Is it worth selling primary residence for capital towards REI

[Tyler Richmond]

I apologize if this topic has been covered already. I have not seen anything that quite covers my questions entirely.

My wife and I currently own a home in San Diego with a 30yr fixed rate mortgage at 2.75%. Like many others my equity has increased significantly over the past few years. Given the fact that this is one of the most desirable cities to live in, I never thought it would be wise to sell, especially with our low interest rate and mortgage payment in comparison to rent cost. On the other hand, it seems as though cashing out the sizeable amount of equity we have would give us significant capital to start pursuing real estate investing in a less expensive market. I have run the numbers and if we were to rent our house long term, we could be cash flowing roughly 1 to 1.5k/month with it being managed. Not bad, but that's all our eggs in one basket here.

We have wanted to leave California for some time now, so the thought is we could sell now and capitalize on the last little stretch of these inflated prices. If we keep this house and rent it out, I don't see how we would be able to access the equity we have accumulated and use it to start making more money. I currently own my own restaurant that unfortunately opened right as the pandemic hit. As you can imagine it has been a struggle to take home much, so from a DTI perspective we would not qualify for a HELOC anytime soon. A cash out refi makes no sense given the difference in today's rates either. My wife may get a job offer out of state, in which we would relocate wherever that is, but I still do not think our DTI would allow us to access the majority of the equity in our place.

The final piece to this puzzle is that our home sits on a flat usable 1/3 acre. With the new laws passed in CA we would eventually be able to put and ADU on our property and also potentially convert our two-car garage into a JADU to up that cash flow significantly. Obviously, cost would be a factor, we do not have the funds to do this right now, but in time it is an option.

It seems like if we cashed out and moved to a market we like and had no jobs, then we could still qualify for a property with a DSCR loan if the number made sense. The other thought is purchasing something all cash relatively cheap that needs some work and doing a BRRRR. Ideally, we would want to house hack right out of the gate with a duplex or triplex, but again, we won't have the funds to do this unless we sold our house.

I hope this makes sense. Any help would be greatly appreciated. Our biggest fear is that once we sell this place it's obviously gone forever. Given it is in San Diego and we have such a killer interest rate, I'd hate to look back and think that this was a short-term bad decision. I also am ready to dive fully into REI and having the capital to start purchasing as many cash flowing properties as I can seems to make more sense than holding onto just one property.

Cheers,

Tyler

[Andrew Bang]

Sounds like you don't want to live in California anymore and if your wife gets a job anywhere outside of California you would pick up and move. I think that is your answer.  If your priority is employment and not living in California,  then sell the house and move.  There is value in your low interest rate mortgage, but if you keep it as a rental, when you do sell you'll pay taxes on the gain.  If you sell now, as your primary residence,  you will have tax breaks on the gains.  Most likely the tax breaks now will never be overcome by 1k a month (which you will also pay taxes on) cash flow.

[Tyler Richmond]

Thanks for the reply Andrew. You correct in that we do not want to live in California anymore. If my wife gets a job elsewhere, we will most definitely consider picking up and moving solely for that employment. On the flip side we are also willing to move wherever makes the most sense to dive fully into real estate investing. We would have the ability to make it both of our fulltime jobs by utilizing the potential funds from our home sale to house hack, BRRRR, or simply purchasing rentals with numbers that make sense.

I suppose we could keep the house for some positive cash flow and still get into real estate investing later on. The issue is that it would take us decades to save up the amount we'd get from selling. I didn't think about the aspect capital gains when this is not our primary residence. In that situation I would hope that the 1031 exchange still exists and we could put that towards a few different properties.

[Theresa Harris]

If you want to leave California (and never move back), then sell it.  However, if you want to move back down the road (or to any expensive area), you may have problems.

Run the numbers as to what it would look like as a rental. You can always do a HELOC and pull some money out, but that needs to be factored into the rental numbers.

[Michael Evans]

Before you sell your house, make sure you have another place to live first.

I sold my house in California last year but didn't realize how difficult it would be to find another place and how expensive rentals are.

[Nate Sanow]

@Tyler Richmond I would just do the math. Is there $200,000 equity (I made up that number) ??? What can you do with $200k in another market? Math will answer your own question. I’m in a similar position rate lock wise, in a 3.7% and if I ever get to where my equity is legitimately that high I would sell in a heartbeat if it allowed me to grow my portfolio faster than if I didn’t. 

