Sell or rent investment property?

45 Replies

I have a new construction home that my husband and I built in 2020. We are trying to decide if we should sell or rent. If we sell after living in it for 2 years we would make about a $800k return ($400k of this amount would be profit). If we rent both the main house and ADU we would profit $24k a year (after you minus all fees related to renting). The property is in a high demand area in Oakland. Selling it would yield a great return now but we don't know if taking this route would be worth missing out on a great passive income stream for the future. Would appreciate any advice from those who have had to make a decision like this, thank you!

If the house is only worth $400k then you’re making 6%, not terrible but not great. If you mean the property is worth a lot more and that’s just your profit, then you sell every time.(since your return would be well under 6%.)  Especially since if you wait the 2 years the $400k is tax free. Instead of a minimum of $60k to the federal government and another 20-30K? To the state. That’s at least 4 years of perfect rental history to be back where you started. 

Thank you @Bill Brandt. The house is worth a lot more. $800k would be the return and $400k of that would be the profit. I am not following the last two sentences of your post, would you mind clarifying. Thanks for your help!

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Once the property becomes a rental you will owe capital gains tax of 15% minimum maybe/probably more, on that $400k ($60k) and you’ll owe California state income tax on that $400k I guessed at $20-$30k (5-7.5%). If you sell as a primary instead you owe zero taxes. That means you’d need 4 years of making $24k a year as a rental. With zero vacancy, make ready expenses, commissions/advertising, or repairs or capex to make $100k. (Which of course would also be taxed leaving you with $75k?). Great. You have $75k in your wallet so that you can pay the $80-$90k in taxes if you want to sell. So you’re slightly worse off if it goes perfectly and you sell 4 years later. 

If you’re investing $800k to make $24k per year that a 3% return, if everything goes perfectly and you don’t sell. You’re investing $800k to lose money if you do plan to sell in 4 years.  Not too good. 

first off, your return is 400k: return and profit are the same in this context, the other 400K is simply the recapture of your original investment. With an investment property I would make sure you think expansively about all options. You mention profit from the rental but I think you are really referring to cash return? You have loan paydown which counts as well and if you have other income to offset taxes may be a factor. Always run the numbers on a cash out refi....a non taxable event which could sometimes recapture almost as much and maybe leave you with the property? Debt is awfully cheap right now and locking in a fixed mortgage in the 3s over the long term is no small thing.

But yeah, @Bill Brandt is almost certainly right, its pretty hard to beat the primary property tax benefit and you are looking at a pretty big bird in the hand. The rental rates don't seem that exciting, especially if you add in debt service.

Sell and buy something else to do all the fancy stuff

Hi @Jonathan, thank you for your input. The $24k a year from the rental is what the return would be after mortgage is paid for and all other related expenses are put aside. We have a fixed mortgage already at 2.99%. You mention cash out refinance, can you say more about why you believe this would be helpful to consider given my scenario?

@Tecsia Evans what are your investment goals? If you want to maximize passive income $24k/year is a nice additive. However if you can sell and reap $400k profit that would be over 16.5 years of rental returns immediately available with the added tax benefit that Bill discussed. You can grow your portfolio quicker if you roll those gains into your next investment.

@Tecsia Evans I'm not sure it would be helpful, just that it belongs on a checklist of options. So if you put 400K in and the house is worth 800K you could conceivably get back say, 600K. So you get your money back and receive a profit 200K and you still have the property. Can the property support a 600K mortgage at 3-4% ? If so, you then have the added benefit of loan paydown and possible further appreciation gain. The loan pay down on the 600K would likely be around 15K a year, lets say the cash flow after debt service and expenses/reserves is 10K a year, thats 25K overall return per year or 8 years to match that extra 200K in gain. 

Not sure thats worth it when you compare it to the immediate benefit of the sale, taxes and all, but it is a different set of numbers to run. Building and holding ain't easy as they say. Still if you are convinced of the long term value time cures a lot of mistakes.

Hi @Tecsia Evans. With California tax rates where they are and federal tax rates potentially going up, I would take that tax-free profit and reinvest it into a passive investment.

There are mobile home park or self storage or apartment syndications, as well as diversified funds, that will likely pay more than 6% annually and provide tax shelters in many cases. You won’t have to worry about vacancy or damage or property  value declines.  

On the other hand, you will be trusting someone else with your money and you will have no control over it if you go this path.

Another option - if you want more control - would be to take that $400,000 profit and buy two rental Airbnb‘s in prime locations with 20% down on each. Assume a price of $1 million.  I have a friend who has done this multiple times and is cash flowing approximately $50,000-$75,000 annually on each home with very little effort.  I wrote about this in a recent BP article in fact.


Happy Investing! 

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Originally posted by @Tecsia Evans:

Hi @Theresa Harris. If we sold it, the actual return would be $400k in our pocket.

 Yes, but what would you do with that money?  Keeping the house as a rental for 2-3 years (which I don't believe will trigger any cap gains taxes as you lived there before that) will get you $50-75K plus whatever extra appreciation you see over that time.  Even if prices don't increase, you'd get $450-475K (though a bit more as you'd have paid off more of your mortgage).  If you can sell it and use that $400K profit (and transfer the mortgage) and buy other rentals with a higher rate of return, you would be further ahead selling it.

If you refi at 75% LTV you would have $200K invested on the $800 current value (not including loan costs). What would be your cash flow under this scenario?

I am a buy and hold investor, but I am in the camp to recommend selling. This is both because of the cap gains you avoid by living there at least 2 years, but also because I believe a new construction SFH is going to have worse cash flow than other potential buy n hold candidates. Another way to put it, in CA how many successful RE investors do you see purchasing newer construction SFR for buy n hold. The reason this happens so rarely is because there are better cash flow options and because there likely is zero value add.

