Santa Clara, CA · Member since 2016 · 22 posts · 4 votes
Hi, Everyone,
This is my first post here, please advise if I should sell now or keep renting.
My rental townhouse is in south San Jose. I lived there for 5 years before I rented it out. Now it is about 2.5 years after I moved out. I bought it for $280k, and currently it's worth $520k, and monthly rent is about $3200-3300. I have $180k mortgage left, it is on the 4th year of the 15yr term, with a fixed interest rate 2.5%. My monthly PITIH is about $2200 and I manage it myself as it is not far from me.
If I sell it now, I can take advantage of capital gain tax free allowance, and get ~$300k cash in hand. I don't know where to invest it though.
Or, just keep renting it out, and in 10 years it will be paid off and generate me $2500-3000/month cash.
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
10y
I was in the same position and always say if you dont need the cash and can hold for over 5 years, you should never sell Bay Area property. And whatever you do , dont sell a Bay Area property and invest the money in cheap out of state homes. I own both and will tell you from experience that holding a Bay Area property will generate wealth in huge multiples of any out of state investment. Thats not to say my OOS properties have not generated positive returns. Yes they have. But I did it as an experiment with a small initial investment. And my equity in Bay properties is 10X that of the OOS properties. You have a great rental yeild on your purchase price. Why on earth would you give up that plus appreciation?
I tend to think along lines of Buy and Hold, if the property is in a desirable area, if the property is in a growth area, and if it is generating income.
If the property doesn't meet those 3 criteria, and is in a declining area, a high crime area, or an area with poor schools, then I would sell and take the money and invest it elsewhere.
However, there a third alternative to holding or selling, sort of a middle ground. that would be to re-finance for 80% loan to value (LTV) now while the interest rates are at historic lows. 30 year fixed rates are as low as 3.5%. I'd grab all the 3.5% fixed for 30 year money I could get my hands on. Someday, I don't know when the interest rates will be higher, and you can take that from somebody who paid 15% fixed for 30 years on a residential mortgage.
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
10y
I was in the same position and always say if you dont need the cash and can hold for over 5 years, you should never sell Bay Area property. And whatever you do , dont sell a Bay Area property and invest the money in cheap out of state homes. I own both and will tell you from experience that holding a Bay Area property will generate wealth in huge multiples of any out of state investment. Thats not to say my OOS properties have not generated positive returns. Yes they have. But I did it as an experiment with a small initial investment. And my equity in Bay properties is 10X that of the OOS properties. You have a great rental yeild on your purchase price. Why on earth would you give up that plus appreciation?
Investor · San Francisco, CA · Member since 2016 · 14 posts · 13 votes
10y
I agree with Anish Tolia . You are in the enviable position of having a Bay Area property which cash flows and has had great appreciation.
Why would you sell that? If you need the money, then refinance.
Fremont, CA · Member since 2015 · 289 posts · 63 votes
10y
It depends on do you believe in income or appreciation. I could see property makes a lot of sense from numberwise but what about return on equity ? It also dependson your end goal and where you can invest your money after taking it from here
Investor · Austin, TX · Member since 2015 · 58 posts · 16 votes
10y
I am big fan of keeping the property, but in your case I would suggest sell. Mainly this is because of taxation. You have a small window left where you can get the Capital gains for tax free (as you lived at least 2 of the last 5 years). If you don't sell now, you end up losing that advantage. Sure you can defer the capital gains with a like exchange, but you can't beat eliminating tax. As others have suggested you can reinvest this again in real estate or better yet, you now have the opportunity to diversify as well.
Rental Property Investor · Doylestown, PA · Member since 2008 · 1k+ posts · 1k+ votes
10y
@Rong Liu Never Sell!! I'm partly kidding mostly serious. My philosophy is to hold everything forever. Now that doesn't mean you have to hold onto everything and never get any money out. You can do a cash out refi and then use that money to buy more cash flowing properties. Or you can sell and do a 1031 exchange rolling it into another property. In your case you can sell without tax implications so it's sort of a moot point but the goal to shoot for with real estate is to keep letting your investment grow with minimal tax implications for as long as you can. If you sell you could buy more investments but what if you could keep it AND buy more investments? That's what I'm doing now with a direct lender that bases their loans off the property and not the borrower... and they're fast. Good for you for weighing your options first!
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
10y
Everyone makes a big deal of taxes. But lets think this through. Capital gains tax is 15%. And that is only on the gains. So in the case of the OP the gain of $240K. Assuming thats his full gain (not usually true since he would probably have spent some money on the home) the taxes due is $36K. However, if he sells he has selling costs of between 6-10% of the total value, not just the gain, so anywhere from $35-$55 K anyway! So either way he gives up that much equity. Meanwhile if he gets 3-5% appreciation per year on the total value, thats about $25-$30K per year in added equity. Plus he gets positive cash flow , plus he pays down the mortgage. Can someone please explain to me why he should sell?
Investor · Mason City, IA · Member since 2015 · 32 posts · 17 votes
10y
Anish Tolia The appreciation is far from a guarantee. I believe releveraging that money in a multifamily asset can increase cash flow as well as equity through principal reduction.
Anish Tolia The appreciation is far from a guarantee. I believe releveraging that money in a multifamily asset can increase cash flow as well as equity through principal reduction.
Agree with this ^^^^^
I'm getting my money out of California and into multifamily in other parts of the country. Better cash flow, better ROI and less hassle.
It depends on do you believe in income or appreciation. I could see property makes a lot of sense from numberwise but what about return on equity ? It also dependson your end goal and where you can invest your money after taking it from here
I see it a bit differently ... appreciation comes hand in hand with rent increases. So, to me it depends on if you believe in short term income or long term income + appreciation. Total return on total investment over the entire life span on the investment is what matters to me. Agree that your end goal and where you can invest your money after taking it from there also matters a lot.
