Question: I fell victim to FOMO during the housing market frenzy and bought a house for $200,000 over asking price. Now house prices are 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 the constant stress of thinking I’ve made a huge financial mistake and I’m not sure if I should see a financial advisor for better decision making and long term investment planning. (Looking for a financial advisor too? This tool can help match you with a financial advisor who can meet your needs.)
My wife and I are in our 30s and work in the Bay Area and make about $320,000 a year together. We live the average life and watch every dollar we spend. We bought our first apartment in the middle of the neighborhood in 2016 because we didn’t have kids at the time and wanted to stay close to our workplace, since we both had to go to the office every day.
We had a baby in 2021 and started thinking we needed more space. We wanted a good/safe neighborhood, good schools, and a good work-life balance with a hybrid job option. I started looking for a place with these needs in mind as I knew the housing market was crazy and we had to move to the asking price. We found a house (nice neighborhood and schools, but not too far from our job and not as big as we wanted) and offered $200,000 over asking price (we were disappointed that we had not been selected on several previous offers). We closed the deal in March 2022 and went on vacation because we really wanted to recharge.
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We didn’t move into a new house after we got back from vacation because I wasn’t sure I could move that far away from my workplace and our current circle of friends. We decided to continue living in the condo we bought in 2016 and rented out the house we bought this year (monthly mortgage is $4,450 including everything, but we only pay $3,250 in rent). I feel like I made a very bad financial decision and doubt my ability to manage finances/investments effectively. What should we do?
Answer: Above all, know that you are not alone: This has happened as tight inventory forced bidding wars across the country. Thanks for not facing the music and knowing it’s time to figure out what to do next – looking at what’s going on and considering hiring a financial professional to advise you. (Looking for a financial advisor too? This tool can help match you with a financial advisor who can meet your needs.)
Chris Chen, a certified financial planner at Insight Financial Strategists, says the first step is “a full financial evaluation of the home.” “This is a business now, so what does the profit and loss look like? We know you lost $14,400, but is that a full accounting or just the mortgage, less rent?” Chen says. In fact, Timothy Parker, a certified financial planner at Regency Wealth, says, “Given the amortization expense and maybe interest, you could be cash flow neutral on a monthly basis.”
Parker adds that you “need to look at the cash flow and the current value of the rental home and the outlook for future real estate prices. Maybe the investment will work or it might make sense to sell,” says Parker.
Since it is a rental property, if you sell at a loss, you can write off some of the property sale losses for tax purposes. However, “it’s important to review your tax situation. Real estate is part of an investment portfolio, and an advisor can provide insight into your other savings and investments, possibly taking into account your risk tolerance,” adds Parker. (Looking for a financial advisor too? This tool can help match you with a financial advisor who can meet your needs.)
Selling is not your only option, and it may not be the right one. “What is the likely future of real estate?” With inflation running rampant, we would be right to assume that rents would increase over time and eventually the property would break even on a cash flow basis. At this point, at least the investment won’t be a cash flow,” Chen says.
Once you have these elements in place, Chen advises thinking about what you want from your life and your financial plan. “How does expensive rent fit into your future? If he sold it, what would you do with the money?” Chen says. It seems that you can use a realistic financial plan to find some answers to these questions.
Need a financial planner to help?
It can certainly help, but it’s not necessary if you think you can do it yourself.
“Working with a financial planner to carefully weigh the various considerations before making your next move will give you an outside perspective,” says NerdWallet’s home expert Kate Wood, who thinks your instinct to talk to a financial planner is a good one. “You can also potentially talk to a local real estate agent to get an idea of what’s going on in your market right now and give you more information to inform your plans,” says Wood. (Looking for a financial advisor too? This tool can help match you with a financial advisor who can meet your needs.)
If you 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 using areas of expertise. “The XY Planning Network has people working under different models and some of them offer hourly services. When you check an advisor’s profile there, you can see if they offer hourly advice,” says Justin Pritchard, a certified financial planner with Approach Financial. It can also be the most cost-effective way to hire an advisor, as hourly, fee-only financial planning typically costs between $200 and $500 per hour, depending on the advisor’s experience.
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Questions have been edited for brevity and clarity.
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