Question: I fell victim to FOMO during the housing market craze and bought a house for $200,000 above the asking price. Now house prices are coming back to reality and I feel like I’ve wasted my hard earned money. I don’t know what to do as I live with constant stress thinking I made a big financial mistake, and I don’t know if I should consult a finance advisor for better decision making and investment planning to long term. (Looking for a financial advisor too? This tool can help you find a financial advisor who might meet your needs.)
My wife and I are in our thirties and work in the Bay Area and make about $320,000 a year. We live an average life and watch every dollar we spend. We bought our first condo in an average neighborhood in 2016 because we didn’t have kids at that time and wanted to stay close to where we work because we both had to go to the office most days.
In 2021 we had a child and started thinking we needed more space. We wanted a good/safe neighborhood, good schools, and good work-life balance with a hybrid work option. I started looking for a place with these needs in mind, knowing that the housing market was crazy and we needed to exceed the asking price. We found a house (nice neighborhood and schools, but a long way from where we work and not as big as we wanted) and made an offer of $200,000 above the asking price (we were disappointed because our some previous offers were not selected). We closed the deal in March 2022 and went on vacation because we really wanted to recharge our batteries.
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When we got back from vacation, we didn’t end up moving to the new house, because I wasn’t sure I could go that far from my workplace and our current circle of friends. We decided to continue our stay in the condo that we bought in 2016, and we rented our house that we bought this year (the monthly mortgage is $4,450 all inclusive, but we only receive $3,250 rent). I feel like I made a really bad financial decision and doubt my skills to manage finances/investments effectively. What should we do?
Reply: First, know that you are not alone: this has happened across the country as tight inventories have forced bidding wars. And congratulations on knowing that it’s time to face the music and figure out what to do next – by reviewing what’s going on and considering hiring a financial professional to give you advice. (Looking for a financial advisor too? This tool can help you find a financial advisor who might meet your needs.)
The first step is to “do a comprehensive financial assessment of the home,” says Certified Financial Planner Chris Chen of Insight Financial Strategists. “It’s now a business, so what does the profit and loss look like? We know you’re losing $14,400, but is that a full accounting or just the mortgage minus the rent? Chen said. Indeed, Certified Financial Planner Timothy Parker of Regency Wealth says, “Given the amortization expense and possibly interest, you can be cash neutral on the monthly cash flow.”
Parker adds that you will need to “look at your cash flow and the current value of the rental home and the outlook for real estate values in the future. It may be that the investment is successful or it may make sense to sell,” Parker says.
Since this is a rental property, if you sell at a loss, you may be able to deduct some of the loss on the sale of the property for tax purposes. That said, “it is important to review your tax situation. Real estate is part of an investment portfolio, and an advisor would likely pronounce on your other savings and investments, taking into account your risk tolerance,” adds Parker. (Looking for a financial advisor too? This tool can help you find a financial advisor who might meet your needs.)
Selling isn’t your only option, and it may not be the right one. “What is the likely future of the property? With inflation raging, we would expect the rent to rise over time and eventually break even on a cash flow basis. At this point, at least the investment won’t bleed money,” Chen says.
Once these things are in place, Chen advises thinking about what you want out of your life and your financial plan. “How does an expensive rental fit into your future?” What would you do with the money if it sold? Chen said. It looks like you could use a real financial plan to find some of the answers to these questions.
Do you need a financial planner to help you?
It can certainly help, but if you feel you can do it yourself, it’s not necessary.
“Working with a financial planner to carefully weigh different considerations before making your next move would give you an expert outside perspective,” says Kate Wood, in-house expert at NerdWallet, who thinks your instincts to talk to a financial planner are good. . “You could also talk to a local real estate agent to get an idea of what’s happening in your market right now, giving you more data to inform your planning,” says Wood. (Looking for a financial advisor too? This tool can help you find a financial advisor who might meet your needs.)
If you just need someone to get you started, you might 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. “XY Planning Network has people who work a variety of models and some of them offer hourly services. When you view an advisor’s profile, 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 employ an advisor to your advantage, as hourly and paid financial planning usually costs between $200 and $500 per hour depending on the experience of the advisor.
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Questions edited for brevity and clarity.
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