Life advice on what to do here? Uncertain couple.

[Aaron S.]

What would you do?

35m/28f couple. Household income $275k/yr

-TSP #1: $205,000.   

-TSP #2: $76,000

-Brokerage and Savings: $40,000

-long-term rental property, VA loan, cash flows $200/mo. est. $100k in equity. Built in 1997, generally low-maintenance.

-mid-term rental property (rented room by room via furnished finder), VA loan, cash flows $500/mo. Unknown amount of equity due to unknown house value.* Newly built in 2022. An absolute headache to deal with due to corners cut by the builder (we are outside of the build warranty). Every few days there are new issues and we are constantly having contractors and technicians at the house dealing with one problem or another, while coordinating with our tenants who are on a range of work/sleep schedules.

-condo that we live in as primary residence, VA loan, est. $40k in equity. Built in 1985, generally low-maintenance.

*a near identical house (same blueprint) was built next door and has not sold for 8 months. The price seemed reasonable but apparently it is too high. This makes us uncertain as to our own realistic house value.

Situation:

We are interested in purchasing a new house for us to live in, and rent out our condo as a long-term rental.

The house we are interested in is a Meritage new construction. $515,000. It has a very nice bath tub that is of high importance to us personally. We heard offhand that only 20% of homes in our market have bath tubs. The area is also good, safe, and with nice mountain views. 

We have 3 active VA loans. To use our remaining VA entitlement and put down as little as possible (without paying PMI), and quoted 5.375% interest by Meritage's preferred lender, our estimated cash to close is $72,000. 

We are considering taking out the required cash to make up that total from our savings, brokerage, and 2x TSP loans from our individual accounts. These loans would be repaid back to our TSP accounts at 4.475% interest.

Complications:

-The condo would not cash flow if rented out. A property manager analyzed comps and it appears that the condo would lose ~$150/mo, before repairs. 

-We are dealing with a mysterious leak at the midterm rental that is tying up a lot of our time, energy, and money. We are using up all of the $500 deductible from home insurance to cover water damage restoration. We are still trying to identify the actual leak source, and figure out how much it will cost to repair it. And also what to do with our tenants that will not have a shower for who knows how long during repairs (any recommendations for how to manage this?)

-The midterm rental also has a new, main line leak that we are getting looked at tomorrow with leak detection. We do not know if this is related to the other leak, or some other issue.

-The TSP loans give us pause due to conventional wisdom saying, "you should not take money out of your TSP." I have done this once before to purchase our condo with no issues and we both make more than enough money to pay both the new mortgage and pay ourselves back (85K + 3600 after tax monthly retirement for my partner, and 140K for me).

-With all of the above stuff going on, maybe taking out TSP loans, spending almost all of our liquid cash and moving into a new house is not a great idea to do right now.

FAQs:

Q: Why not get a property manager for the midterm, if running it is such a headache? 

A: Because it is rented by the room, we cannot find a property manager who will run it for us. Especially not with 4 separate leases. Even a 10% PM fee would bring the cash flow down to zero.

Q: Why not rent the midterm as a traditional rental, with a property manager?

A: There is a lot of furniture in that house that we would have to figure out what to do with, if it were rented as a SFH with no furniture. Do-able for sure, but a lot of work. With a 10% PM fee, there is a possibility of some small cash flow, or maybe break-even.

Q: Why do you need to do anything? Why not just stay where you are?

A: While our condo is fine, we would prefer more space and a nice bath tub. It sounds silly but in our market this is difficult to find. 

So...

What would you do?

[Jonathan Bock]

I like bath tubs and mountain views easy one for me....

[Aaron S.]

Quote from @Jonathan Bock:

I like bath tubs and mountain views easy one for me....

 We love this comment! But...seriously? No glaring issues from a financial advisor?

[Jonathan Bock]

@Aaron S.

Seriously, I would make and have made suboptimal financial decisions for happiness; everybody has a different philosophy that's mine.  

The purchase price of your potential new primary versus your HHI is under 2x gross which in today's climate is rather impressive! 

We are humans and everything does not have to be rational at all times.  

Obviously, everything on the forum is for fun nothing is personalized advice just entertainment.   Overall, your case facts are very commendable wish you the best!

[Benjamin Weinhart]

I agree with Jonathan. If you're looking at just a pure financial perspective with little/no room for personal comforts, the absolute best thing you can do is live in one of those tiny homes or something like that. It sounds like you guys are doing pretty well for yourselves. I would advise against taking a loan from your TSP because the money wouldn't benefit from any growth while it's out on loan to you.

