From Straw to Bricks

That old saying about the last straw breaking the camel’s back has been on my mind a lot in recent days. How much is too much? It’s tough out there and things only seem to be getting tougher. But now it’s a growing number of conversations and news stories about folks just being done with it and planning to move out of the area. Many say they’ve been at the tipping point for a while and the current smoke situation is that final straw that feels like a ton of bricks.

All this has me considering the thought process behind relocating. It’s a complicated thing, upending your life. There’s lots of risk but big potential rewards. And deciding to move involves a series of tradeoffs that are intensely personal. So this is a big topic, but I’ll highlight some of the core financial issues now and in the coming weeks.

Let’s look at a common question when you’re moving out of state: to sell your home or rent it.

If you’ve owned your home for a while you likely have a good amount of equity. This is great because you can transfer it, so to speak, to somewhere on a long list of states with cheaper housing prices and probably overall lower cost of living. We pay a premium to live here and it’s no surprise that our housing cost is over twice the national median and over 50% higher than Austin, TX, a popular would-be destination for folks leaving Sonoma County.

To illustrate how leveraging this Sonoma County premium could work at the household level, here’s a scenario using median home prices and typical homes here and in Austin.

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Say you sell your home for $690K (the August median asking price) and buy in Austin where the median is $450K. If we assume you bought your current home in 2010 with 20% down, you could walk away with, say, $240K from the sale after paying the realtor and various closing costs. Your current mortgage might be about $3,400, all-in. Your new Texas mortgage might be around $1,500 if you put all your sale proceeds into the new home.

That’s $1,900 per month that could go right into your pocket if you work remotely and bring California income to Texas. Or maybe you plan to find work closer to your new home. Surprisingly, you might still come out ahead. Median income here is actually lower than Austin, at $81,000 vs $98,000, respectively (Austin has experienced a tech industry surge in recent years and housing costs haven’t caught up yet). Or maybe this cost differential helps you retire earlier and leave the rat race entirely.

But should you sell? What if it doesn’t work out in Austin? Do you have any personal experience with the city, or has it only been internet tire kicking? Are you ready to cut ties with Sonoma County and California in general? There’s a saying that it’s harder to move West than East, so it’s an important consideration.

One alternative is to rent your home here, then rent in Austin and give yourself a little time to ease into your new locale. Maybe a one-year lease on both sides.

A search on Zillow shows rents in Austin being about 30% lower than Sonoma County, so renting can be a viable option. Your Sonoma County tenants would cover your rent in Texas while also putting cash in your pocket. How much cash depends on lots of factors, but my quick research indicates maybe $1,000 per month if we compare average homes in both markets. Ideally, you’d at least break even on renting your Sonoma County home, but you could potentially cover negative cashflow for a while, just don’t plan to do that forever.

Here’s are some other aspects of this “sell vs rent” decision and relocation in general:

Taxes can be an issue. If you have lots of equity in your home, you may have to pay capital gains taxes when you sell. Work with a tax professional on this because it’s complicated, but the shorthand is that spouses can “gain” up to $250K each without paying a dime in taxes. Also, plan on your rental income being taxable. This gets complicated as well, so use a good tax person to help with planning and filing your tax returns.

If you’re planning on working virtually for a California employer while living out of state, you might still have to pay some California income tax if you’re travelling back periodically to do business. Get a tax professional’s help with this. Otherwise, Texas, for example, doesn’t have a personal income tax, so that’s a bonus. Instead, sales taxes and property taxes trend higher than the national average but the former, sales taxes, are on par with Sonoma County.

We’ve so far assumed you have a home to sell or rent to someone else. What if you’re renting now and want to move where the grass is greener and the skies less smoky? If you can attest to being impacted by the pandemic you should be able to take a hardship withdrawal from your workplace retirement plan of up to $100K without penalty. You can spread the taxes on this out over three years if you take the distribution this year, so that could help fund your POD rental, shipping your car, and other relocation expenses.

What about buying a home remotely? If you’re unable to travel to the new city to personally kick the tires but still want to pull the trigger on moving, can you buy/rent remotely? Of course you can. While certainly not ideal, technology really helps here. You can leverage Google Street View to get a sense of neighborhoods and can use the search engine to look at everything from weather patterns and school options to local crime statistics. You can really go deep into the community. But the internet won’t tell you if the house reeks of animals or cigarette smoke, so you’ll have to rely on local professionals like realtors and home inspectors (don’t skimp on inspections!) to confirm the details and advise you of risks.

The news is coming fast and furious lately and the sheer weight of it all can be hard to bear. Obviously, you’ll want to be deliberate about making major life decisions like these. Try to remain objective and try not to feel pushed by the circumstances even though that might be exactly what it feels like. This too shall pass, as they say, but you likely have several options if a move is in the cards for you and your family. Let me know if you need help evaluating them.

Here's a link to one of the recent Press Democrat articles on the topic of folks looking to move out of the area.

Have questions? Ask me. I can help.

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