss? We know you’re losing $14,400, but is that a full accounting or just the mortgage minus the rent?” says Chen. In fact, Regency Wealth’s Timothy Parker, Certified Financial Planner, says, “Given the cost of depreciation and possibly interest, you can be cash neutral on monthly cash flow.”
Parker adds that you “need to look at your cash flow and the current value of the rental property and the prospects for property values in the future. It may be that the investment pays off or a sale makes sense,” says Parker.
As it is a rental property, if you sell it at a loss you may be able to deduct part of the loss from the property sale for tax purposes. However: “It is important to review your tax situation. Real estate is part of an investment portfolio, and an advisor would likely assess your other savings and investments, taking into account your tolerance for risk,” adds Parker. (Are you also looking for a financial advisor? This tool can help you find a financial advisor that fits your needs.)
Selling isn’t your only option, and it may not be the right one. “What does the probable future of real estate look like? With inflation raging, we would be justified in believing that rent will increase over time and the property will eventually break even on a cash flow basis. At this point, the investment will at least not cost hard cash,” says Chen.
Once you have those elements in place, Chen advises thinking about what you want out of your life and financial plan. “How does expensive rent fit into your future? What would you do with the money if it were sold?” says Chen. It seems you can use a real financial plan to find out some of the answers to these questions.
Need a financial planner to help you?
It can certainly help, but if you feel like you can do it on your own, it’s not necessary.
“When you work with a financial planner to carefully weigh various considerations before taking your next step, you get an expert, outside perspective,” says Kate Wood, household expert at NerdWallet, who thinks your instinct to work with a financial planner is too speak is good. “They could also potentially talk to a local real estate agent to get a sense of what’s going on in your market right now and give you more data to help you plan,” says Wood. (Are you also looking for a financial advisor? This tool can help you find a financial advisor that fits your needs.)
If you just need someone to help you get started, you may want to find an hourly financial planner with real estate experience. Garrett Planning Network has a feature that allows you to search for qualified financial planners by specialty. “XY Planning Network has employees working under different models and some of them offer hourly services. If you check an advisor’s profile there, you can see if they offer hourly advice,” says Certified Financial Planner Justin Pritchard of Approach Financial. It can also be the most economical way to hire a consultant for your benefit, since an hourly, fee-based financial plan typically costs between $200 and $500 an hour, depending on the consultant’s experience.
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The questions have been edited for brevity and clarity.
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