You're actually in a very similar situation to where I was at personally about a year ago. I had more than enough income to pay for a mortgage on the range of properties I was looking at but I just didn't have a significant enough down payment without tapping into my 401(k) for a loan. I ultimately decided that it was better to reevaluate after a year of saving and I'm now in a significantly better position to restart the process. Plus you have to keep in mind that we are in a climate where interest rates are very likely to start trending downwards, maybe that's worth waiting a bit longer than you otherwise might to pay yourselves in dividends in the future.

Surprising that only 20% of homes have a bathtub as I think of them as a necessity personally. Maybe they'll work with you and make one special for a bit extra? Ultimately, it's more of an emotional decision than anything. There isn't a wrong answer as it's not like you're taking out a TSP loan to go on a vacation or anything. Might just be best to wait for a bit if there's not a pressing need to move.

[Sean Barrett]

Aaron,

You've done well to accumulate the portfolio you have.  One data point missing from your post is if you are still active duty subject to future PCSs.  I'm recently retired myself and have struggled with some of the same questions you are raising.  For me, as I've moved around the country and assess the buy vs. rent question, I had to determine how much risk I was willing to take in that particular market.  I never bought my dream home at the stage of my career when I was at the age you are.  I bought future rental properties that I was willing to live in while I was stationed in that market.  In that light, I did the math on the property to ensure that when I left and lost my housing allowance, i could cash flow it, or at least break even.  

As you look to borrow from your TSP, consider the cost of that, both in the borrowing, the repaying, and the potential loss in capital gains. If you are destined for a military retirement, then perhaps this isn't a big deal. If you plan to get out pre-retirement, or if you already have, then that TSP has a lot bigger impact.

Your mid-term rental is what concerns me in the discussion.  You have a lot of unknowns in potential costs in repairs and yet you are considering depleting your available cash to get a place with more room and a bathtub.  Considering that, may be wise to hold with what you've got until you resolve those issues and see what money you will have available to commit long term without risking a cash crisis if you use your available funds and then find out you have a $50k problem on your hand with the mid-term rental.   If the mid-term rental wasn't the issue, then i'd move on to my next point.

Again, assuming you aren't burdened with the uncertainty of massive repair expenses on the other property, i'd assess the rental value of the condo you're living in. For planning, i've found the following to be decent planning factors: 10% property management fees, 10% potential repair and maintenance expenses, plus any excise taxes your area imposes and condo/association fees. I'm in Hawaii and that's an extra %5 of the gross rents. So, for me on a Hawaii property, rent - (25% + PITI + condo fees) is my estimated cash in. Will the potential rent at least cover that? If so, let's move on.

Your future home.  Will this be your forever home or another potential rental?  If your forever home, then buy what you can afford that has the awesome bathtub, etc.   If not, you are either buying on speculation for future resale or as a rental property.  So, do the math.  In two or three years, if you have to move, can you either sell for enough to cover purchase plus the 20% or so transaction costs or cash flow it as a rental?  

The selling option on a short term property, for me, is paramount to going to the casino. You don't know what will happen in the market and or with interest rates. If long term forever home, neither of those two data points really matter much. So you need more than a few years of long term normal appreciation to get your money out of it. There are exceptions, but don't bank on those. Here in Hawaii we saw 40% gains through and after COVID until the interest rates went up. Now prices are declining. If you bough here two years ago, selling now could be a huge negative unless you can sell to another VA borrower who can assume the low interest rate.

If uncertain on your future timeline in the new place, I recommend you do the financial analysis as if you were buying a rental.  That mitigate much of the resale market risk.  

With that said, I think you need to figure out how big of a problem your mid-term rental is, financially, before making this decision.

Cheers and good luck.

[Stephanie N.]

Hi Aaron, is the condo not going to cash flow because you'd hire a property manager? If so, I would consider going forward with your plan but self-managing the condo for now for the sake of cash flow. As rents grow (assuming this is in a good area where population and incomes are increasing), you can then bring in the property manager and cash flow.

[Travis Timmons]

You make way too much money to not have any cash. There's always going to be another house with a bath tub and a view. Cut expenses, sell something, or do what you have to do to make your $275k income add up to a little more liquidity. 

[Bruce Woodruff]

Quote from @Travis Timmons:

You make way too much money to not have any cash. There's always going to be another house with a bath tub and a view. Cut expenses, sell something, or do what you have to do to make your $275k income add up to a little more liquidity. 

 This ^^^ was my thought as well. That and the fact that either you are very unlucky or do not choose properties wisely....?

I would not base any financial or RE move based on a bathtub, you know how that sounds, right? :-)

My thoughts are: sell everything and start over. Even your units that are making $200/$500 are not really making enough to be happy about, right?

Just my $0.02.....

[Michael Smythe]

@Aaron S. sell the MTR. Not worth the headaches.

Also sell your condo and avoid any capital gains. Not a good rental.

[Benjamin Weinhart]

Quote from @Michael Smythe:

@Aaron S. sell the MTR. Not worth the headaches.