Anish Tolia The appreciation is far from a guarantee. I believe releveraging that money in a multifamily asset can increase cash flow as well as equity through principal reduction.
Last I checked, cash flow was far from a guarantee as well, especially on a high cap rate out of state multifamily. There are risks either way, that is why it is called an investment. Spencer took the "Pepsi challenge", as have I, and is speaking from personal experience having tried both. I can vouch that my similar experience (S. Cal instead of N. Cal) has led me to the same conclusion. If you already live in and are familiar with a market with high cap rate multi's, then I concede that your home court advantage may very well tilt things the other way, but not for an out of state investor.
Fremont, CA · Member since 2015 · 289 posts · 63 votes
10y
again it is very subjective appreciation is imagination and income is real. Everyone is talking about cash flow and cap here how about return on equity ? I see you can refi if you put same effort on multifamily than your rrental increase will change property value.
Again it is personal choice everyone do it differently. So no offense
Investor · Georgia, GA · Member since 2015 · 29 posts · 21 votes
10y
I will explain to you why he should sell, as I was in his situation. If he plans on renting multiple properties, he should have a huge lump sum as to allot it out proportianately. While many other investors are taking advantage of the low interest rates and flipping opportunities, he is stuck on that property (probably paying a high mortgage rate)...
-not having enough cash to invest in more properties
-If he does decide on flipping and earning lump sum, he can purchase enough properties to rent.
- real estate market has gone up everywhere and that includes smaller properties.
- that huge lump of sum can invest in smaller properties, they're worth a lot of money and will increase in value overtime.
Investor · Georgia, GA · Member since 2015 · 29 posts · 21 votes
10y
In 10 years if he /she continues to rent it, it will pay itself off, but do you really want to wait that long? or do you want to maximize your profit?
Take me for example, in 2013 i bought a house for 95k, borrowed 60k, my monthly mortgage was $200-300 non fix rate (paying off most of my principle). It would take me 5 years to pay it off. I rented it out for $1200 per month for the next 2 years. I couldn't purchase any other property because all my cash was invested into this property. While i was missing out on many flipping opportunities, I decided to sell. It was sold on the market for 160k in 2015. I paid back the bank $40k (paying off most of my principle). Now, i have $100k leftover, bank told me i can borrow as much as i want from the 60k.. i bought two small house each one being $52k and 56k. Put 5-10k into renovating these houses, sold one for 120k and the other for 140k. Guess what? I'm not in debt, quadruple my income in 4 months. I have more money to invest, with those two houses it can create 4 more investment properties.
Developer · Tampa, FL · Member since 2016 · 118 posts · 61 votes
10y
Great position to be in.
Here is something to think about. If appreciation slows, chance are rents will stay firm. Considering the amount of appreciation thus far even with a pull back in prices you will still be net positive so you will be able to "ride it out" while cash flowing well and potentially catch another wave of appreciation.
Take some time to find another investment, which can take awhile to find a good one, THEN consider selling or taking out a HELOC.
I am in a similar position. Purchased a condo in NY for $465k in 2010 recent comp sold for $700k. I have a 10yr tax abatement. It currently rents for $3250 a month providing $400 cash factoring the 50% rule but it's much higher as the it was built in 2009 and I have spent $400 in maintience in 3yrs. I owe about $240k on it.
Our plan is to leverage it into a multi family of about 1mm with 50% DP once we complete phase 1 of our SFR acquisitions. So that will be in about 1 year.
Sell it. Reinvest in a small apartment building with management in a b area.
I agree with Spencer, for what ever reason you would want to sell it, I would sell it and with $300k profit, pocket $100k, and $200k is your 20% down on a million dollar building.
Rental Property Investor · Indianapolis, IN · Member since 2016 · 200 posts · 87 votes
10y
I would take the other side of the argument. Your yearly cashflow is only 12k which is not much for the 340k you could get from the sale of the house. You would be better off owning stocks at that point.
Flipping to self is not an option either as your cashflow would go to zero.
I would sell and try to use the 340k you get (which is especially nice if you don't have to pay taxes on it) to buy other properties. Out of state can be good if you are careful, but it does not have to be out of state. Here in Indianapolis, for example, you could get four 80k homes that rent for 1k each and have 2800 a month cash flow with no mortgage.
I would take the other side of the argument. Your yearly cashflow is only 12k which is not much for the 340k you could get from the sale of the house. You would be better off owning stocks at that point.
Flipping to self is not an option either as your cashflow would go to zero.
I would sell and try to use the 340k you get (which is especially nice if you don't have to pay taxes on it) to buy other properties. Out of state can be good if you are careful, but it does not have to be out of state. Here in Indianapolis, for example, you could get four 80k homes that rent for 1k each and have 2800 a month cash flow with no mortgage.
Exactly, he won't make enough annual rental income due to the fact he still has a huge mortgage payment on it. From my other post i told him to invest in smaller properties as they make good cash flow.
Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
10y
A couple things to consider; you mentioned that you weren't sure what to do with the cash if you were to sell. Run your own analysis on other places you might park that money. I'd guess that getting the type of return that you're seeing right now on that property would be tough to find. Of course, there's no guarantee that you'll continue to see the rate of appreciation that you've had. If you do decide that you want to invest in more real estate, why not do a cash out refi? You can get your money out tax free and use it as down payments on other properties. With the type of appreciation you've seen in your property, and in northern California in general, you might not get too far with $300K, but there are other markets out there with better returns. You could always look in to hard money and private lending as an investment option as well. Great problem to have, good luck!