Cannot decide whether to sell or rent it out

14 Replies

Hi,

This is my first post in this site and a newbie. We have a home in San Diego and moved out of state and rented it for couple of years. The house is in a very good neighborhood, and goes for rent easily and also appreciated from when we bought it. It was our primary residence before renting it out. For us to get the tax benefit we have to sell this year. 

We cannot make our mind whether to sell or keep renting it out. How would you all decide and calculate ROI and any help appreciated.

Thank you!

@Sowjanya J.

How long ago did you move out of the house and start renting it out?
You may be eligible to exclude up to $250,000($500,000 if Married filing jointly) of gain on the sale of your home if you lived and owned it for 2 out of the last 5 years.

Cities like San Diego have low cap rates/low cash on cash return. Therefore, a lot of investors who value cash-flow avoid investing there or sell their properties there and invest no where.

However, you need to evaluate what your goals are. If you are banking on appreciation - maybe you want to keep your property.

Ultimately - it depends on your goals.

@Sowjanya J. Three things we'd know to give you better advice:

1. What's the property's basis (what did you buy it for and when did you buy it)?

2. What does it rent for and what do you think you could sell it for today?

3. What are your available options to invest the proceeds?

It's pretty straight forward - figure out what what your returns look like and make the call.  Add in the variables of emotion (any personal attachment to it?) and the value you place on likelihood for continued appreciation and you'll have your answer.

@Justin R.

Thank you for the reply here are the answers:

1: Bought it for 570 in 2010.

2: It might sell for 780 and rent is 3300, still have a mortgage though.

3: Plan to invest somewhere, don't have any idea though for now.

That was our first house but moved out, and as a newbie cannot decide Goal is to use the amount for investment in rental properties.

@Basit Siddiqi

We move out of the house 2 years back and rented it back then. Yes the cash flow is very low but I am not sure how the appreciation might be, if we have to hold its only for appreciation.

  • Sell it. Uncle Sam will in no other circumstance give you a free pass on a $200k cap gain.
  • Your cash flow and ROE is low.
  • I wouldn't rent out a $570k house ever. Even if damage isn't on purpose, renters tend not to report pesky little leaks and stuff that can blossom into real problems.

I am pro San Diego buy n hold but recommend you sell.  Here is some of my rationale: 1) you currently qualify for the exemption on cap gain.  It will not be long before you no longer qualify this.  2) you rent to value ratio is 0.42%.  This value helps determine the type of cash flow that can be expected.  In San Diego a good ratio is >0.75%, pretty good 0.7%, alright 0.65% (I have never purchased one this low).  This is to be expected because you chose your house to be a good home and not necessarily to be a good rental investment.  My worst San diego investment RE is my ex-Home for exactly the same reasons. 3) you are out of state.  Fortunately you likely know people here you can trust but even so owning out of state has hurdles that owning local does not have.  

To follow what @Steve Vaughan said - sell it, and redeploy the capital here in Texas. You will get much better returns. Either go the single-family route, BRRRR strategy and pick up a number of rentals with the $200k, or find one of the local multi-family syndicators and get into a couple of MF deals.

Andy

Originally posted by @Basit Siddiqi :

@Sowjanya J.

How long ago did you move out of the house and start renting it out?
You may be eligible to exclude up to $250,000($500,000 if Married filing jointly) of gain on the sale of your home if you lived and owned it for 2 out of the last 5 years.

Cities like San Diego have low cap rates/low cash on cash return. Therefore, a lot of investors who value cash-flow avoid investing there or sell their properties there and invest no where.

However, you need to evaluate what your goals are. If you are banking on appreciation - maybe you want to keep your property.

Ultimately - it depends on your goals.

 >Cities like San Diego have low cap rates/low cash on cash return. 

I challenge you to find one reputable source to corroborate this statement.  Guess where Case-Shiller ranked San Diego for profits in the last year.  Guess where Case-Schiller ranks San Diego for profits this century. 

