Quote from @Sheronda Smith:
Quote from @Rick Albert:
Did you factor in the tax implications, if any, when selling the investment property? Are you intending to sell the investment property with tenants in it? These can change anyone's recommendation.
I wouldn't focus on the interest rates. That's a trap many people fall into. Just because something is a low interest rate doesn't mean it is worth keeping.
Can you pivot on the investment property to generate more cash flow? For example mid term rental for fire victims while their homes are being rebuilt? Would it actually make sense to put more money into and build out an ADU? The ADU alone might close the gap. The money can come from a HELOC, etc.
How much equity do you have in your current home? That money is going to be tax free and generally speaking a three level home with no yard can be a tough sell. Your buyer pool is very small for a property like that. I've sold homes like those in the past in LA and it ends up being a price play. Maybe taking the liability away with tax free money makes more sense while pivoting the investment property.
Another option that wasn't talked about was moving into the investment property, refi into an owner occupied rate, and then sell the old primary where, again, the money is tax free.
Thanks Rick.
These are great options and new perspectives. The investment home actually has a great garage and yard that we hoped to make into an ADU at some point so that may be worth considering sooner. This would require us to stay in our current home another two years maybe but we have some wiggle room since our daughter is still young as long as we don’t have any health issues with our parents.
Other homes in the neighborhood of our primary residence are selling well at the moment. It’s a gated community with a pool and clubhouse that is very young family friendly. We actually love it for that. If we hold out another two years in this community, we won’t be miserable.
We have a good tenant in the investment property so selling with them in would be ideal if we do. We could move into that property ourselves at some point. It would be a downsize but it is one level and we would gain a yard. It’s not in our desired neighborhood but still a nice area. This would be a great idea if we were sure we were not going to buy our long term primary residence in the next two years because that would lock us into that home for at least one year.
I suspect that the tenant would actually like if the garage was an ADU because they have a large family. That may be an option worth considering.
Thanks!
So now you brought up a sticking point: Selling with tenants in place.
A single family home will likely sell for more vacant than with a tenant. If you are hoping to sell with the tenant in place, then it becomes an investor play, where the numbers have to make sense. If you sell vacant, then you follow the comparable sales in a neighborhood.
For example:
Selling as an investment property:
Rent is $6,000/month= $72,000/year
30% for property taxes, insurance, vacancy, cap ex, etc.: $50,400 net
If an investor wants a 5% CAP rate, that's a $1,008,000 value.
But typically we see about the .5% rule (versus the 1% rule of rent versus price), so that means comps are likely showing around $1,200,000 as a valuation.
Of course this is all hypothetical because I don't know about the home, what area, etc. But with this example you are leaving $200K on the table.
Also yes you are losing $2K/month, but that may not factor in tax benefits, loan buy down, and appreciation. You might be making that up in unrealized ways.
Putting my investor hat on, I would consider finding the money to convert the garage into an ADU and generate income. The challenge is your tenants have the rights to use the garage, so it may be after they move out. In which case then you can consider selling.