When determining an investment it is not sufficient to just analyze the expected return, but you need to compare that expected return to other potential investments and the expected return from those investments. I am confident that you could find other RE investments that will produce a better return as a long term rental than your newer construction SFR (for example a quad build 25 years ago).

I am not one of those that believe appreciation on a long term hold in an area like Oakland is not a likely event.  Historically in a market like Oakland for a long term hold, most of the return comes from appreciation and the cash flow improves with time.  I do not weigh this, because other RE that you could invest in in Oakland is likely to have similar appreciation and similar increases of the cash flow.

Add that the gains are exempt and to me it is an easy decision.  Sell.  If you want a rental property purchase a good rental property (one with top of market cash flow).

Good luck

>> main house and ADU we would profit $24k<<

What area of Oakland, CA? Profiting only $2k / mth seems low. 
What are the numbers? 

But let me say this ... selling Oakland property IMO is a NO-NO!!! 

I say NEVER sell Oakland property. Refi always pulling cashout!!! 

At a min 10% appreciation / yr and that could be low. Use a future 

calculator to determine it's value over the next 5 - 10 yr's just at 6% 

appreciation. You'll be SHOCKED!!! NEVER SELL OAKLAND!!! 

======

After reading the other comments you are doing yourself a disservice by

not spelling out all your details. I live in Oakland, CA. the above comments

do not reflect Oakland's EXPLOSIVE appreciation rates. You mentioned 

>> building another new construction project << 

So lets say this current property is worth at a min $1.5 million!!! You said

in a nice area of Oakland and it has an ADU. Using the future cal at only 6%

appreciation/yr. in 5 yr's it will be worth $2,007,338.37. 10 yr's 2.7 mil. 

Yet last yr in nice areas it approx 15% appreciation. So lets do 10% over 10 yr's

$3.9 million!!! 

The money in Oakland real estate is NOT from rents!!! It is from appreciation!!! 
I've owned 5 homes in Oakland over the yr's. I've learned the hard way NEVER
SELL OAKLAND real estate!!! 

A small 1600 sqft home / ADU just sold in San Mateo for $2.5 mil. Be patient!

Your property will get there. Location does matter. 

Thank you @Paul Merriwether for your feedback. The home is valued at $1.6-$1.7 million and there is a $750k mortgage. If we were to rent it, we would receive about $6000 a month total but after mortgage is paid and other related expenses are put aside the return in our pocket would be $2k a month. The home is located in Montclair/Oakland Hills. Based on these details, would it be safe to say that your recommendation would still be to rent it and take advantage of the appreciation?

ABSOLUTELY!!! However ... the biggest factor is you are in a fire area. Now A days we 

just don't know what insurance companies will do. I'm in Maxwell Park. Your other biggest

issue as it appreciates .... how do you pull your money out? I mean you're talking min $150k/yr. 

compounding!!! :) :)  Make sure if you rent it to increase the rent every single yr to the MAX

allowed by law. Learn everything you can about Oakland's crazy rental laws, become an expert. 

Insure you add in the agreement something to the effect of owner can move back in with prior to

X days notice without any compensation to tenants. Property management companies will explain

even if you don't go with one get their advice upfront or speak with a real estate attorney. 

According to Zillow ( it's in the ball park) Oakland's Index value is now at $946,382 up 15.9%

over the yr. At $1.6 mil & @15% you'll earn approx $240,000 over the next yr if that continues

in other words $240,000!!!  A quarter of a million /yr just for renting it out or living in it.  

You can use Zillow's previous yr's sold prices and calculate the average appreciation / yr over

3 decades to determine the average. The home across the street from just sold. The old owners 

were tech workers that relocated to Oregon because they can now work form home & wanted better 

schools and the CASH. They paid 6 yr's ago approx $560,000. They listed for $898,000. It had 

offers in less than 2 wks and sold for $1.225 mil. 

Another home sold in 9/2020 for $560k  A fixer. they redid everything including foundation, plumbing 

wiring etc. They listed for $980k in 4/2021. It sold for $1.45 mil. 

You are in the MONEY!!! NEVER SELL OAKLAND PROPERTY!!! :) :) 

Figure out how to pull cash out. There are companies that will buy some of your equity with no

payments and hold for 30 yr's. Point is one & Unisom is another. Co-investing. 

@Tecsia Evans   Join Oakland Now on facebook. We need all the help we can to build a better Oakland. 

Bottomline Oakland has some of the highest crime in the state. Yet property values are lowest ( except

for Richmond).  Look at property values in the worst parts of Oakland and see how much they've increased. 
as we get control of our crime ( and we will ) property values will soar even more. Ignore the comments you've 

read here, while meaning do not apply to Oakland & the Bay Area. I mean where else can you find $500,000

homes in a very rough area other than Oakland & San Francisco. Homes that are less than 900 sqft. exploding in value

exposed to heavy crime & murders!!! Your only issue is mother nature ... living in CA forest is tough. Yet

you've got fire insurance. If it goes up raise the rent accordingly. Run the numbers you'll see I'm right. I know the temptation

is to sell and get that money. You mention building new again ... where??? Very few lots avaibale. In your area a few more mountain goats lots building at what cost $600/sqft or more? You would do better to find a decent home add ADU or add sqft to the home. Just ignore the Montclair home as if it's not there. Start from scratch as if you don't own it. It is your security blanket

that will insure your millionaire wealth status long term no matter how much you might screw up in the future. 

NEVER SELL OAKLAND PROPERTY!!!