Your statement sounds like it is fact but I can find multiple sources that run the numbers and indicate that your statement is not close to factual. 

Thank you for your kind responses and replies, we chose that as our primary residence and never planned to rent it out, but last minute before moving rented it instead of selling. 

I really appreciate the time you guys took to help me, trust me we are completely dual minded whether to sell or hold and all the opinions here are the same and gave us confidence to sell.

Sorry being a newbie here takes sometime to understand the forum and how replies work :). Also could you please suggest any good books for rental investment, as words like BBBB and MF and multi-family syndicators are jargon to me.

I just looked into this site and will follow all the forums here to understand.

Originally posted by @Sowjanya J. :

Sorry being a newbie here takes sometime to understand the forum and how replies work :). Also could you please suggest any good books for rental investment, as words like BBBB and MF and multi-family syndicators are jargon to me.

I just looked into this site and will follow all the forums here to understand.

 There is probably an acronym list on bigger pockets but ...

BRRRR: Buy rehab refinance rent repeat. It is a way that ideally pulls out your initial investment while increasing your equity. In practice it is not easy to get all of the investment back out via BRRRR but you can typically get a lot of it out.

MF: multi family. There is small multi family that is 4 or less units that qualifies for conventional loan like you single family residence (SFR) and commercial multi family which is 5 or more units and needs a commercial loan.

MF syndicators are entities that partner with individual investors to purchase typically large MF properties.  It should be less hands on than individual real estate investing but you have less control and are relying on the skill set of others.   Ideally they are well qualified.  Of course they also get some of the profit; sometimes a large portion of the profit.  

To tag an individual enter the @ followed by the name and a pull down should pop up for you to select the name from the list.  For some reason this does not always work fo me.  

I buy n hold in San Diego.  I have an ex-Home in my real estate (RE) investments.  I am still purchasing in San Diego (last purchase was in Oct).  I am a big advocate of San Diego buy n hold RE and I am indicating you should sell.  Because I am such an advocate of San Diego buy n hold and am advocating you sell I will be a little surprised if you get any response that indicate you should keep this property as a rental.  Smart move is to sell it before you lose your tax exemption.  

Good luck

Being that the house is in CA, you also would have to pay CA cap gains taxes.  Let's say the combined amount is 25%.  If you wait too long, you will be paying about $50K in taxes on that $200K profit.  To make that $50K up in the future, the house would have to appreciate an additional  $67,000 just to net you $200K.  Can and will that happen?  Yes, but maybe not.

Alternatively you could sell it and structure a 1031 exchange to defer the taxes.  But the key word is DEFER.  You will pay the taxes at some point.

Good Luck

Hey Sowjanya- 780k or 3300..... take the equity and sell it. You're not really cash flowing long term, and you're at the top of a market. Go put that cash in a market that doesn't appreciate or depreciate. I just got a 5 unit in a working class neighborhood for 125k that rents for 3300/mo- that's the kind of asset you should seek to benefit from your appreciation, and buffer against a crash.

As @Shawn Couch said you would still pay the CA capital gains tax. 

Prices in SD are still going up, but at a lower rate. As a real estate broker, I would take the money to a different market. There plenty of other opportunities elsewhere where you can utilize a 1031 exchange.

If you decide on out of state investing you might want to consider syndications if you qualify as an accredited investor (Delaware Statutory Trust, DSTs). We view institutional grade real estate investments as very attractive area especially for folks that want to invest w/experts that have decades of experience and very impressive track records that do all the heavy lifting for you. I've written a few blogs you might find of interest as an alternative to the extra hassles and distance of managing your own properties. If you like to be somewhat active, great, do that locally but for distance and diversification, a great option for many investors is ownership interest in multimillion dollar properties that offer long-term income, tax shelter and appreciation. Loans are non-recourse btw.

Thanks to each and everyone who took some time to reply with all valuable suggestions. We decided to sell our house. From now will go over some other threads in this site. They all have very useful information.

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