Also sell your condo and avoid any capital gains. Not a good rental.

 Agreed with the selling if they do decide to move. The section 121 exclusion amount is likely going to be worth more than they'd get by renting in TMV terms.

[Jonathan Bock]

@Aaron S.

Are you and your partner both planning to serve until you have access to your defined benefits? I'm going to make an assumption that you are not legacy but BRS.  

That's going to be way more impactful compared to anything else in this thread.   

Do you really want to be a direct real estate owner?  

I'm sticking to that bathtub and going to Lush on my way home before a great soak ha!! 

[Aaron S.]

Quote from @Benjamin Weinhart:

Quote from @Michael Smythe:

@Aaron S. sell the MTR. Not worth the headaches.

Also sell your condo and avoid any capital gains. Not a good rental.

 Agreed with the selling if they do decide to move. The section 121 exclusion amount is likely going to be worth more than they'd get by renting in TMV terms.

 Can we sell both MTR and condo and roll both of those gains into a 121 purchase on a new house?

[Aaron S.]

Quote from @Jonathan Bock:

@Aaron S.

Are you and your partner both planning to serve until you have access to your defined benefits? I'm going to make an assumption that you are not legacy but BRS.  

That's going to be way more impactful compared to anything else in this thread.   

Do you really want to be a direct real estate owner?  

I'm sticking to that bathtub and going to Lush on my way home before a great soak ha!! 

Sorry, I should have clarified. She is recently medically retired at age 28. Her VA + retirement benefits are $3500/mo and her new job is $85,000/yr. I have been separate for 12 years and am a civilian federal employee.

[Aaron S.]

Quote from @Travis Timmons:

You make way too much money to not have any cash. There's always going to be another house with a bath tub and a view. Cut expenses, sell something, or do what you have to do to make your $275k income add up to a little more liquidity. 

 Hard to argue with that!

[Aaron S.]

Quote from @Stephanie N.:

Hi Aaron, is the condo not going to cash flow because you'd hire a property manager? If so, I would consider going forward with your plan but self-managing the condo for now for the sake of cash flow. As rents grow (assuming this is in a good area where population and incomes are increasing), you can then bring in the property manager and cash flow.

 Yeah, if I cut out the PM it would maybe break even, but even still likely be negative after repairs. With a PM it would be definitely negative cash flow.

[Aaron S.]

Quote from @Bruce Woodruff:

Quote from @Travis Timmons:

You make way too much money to not have any cash. There's always going to be another house with a bath tub and a view. Cut expenses, sell something, or do what you have to do to make your $275k income add up to a little more liquidity. 

 This ^^^ was my thought as well. That and the fact that either you are very unlucky or do not choose properties wisely....?

I would not base any financial or RE move based on a bathtub, you know how that sounds, right? :-)

My thoughts are: sell everything and start over. Even your units that are making $200/$500 are not really making enough to be happy about, right?

Just my $0.02.....

 Lesson learned on the MTR is to get a better home inspection done, and also we have a better eye for bad construction. Specifically, shower tile with grout missing, tiny thin grout lines, gaps in overhand coverage/not sealed, and the list goes on. The house was built by a local guy in 2022, not a reputable builder.

[Benjamin Weinhart]

Quote from @Aaron S.:

Quote from @Benjamin Weinhart:

Quote from @Michael Smythe:

@Aaron S. sell the MTR. Not worth the headaches.

Also sell your condo and avoid any capital gains. Not a good rental.

 Agreed with the selling if they do decide to move. The section 121 exclusion amount is likely going to be worth more than they'd get by renting in TMV terms.

 Can we sell both MTR and condo and roll both of those gains into a 121 purchase on a new house?

 Section 121 only applies when selling, not purchasing (it's not like a 1031 exchange). You would only be able to take advantage on your condo in your current position. You theoretically could use it for your MTR as well if you wanted to live in it for 2 years before selling.

[Aaron S.]

Thanks everyone for your input. We read every response and discussed. This is what we decided to do:

-Keep MTR. Repair leak (in progress, finished by the end of next week. Est. $3,000-$3,500).

-Fix the other shower (same issues. Tile was laid improperly, grout lines are too thin, cut-out is slanted outward so water pools in the corner). Another $3,000-$3,5000

-Get another home inspection done and fix what needs to be fixed.

-Take a breath.

-Save an additional $40,000 over the next 8-10 months to put a down payment on our future primary residence.

That's it. We realized that tapping into our TSPs was foolish when considering our income. We can easily save up the money needed without eating rice and beans.

I am glad we got feedback on what to do here. I also talked to an investor I know and got some great feedback on the long term value of holding the MTR, versus selling it based on emotion and the sticker shock of a leak repair.