Sell, rent, or stay put ?

February 13, 2007 1:30 PM

I'm in a really weird housing market (Baton Rouge, LA). Should I get out and rent for awhile until it calms down? Any ideas about weighing capital gains tax vs. possible profit I might lose if prices nosedive before my 2 years are up?

I know the housing market is weird everywhere, but this is really a unique situation so I thought I'd see if anyone had some unique perspective. Baton Rouge is about 70 miles west of New Orleans, and due to the great diaspora after Katrina housing prices went up around 26% here in just a few months. So did rent, incidentally, which is why I bought a fixer upper condo in July.

I'm getting really nervous about staying in a market that's so unpredictable and inflated, but I don't want to sell too early and end up paying a ton of capital gains taxes (a ton = rough estimate; I can't find any real idea of what rates are here).

Which is riskier: Staying put until my 2 years is up, hoping there isn't a huge crash? Or selling this summer and paying the tax on my profit (which probably won't be more than $10-15k)? Renting will cost around the same as my mortgage, so should I rent for awhile until things get a little less murky?

posted by ultraultraboomerang to work & money (10 comments total)

How long do you intend to stay in Baton Rouge? If you're there for the foreseeable future it might be reasonable to expect to wait out the market until it stabilizes.
posted by handful of rain at 1:36 PM on February 13, 2007

I am in Baton Rouge, and I actually just got back my home appraisal today. I bought my place (a fixer-upper around LSU) for around $60/square foot, in June of 2004.

In the time that's followed the you-know-what, a number of houses on my street have sold up to $90-94/square foot, and, most recently, a speculator picked up one place on the block and is trying to get around $130/square foot.

The speculation market hasn't calmed down yet, but, I'm beginning to realize that higher home prices are the "new normal" around here.

More recently, a buddy of mine bought a condo for $65k in a sketchier part of Mid-City in 2003. He sold it 4 months ago for a tidy $130k. Not a bad deal, IMHO.

Today, the appraiser who ran the numbers on my place said, realistically, that my place has only increased in value around 14-15% (now at $70/square foot) since the storm, and he (among other appraisers) are taking the recent ridiculous price hikes with a grain of salt.

Incidentally, I'm pretty positive on the future of Baton Rouge, and I do believe that you'll do fine to sit on that condo for a while.
Some quick thoughts:
1. The housing stock in Baton Rouge isn't currently overbuilt, there are ten to twenty thousand homes being built on the outskirts of town that don't exist yet. Only at that point will it be worth considering getting out.
2. Home values in Baton Rouge were escalating at a pretty good clip before the storm, in a way, Katrina just sort of escalated things by about 5-8 years.
3. As New Orleans' recovery hasn't been as speedy as anybody would have liked, most people who have bought homes in Baton Rouge are likely to permanently going to resettle here (I can tell you the story of around thirty or so friends and associates of mine who have done just that).

A bigger question for you: Where in Baton Rouge did you buy?
posted by The Giant Squid at 2:42 PM on February 13, 2007

Whoah, sorry for the terrible English in that post. Please accept my apologies.
posted by The Giant Squid at 2:44 PM on February 13, 2007

Wow, Giant Squid, very helpful! I think you're probably right. I'm just antsy because prices got so inflated so quickly, and because, to my knowlege at least, the whole "apocalyptic clusterfuck forces huge diaspora" variable in housing prices is kind of uncharted territory.

It's a 1000ish sf 2bed 2ba condo around Jefferson and Bluebonnet. 70809 seems like a pretty safe bet for the forseeable future: empty nesters, young couples, grad students, the kinds of parents who buy their kids condos when they go to college, etc.

Do you know anything about capital gains taxes? My google-fu has failed me. Are we talking like 40% or like 8%?