Having said that, your monthly cash flow numbers are tantalizing. Holding isn’t a terrible idea. Especially if you grow your mindset towards finding more money and more deals no matter where you go. That’s always the trick for all of us. In other words if you left the equity in that house, because it’s at a lower rate, can you become someone who finds deals at prices so low that lenders will cover 100% of the cost? This is the journey into “other peoples money” that all of us eventually have to come face to face with. 

I wish you well either way.

[Steve Meyers]

@Tyler Richmond If I were in your shoes I would probably sell, especially if you are planning and wanting to leave CA down the road.  Homes prices in San Diego are starting to correct and I personally think values will continue to fall in 2023 unless rates drop back down.  

I found this article below on some alternative options you may consider.  I'm also investing out of state myself and would be happy to share with you the areas I'm targetting in the Midwest

https://www.wealthmanagement.c...

[Luka Milicevic]

@Tyler Richmond My opinion/ "advice" to you is the same as anyone that lives in CA. Sell what you have and move out of state, and don't ever come back.

There are states with low to no income state tax as well as low property taxes. There are states that also have FAR less red tape and don't hate producers. I would look into those states and move sooner rather than later. 

[Erik Estrada]

Where in San Diego is it? Perhaps you could convert it into an STR, use a NO DSCR loan for the refinance and move out of state.

[Erik Estrada]

Quote from @Erik Estrada:

Where in San Diego is it? Perhaps you could convert it into an STR, use a NO DSCR loan for the refinance and move out of state.

 That's if your city allows it

[Eliott Elias]

You made your money on this deal, take the cash and 10x it somewhere else. Like Texas. 

[Tyler Richmond]

Thank you everyone from providing some awesome input for me! I had no idea about some of these options such as home equity investments and NO DSCR loans until now.

I think the hardest part of this decision is the simple fact that we are fortunate own a house in San Diego. We aren't right by the beach by any means, but only a 25 minute or so drive away. What will this house be worth in 10, 20, 30 years? No clue, a lot more. There's this saying I hear constantly, something along the lines of "Once you leave, you can't come back", basically saying you will never be able to afford it again.

If we can truly take the cash from this place and multiply it at a far higher rate elsewhere, then it seems foolish to hold on to this one thing. My area does allow STR but this is East County San Diego. More so where families live and not exactly where tourists look to book a stay. I have been taking a good look at Mid Term rentals due to my close proximity to hospitals, but I am not confident enough in the cash flow that could consistently produce. If anyone has experience with MTR in San Diego, I'd love to chat about it.

At this point I'm really leaning towards selling. We have minimal baggage and could honestly move anywhere if we decide to ditch following my wives w2 job and go all in with real estate. Again, thanks everyone for taking the time to provide your input.

[Dan Heuschele]

Quote from @Tyler Richmond:

Thank you everyone from providing some awesome input for me! I had no idea about some of these options such as home equity investments and NO DSCR loans until now.

I think the hardest part of this decision is the simple fact that we are fortunate own a house in San Diego. We aren't right by the beach by any means, but only a 25 minute or so drive away. What will this house be worth in 10, 20, 30 years? No clue, a lot more. There's this saying I hear constantly, something along the lines of "Once you leave, you can't come back", basically saying you will never be able to afford it again.

If we can truly take the cash from this place and multiply it at a far higher rate elsewhere, then it seems foolish to hold on to this one thing. My area does allow STR but this is East County San Diego. More so where families live and not exactly where tourists look to book a stay. I have been taking a good look at Mid Term rentals due to my close proximity to hospitals, but I am not confident enough in the cash flow that could consistently produce. If anyone has experience with MTR in San Diego, I'd love to chat about it.

At this point I'm really leaning towards selling. We have minimal baggage and could honestly move anywhere if we decide to ditch following my wives w2 job and go all in with real estate. Again, thanks everyone for taking the time to provide your input.

 >If we can truly take the cash from this place and multiply it at a far higher rate elsewhere, then it seems foolish to hold on to this one thing.

