Sell in buyers market or hold

Buying & Selling Real Estate
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Sell in buyers market or hold

Ricardo Zuniga
Encino, CA · Member since 2015 · 10 posts · 4 votes

Hello Forum,

My name is Ricardo I live in Southern California in Reseda Adjacent to Encino and Lake Balboa. I would like any advice or recommendation on my current situation. My wife and I bought our first home 6 months ago for the price of $490,000 its a 3Bed 1 bath with a 2 car detached garage and fully remodeled home. We currently owe $470,000 on a 30yr Fix at 3.85% FHA loan. The property when purchased got appraised for $560K. I am looking at what options I may have to maximize on my opportunity to invest in rental properties.

1. I was looking into refinancing into a conventional loan and get rid of the PMI but now interest rates have gone up. I don't know if that still makes sense. I also wanted to pull some money out and convert the garage into a rental.

2. Another option I had in mind is sell the property and try to get top value for it. Then buy a smaller 2bed 1 bad property in a better area. Put a portion of the profit down and use the rest to convert the property into a 3bed 2bad which will increase the value of the home and gain my equity back and then some and have a lower payment in order to buy a rental property.

What I am trying to accomplish  is a way to use my profits to have leverage on buying rental properties. Any suggestions or comments on what will be the best practices on this situation will be greatly appreciated. 

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Sri Voodi
Investor · Woodland Hills · Member since 2016 · 82 posts · 33 votes
9y

I'm very familiar with the area, so if I were to stand in your shoes, this is how I would look at your options

Monthly expense on current home based on the numbers you provided - $3144 (PITI)

I don't know the property and any comps so I would suggest you to run the numbers to see if refi makes sense in your case given today's interest rates 

garage rental is a not a bad option, I know you can find tenant easily in Reseda. But it is lot of work and liability. All it takes is one TENANT FROM HELL to make your life miserable. You are more vulnerable when you rent it out illegally. Renting is not as easy as it looks. 

Now coming to selling - I really don't think you are going to get any where close to $560k as it is appraised. here is the closest comp I got valued at $455K, and mind it has 2 baths. And Reseda doesn't have good schools, to me a good school is seller magnet in LA market. I would say you bought it at a high price to start with. And buying a 2 bed 1 bath will most probably will get you a Condo with HOA, so there wouldn't be any chance of adding a bed and a bath

http://www.zillow.com/homedetails/7631-Bothwell-Rd...

Having said that I would stay put in the same property for a few more years and keep building equity. 

I'm in no way discouraging you in pursuing your alternatives, the chances are I might be completely wrong with my analysis. 

Hope it helps and good luck with whatever you would choose to pursue 

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  • Sri Voodi
    Investor · Woodland Hills · Member since 2016 · 82 posts · 33 votes
    9y

    I'm very familiar with the area, so if I were to stand in your shoes, this is how I would look at your options

    Monthly expense on current home based on the numbers you provided - $3144 (PITI)

    I don't know the property and any comps so I would suggest you to run the numbers to see if refi makes sense in your case given today's interest rates 

    garage rental is a not a bad option, I know you can find tenant easily in Reseda. But it is lot of work and liability. All it takes is one TENANT FROM HELL to make your life miserable. You are more vulnerable when you rent it out illegally. Renting is not as easy as it looks. 

    Now coming to selling - I really don't think you are going to get any where close to $560k as it is appraised. here is the closest comp I got valued at $455K, and mind it has 2 baths. And Reseda doesn't have good schools, to me a good school is seller magnet in LA market. I would say you bought it at a high price to start with. And buying a 2 bed 1 bath will most probably will get you a Condo with HOA, so there wouldn't be any chance of adding a bed and a bath

    http://www.zillow.com/homedetails/7631-Bothwell-Rd...

    Having said that I would stay put in the same property for a few more years and keep building equity. 

    I'm in no way discouraging you in pursuing your alternatives, the chances are I might be completely wrong with my analysis. 