I had the dumb luck of being transferred from NO about a year before the storm. In retrospect: good call on the move, bad call on not buying right away. D'oh, a thousand times, d'oh. I will never forgive myself.
posted by ultraultraboomerang at 3:39 PM on February 13, 2007

You aren't clear about whether this is investment property or a residence you have lived in. If this is your personal residence there is a capital gains exclusion of $250,000 for singles and $500,000 for couples. This exclusion applies to the net profit of the sale, not the sales price. If it is your residence, you likely have no capital gains taxes.
posted by JackFlash at 4:06 PM on February 13, 2007

As JackFlash probably knows more about the capital gains end of things, I'll let him (and others) speak to that.

As for your neighborhood, I'm pretty sure I know exactly where you bought, as I lived in that neighborhood off and on throughout the eighties.

My advice from here:
1. In places like Baton Rouge, it's almost always better to buy than to rent. You're not dealing with a 380k average home value, like you'd be experiencing on the coasts.
2. I'm a firm believer in equity, and if you took your cash (10-15k) and dropped it in an interest bearing account, you wouldn't be increasing your investment as much as regularly putting a couple hundred into your principal on your mortgage every couple of months.
3. If you're hanging out in BTR for another 3-5 years, and sell, you'll get every penny back.
4. You're in a nice little neighborhood, I prefer 70802 and 70806, but, where you're at is pretty central. You could twist my arm and I could stand living out that way, and there's very little chance your neighborhood will be going "downhill" any time soon. Rather, I expect the push from Bocage -> southward to have a positive effect on your property values for the forseeable future (we're talking up to ten years, IMHO). Land in that stretch seems to be doing well, and the Corporate Boulevard development will continue increasing property values in your ZIP for a while.
5. I own rental property, and I've been forced to up rents because my flood and hazard insurance premiums have doubled in the last year. I'm sure many other landlords are considering the same thing. Don't even consider renting unless you can lock down a 5-year lease (which is impossible in most places).
6. Please tell me you didn't get an ARM or an interest-only loan or anything stupid like that.
7. I'm guessing you probably bought something in the 115-140k range (knowing the neighborhood). If you did, you're most likely going to be okay. Those places were going for 80-100k before the storm, and those prices will never return.

But, one caveat!!!
In 1983-1984, Louisiana had the mammoth oil bust (if you were in the area, I'm sure you remember that). That event was terribly destructive to Baton Rouge's economy and housing market. I had friends buying 4-plexes around town for 35k. I'm far more concerned about an event like that than I am a post-Katrina bust.

The Squid is out.
posted by The Giant Squid at 4:50 PM on February 13, 2007

Thanks so much! That's pretty much what I told myself when I bought the place, but it's nice to be reassured I wasn't just making it up.

And yeah, this is my primary residence and I'm single, but I don't think the exclusion kicks in till I've lived here two years (which will be July 08). That's why I'm wondering if there's any real huge advantage to waiting the two years, since we're talking about a relatively small amount of money. (Once I convince myself to stay in the market, I start wanting something more house-like!)

Thanks again.
posted by ultraultraboomerang at 6:54 PM on February 13, 2007

Ah, I see. I didn't catch the fact that you just moved in last year. In that case, if you were to sell now, less than one year from your purchase, then your gain would be taxed at your regular income tax marginal rate, for example 25%.

But if you wait until July 07, at least one year from your purchase date, then it becomes a long term capital gain which would be taxed at a maximum rate of 15%.

And then if you wait until July 08, the rate becomes 0%.

As you point out, it's a small enough amount of money that your decision probably shouldn't be driven taxes. But, even if you decided to sell now, you could delay closing until July and save a little on a lower tax rate.
posted by JackFlash at 8:11 PM on February 13, 2007

Hmm. I don't know, but if you need a realtor in Baton Rouge, my mom is a good one.

(I live in New Orleans and just had my homeowner's insurance cancelled. I'm bitter about the way things are going right now down here. Don't mind me.)
posted by pyjammy at 1:39 PM on February 14, 2007

Oh, and her office is probably within walking distance of your condo. Okay, okay, I'll stop pimping her out now. Ha!
posted by pyjammy at 1:40 PM on February 14, 2007