Buying & Selling Real Estate Discussion

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Billy Bey
  • Rental Property Investor
  • Lake Forest, CA
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Need help with a sell vs rent decision

Billy Bey
  • Rental Property Investor
  • Lake Forest, CA
Posted May 2 2022, 17:13

We're looking to upsize current home and buy in a neighborhood closer to kids school. Debating whether to sell our current primary or rent it out. Have pre-approval from bank on new home purchase without a sale contingency so have the option to go either way. 

Here are some facts:

Current home value (SoCal) = $1.8-1.9M with $680k mortgage. Would net ~$1M with sale after fees/expenses. Original purchase price + cost improvements is around $1.2M, so most of the capital gains would be wiped out by $500k primary home exclusion. Mortgage is 30-year at 2.375% (refi'd in 2019). All-in PITIA is about $4,300/month, anticipated rent is $5,500 (4BD/3.5BA,2,600 sq ft). Home is in a nice neighborhood with great HOA amenities (parks, pools, etc.), built in 2015. It's not the most expensive home in the community (some have gone in upper $2Ms), but it's higher than average.

I've been wanting to get into rentals, but it's been extremely hard to find cash flowing properties in my area and I don't have a desire to own something far away. Due to the great fixed mortgage rate and (relatively) low property taxes ($1k/month), this property will cash flow nicely out of the gate with the ability to grow over time as rents increase. I like the idea of maximizing my low fixed cost base on this property, but the $500k tax free gain and being able to use proceeds from the sale to minimize a higher mortgage cost on whatever we purchase is also appealing. We're looking at homes in the low $2M range and a mortgage rate around 4% +/- 0.25%. We'd put 20% down if we use current home as a rental, probably double that if we sell.

My gut tells me to take advantage of the current market and sell before it cools...I recognize there are signs it's already cooling. I'm also not sure netting $1,200/month on a rental (~$14k/year) makes sense if I can take home around $1M after fees and taxes. Is this a 1.4% cash/cash return which will require me to have a higher mortgage costing me ~4%? If that's the analysis, this seems like a no brainer to sell especially since the numbers exclude maintenance, vacancy, etc. 

How would you experts run these numbers and think about the decision?

Orange County, California

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Scott E.
  • Developer
  • Scottsdale, AZ
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Scott E.
  • Developer
  • Scottsdale, AZ
Replied May 2 2022, 18:38

Before I finished reading your post, I was getting prepared to respond with exactly what you have identified in your final paragraph.

I'd sell this house for sure and redeploy the capital into something else that can generate 7-8%+ cash on cash returns.

Some might argue that SoCal is more of an appreciation play and that your appreciation will outpace your cashflow in any other market. But I've spent a lot of time in SoCal over my lifetime (was born in Burbank and still have family out there) ... and I don't buy into it continuing to appreciate like it has been all these years.

Lock in those gains.

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Chris Davidson#1 Personal Finance Contributor
  • Real Estate Agent
  • Boise, ID
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Chris Davidson#1 Personal Finance Contributor
  • Real Estate Agent
  • Boise, ID
Replied May 2 2022, 18:57

@Billy Bey you have broken it down really well. You can rent it out for a year and see what you think as you can change your strategy if you don't like it. Or like @Scott E. mentioned lock those gains in and redeploy the capital. If you are looking to redeploy in the same market it will likely make sense to hold on unless you are looking at a different class of property due to transaction cost. 

Great position to be in, and best of luck!

Real Estate Agent Idaho (#SP52729)

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Billy Bey
  • Rental Property Investor
  • Lake Forest, CA
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Billy Bey
  • Rental Property Investor
  • Lake Forest, CA
Replied May 3 2022, 11:15

@Scott E. and @Chris Davidson, thanks for the responses and confirming what I was thinking. It's so hard to cash flow in SoCal that I was thinking this could make sense. I also hate losing 2.375% money for the next 30 years! But the gain is just too good to pass up. Appreciate your time.

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Chris Davidson#1 Personal Finance Contributor
  • Real Estate Agent
  • Boise, ID
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Chris Davidson#1 Personal Finance Contributor
  • Real Estate Agent
  • Boise, ID
Replied May 3 2022, 13:28

@Billy Bey One thing I would add is start working on the plan for deploying the capital asap that way it won't be a rushed decision and can be more thought out and excuted how you want.

Best of luck and you know where to come to have a sounding board for ideas!

Real Estate Agent Idaho (#SP52729)

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Zambricki Li
  • Real Estate Agent
  • Los Angeles CA + Lake Tahoe, NV and CA
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Zambricki Li
  • Real Estate Agent
  • Los Angeles CA + Lake Tahoe, NV and CA
Replied May 3 2022, 13:58

I think it depends how deep you analyzed the upsizing to a bigger home in the same general area. Your property tax will be higher for your new larger home. You're going to be paying tax on 2m instead of your relatively low locked in property tax on your original purchase(i'm assuming its around 1m) I think planning for family takes more nuance than just numbers. If you said, "i'm cashing out and moving my family to TX cuz schools are great, my money will stretch, and there is a lot of room for appreciation". I would say "sell" in a heartbeat. To stay in the same general area and up your property tax exposure.....I would further consider. 

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Todd Rasmussen
  • Rental Property Investor
  • La Verne, CA
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Todd Rasmussen
  • Rental Property Investor
  • La Verne, CA
Replied May 3 2022, 14:04

@Billy Bey

If you HAVE to upsize your primary residence, then my vote is sell now.

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Brock Dowis
  • Investor
  • Southern California
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Brock Dowis
  • Investor
  • Southern California
Replied May 9 2022, 06:27

If you are able to buy without selling. And the home in question does become an investment property, the 1031 exchange could be a powerful tool for you to not pay those capital gains should you choose to sell further down the line. 

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Robert Reynolds
  • Real Estate Agent
  • Los Angeles, CA
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Robert Reynolds
  • Real Estate Agent
  • Los Angeles, CA
Replied May 25 2022, 09:28

Hi @Billy Bey

This is a tough one. I'd probably lean towards selling because your return on equity would be low. You'd be getting about $14k on $1 million in equity, like 1.4% return. I'd sell, and buy multiple properties. This big benefit to not selling would be that your current house will keep appreciating. Please reach out and we can go through your scenario in more depth. 

Real Estate Agent California (#02166235)