Historically this is not the case.  Case Shiller has released returns by decade going back to 2000.  It list San Fran as having the highest overall residential return since the start of this century and the top appreciating market since 1990, 2000, and 2010. 

Los Angeles and San Diego are the next highest residential RE return.  

This is because typically properties that appreciate more have higher rent increases.  If you reference neighborhoodScout, you will see that virtually all the large CA coastal cities are ranked 10/10 nationally since 2000.  

What does this mean?   It means not only have these properties produced great appreciation, but they have produced great long term cash flow.  

Initial cash flow does not equate to the long term cash flow.  In fact, historically there is a poor correlation between initial cash flow and actual long term cash flow.  This is because the markets with poor expected appreciation typically have good initial cash flow that is not expected to improve much with time.  Contrast this with an area such as San Diego that has long track record of long term appreciation exceeding inflation.  The expectation is rent increases will also exceed inflation and cash flow will improve significantly as you hold the property. 

>"Once you leave, you can't come back", basically saying you will never be able to afford it again.

Historically this has been true if you moved to a cheaper market.   I suspect it will continue to be true in the long term.  However, my pro forma are being executed with a 0% appreciation over the next 5 years.  I want my pro forma to be conservative but I am using zero percent because I expect minimal short term appreciation in San Diego.  This is due to rate increases and because we are coming off of 10 years of crazy appreciation.  

Good luck

[Allan C.]

@Tyler Richmond I don't take issue with the CA market, but I think holding a SFH in CA doesn't pencil out well. You got the right view of diversifying your investment. Getting more doors, even if in CA, makes sense if you're up for it.

[Peter Eberhardt]

@Tyler Richmond my first mentor once told me "if you can afford it, never sell". Without knowing your actual numbers and situation, and what you value as a person and as a family, I can't give the best advice. From what you wrote, and what I read, I would exhaust every option to try and keep your San Diego home. Your DtI would be thrown out of wack even with a IO HELOC?

My opinion would be to leverage your home to buy another home. Keep it as a rental, even if you break even (cash flow covers all expenses including new note payments or property management) you are still going to benefit from appreciation that you can leverage later on.  Your end goal is to buy a house whereever you end up moving too. Weather you use your SD home to buy that house or not, the end goal is the same of you bought another house. It is just that one route you end up with two houses, the other route you end up with one. 

Shoot, I would almost offer to manage the property for you for cheaper then a PM company would, just so you can make it work. From the face value of you post and not knowing more, I would hate to see you short yourself in the future from selling arguably the most valuable real estate in CA. 

[Drew Sygit]

@Tyler Richmond what are investments looking like where you would relocate? 

If the numbers are higher there, and you can buy MORE rentals, then sell.

[Bud Gaffney]

Heck ya!

[Tyler Richmond]

@Drew Sygit If we move to wherever my wife lands a job then we will be at the mercy of that market. Denver, Portland, Austin, all pretty expensive places. If we decide to go all in with REI and just move wherever we want, then I am looking at properties around 250k and under. At say 250k, that's a 50k down payment at 20% and we could snatch up say 4 of those if they penciled out and still have a lot of cushion left in the bank.

It's really great to see everyone's varying opinions but so far it looks like the people that live in this Southern CA market are advising to hold this property and leverage it, whereas many from out of state are leaning towards sell and get the heck out of CA. I think the main factor here is that in order to access the equity in this house without selling, it would be via a HELOC. In order to qualify for that we are going to have to be making enough income for the ratio to make sense to the bank. This is where it gets tough because right now we would qualify for a very small fraction of the equity we have. So in a sense I feel like I'd be missing out on all of that locked up potential for investing until we step up our income a bit in say a year.

On top of all of that you still are paying interest on a HELOC which will make those cash flow calculations be a bit lesser than if we had the money outright. I sure could use a crystal ball...

[John McKee]

Just keep shopping around the Heloc. Try 6 different banks if you have to. In fact my HELOC all interest rate is lower than any rate I can get on the market for an investment property. I love the idea of maximizing the square footage on your lot with an ADU. Just run the numbers and you might get so excited that you will soon be getting out that hammer to convert the garage!! Even if you only get $75K from your heloc take it and start shopping around in your new city with your new found access to capital. Right now you have ZERO access to capital, so get moving and don't look back!!