    Hope it helps and good luck with whatever you would choose to pursue 

    2Reply
  • Walter Roby jr
    Rental Property Investor · Encino, CA · Member since 2016 · 324 posts · 178 votes
    9y

    @Sri Voodi Just a thought that crossed my mind, if he went with option 2 and were to sell it so soon, wouldn't he not reap the benefits of capital gains tax and instead being paying more in taxes than if he were to hold it longer?

    1Reply
  • Ricardo Zuniga
    OP
    Encino, CA · Member since 2015 · 10 posts · 4 votes
    9y
    Sri thanks for the info. I have received comps in the area that I am at and it looks like between $550k-$560K being that it is fully remodeled compared to others in the market. Say I could sell in that price range would it be a good solution to go with option 2. I would like to see what people have to say on the pros and cons of it.
    0Reply
  • Sri Voodi
    Investor · Woodland Hills · Member since 2016 · 82 posts · 33 votes
    9y

    Ricardo, if you can sell at that price than I think it would be a good idea. And the other consideration should be that you have lived in that house for at least 2 years, so that you can take advantage of capital gain exemption (tax free profits). Having said that, given the appreciation you have seen on our own home, the same would apply to 2/1 you are going to buy - you will be paying top dollar as well, unless it's a run down home. And as you know "Better Area/schools" tag alone in LA changes the price dynamics completely. But adding a additional bed and bath would increase the house price substantially. And IMO you can never go wrong with primary residence, if you have done enough due diligence. 

    Good luck and keep us posted

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  • Sri Voodi
    Investor · Woodland Hills · Member since 2016 · 82 posts · 33 votes
    9y

    @Walter Roby jr

    The IRS requirement for married couple is to stay in the home for 2 years to qualify for Capital gain exemption

    1Reply
  • Ricardo Zuniga
    OP
    Encino, CA · Member since 2015 · 10 posts · 4 votes
    9y
    The 2yr waiting period kills the deal with exemption on capital gains since we've only been in it for 6months. That will be too big of a hit on our profit. I'm trying to be creative on how to maximize in order to gain another property.
    0Reply
  • Kyle McCorkel
    Rental Property Investor · Hummelstown, PA · Member since 2015 · 638 posts · 653 votes
    9y
    Ricardo Zuniga You could tap into that equity using a 100% LTV HELOC. Not sure about your area but in my area we have some local credit unions offering that option on your primary residence. Then you can use that $90k to build your RE portfolio.
    1Reply
  • Michelle Pinneo
    Encino, CA · Member since 2016 · 11 posts · 1 vote
    9y

    why is no one talking about a 1031 exchange?? If he is just going to buy another property (2bd/1ba) anyway, then why couldn't he just defer the taxes and put all the gains as a down payment into the new property?? You wouldn't have the PMI anymore and after closing on the new property, should you decide you would like 80% of your gains from last (current) property you can just do a cash out refi. Yes your mortgage will then be bigger, and most of the homes equity will be cashed out but at least on the upside you will have most of your cash in your pocket to reinvest in another property if desired.

    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    9y
    Originally posted by @Michelle Pinneo:

    why is no one talking about a 1031 exchange?? If he is just going to buy another property (2bd/1ba) anyway, then why couldn't he just defer the taxes and put all the gains as a down payment into the new property?? You wouldn't have the PMI anymore and after closing on the new property, should you decide you would like 80% of your gains from last (current) property you can just do a cash out refi. Yes your mortgage will then be bigger, and most of the homes equity will be cashed out but at least on the upside you will have most of your cash in your pocket to reinvest in another property if desired.

     You can not use a 1031 on an owner occupied property.

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  • Michelle Pinneo
    Encino, CA · Member since 2016 · 11 posts · 1 vote
    9y

    oh yeah guess that's true. Too bad :( Thanks @Russell Brazil

    0Reply
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