Real Estate and the "Hot Tub Time Machine"

Recently my husband and I watched the hilarious new comedy recently out on video: Hot Tub Time Machine. The basic story line of the movie is classic "Back to the Future"; three guys who in the year 2010 are in their 40's go back to try and relive their youth by staying in the same ski resort that they vacationed at in 1986. After a night of wild partying which culminated in the hotel's hot tub, they wake up in 1986 and discover they have been given the unique opportunity to relive a weekend from their youth. Now that they know what the future brings, the question is do they chose to follow the path they know life will lead them, OR do they make a decision that will change their future.

The most classic "Hot Tub Time Machine" scenario in real estate situations that I have seen over the last five years in the Northern Virginia market is the owner who do not like the market conditions and instead of making the adjustment to get the house priced to market and sold, decides to put it on for rent for a few years in hopes the market will improve. Most market cycles are typically seven years in duration. So it isn't surprising that unless a property is held at least that long, it is not likely the market has had the time necessary to recover completely. Further, real property (and even land) is in a constant state of deterioration. Grass needs mowing, landscaping materials require trimming, gutters need to be cleaned, HVAC systems serviced, and on it goes. The rule of thumb that I tell home owners is to plan to spend 1-3% of the value of the property on the maintenance and updating of the property each year. So on a $1 million property, an owner should invest at least $10,000-$30,000 per year to keep it in marketable condition.

It has been my experience that even the best tenants do not care for a property the way the home owner would. Further there is the cost of commissions for the leasing agent and if there is a management company involved, that fee as well. Taxes and insurance has to be paid on the property. If there is the possibility of capital gains being realized on the sale of what had been an owner occupied property, one of the requirements is that it that the home has to have been lived in by the owners for 2 years of the most recent 5 years (always verify with a tax advisor to determine if this applies). The capital gains exclusion for home owners thus requires coordinating of when tenants move in and out and getting the home on the market and sold in the required timing.

Most significant however is the time, energy and lack of ability to truly move on is where I hear the most regret from people who have taken this approach. The time and energy to manage another property, usually from a distance, is huge. Not being able to utilize the capital invested in the equity portion as well as the outstanding debt on the property in many situations ties the home owner's hands from being able to truly settle in the new location.

The next time I have someone ask me if they should put their home on for rent for a few years and then try the market again, I'm going to share the story of real estate and the "Hot Tub Time Machine"! In the case of the movie, one of the guys realized the mistakes of his past and actually made a different decision then he had the first time around and his and everyone else's future was much better for it.