Should I sell my Rental SFR in San Diego?

20 Replies

Hello all! Been a while since I've been on, but I'm looking to get active once more.

Situation: My significant other bought her house in San Diego in 2006 and survived the 2008 crash by refinancing with an ARM that had an amazing rate. It was the right thing for her to do at the time, and she weathered the storm and now has roughly $200k in equity in the home. However, the ARM's interest rate has now increased to a point where the mortgage has eclipsed the rental income as of January 1st.

Although I promised myself years ago to NEVER SELL A HOME, my initial thought now is to sell immediately, but I'm not exactly sure how much we will have to pay in taxes if we do. We have not used it as our primary in the last two years.

I'd like to turn the profits into an out-of-state property, possibly with Memphis Invest, but we also have a bit of debt to settle as well work that needs to be done to our primary SFR that would take precedence.

Refinancing to a fixed-rate mortgage isn't an option as my latest entrepreneurial experiment failed and we took more than a few 30-day lates on some things over the last year or so. (We have recovered since ;-)

Anyone feel like chiming in with some helpful knowledge?  Thanks in advance!

You only have to have lived in it 2 of the last 5 years to not pay capital gains. Even though you haven’t lived in it last 2 years but lived in it any two years of the last five then you are good and don’t need to pay capital gains.

@Nathaniel Donnelly If you are cash flow negative that is a terrible return on $200K of equity.  Even if you could finance to fixed rate I doubt it would be less payment than your adjustable.  I think selling is an easy decision but how to minimize your taxes is difficult. 

You indicate you have $200K in equity.  Paying the taxes would come out of this equity but who wants to pay taxes on RE?  I never plan on paying taxes on my RE gains.  You can look into a 1031 exchange.  has 1031 exchanged some San Diego RE properties into Ohio Multi Family and seems to be successful with a few learning moments on the way.  I would think the difference between Memphis and Ohio would be minimal.

I do want to say I am a big proponent of San Diego RE but SFR is real difficult to find cash flow in this market. I would also not advocate an investment that is bleeding cash in a market where cash flow is possible. Your investment has a couple of things hindering it from being the type of purchase that I am a big proponent of (the issues are related) 1) It was bought to be a home and not a good RE investment 2) it is a SFR which in San Diego has to purchased significantly below market to have cash flow.

To summarize: 1) selling is a no-brainer 2) you have ~$200K of equity that I assume is largely from appreciation 3) you should look into ways to minimize your taxes and the $250K/$500K exemption is not available to you 4) You are still looking to invest in RE 5) Possibly the best way to minimize your taxes considering item 1 to 4 is via a 1031 exchange.

I have never done a 1031 exchange.  Swanny has done at least a few.  There are many others who also have done them or been fiduciaries on the 1031 exchanges that are more capable of providing the details.

Good luck

@Nathaniel Donnelly I think @Dan Heuschele is on the right track with 1031ing. It won't solve your immediate desires for a "settling debts" and/or "primary SFR work" but you could (hopefully) use the cash-flow to take care of that over time. That said, unless you're buying cash I'm not sure how the ol' banks are going to look at your 30-day lates and think of that nature so maybe the 1031ing (and need to "go bigger") won't work. There are probably more than a few moving parts to try and think through.

And, I'll just put it out there, your best option may just be to sell and take the tax hit. Do your SFR improvements, pay your debts, and set a chunk of money aside as reserves. I would guess your credit is pretty well shot at the moment. So if you do get a mortgage it's not going to be super duper awesome terms. And if you do have enough "entrepreneurial experiment" maybe that is where you need to put your "investment dollars" instead of real estate.

I hope I'm not sounding like a jerk but if you're getting mortgage lates but the recovery took less than 12 months you (almost by definition) didn't have adequate (personal) reserves to start.  Maybe you want to look into the ol' Suze Orman style emergency fund.  Mortgage lates and credit issues are the gift that keeps on hurting... 

Hi @ Nathaniel,  

i agree with @Dan Heuschele  1. It can lose money. 2. It must cash flow.  If you utilize that dead equity, buy right (under value) and it cash flows after a repositioning period, you will not lose money and it will cash flow.  You could 1031 exchange that thing into 3 properties 3 quads in the Midwest or if you were pretty savvy and have connections, you could put 25%-30%  down on a $700,000-$800,000 apartment complex in the midwest.  If you do a straight sale, pay some taxes, you could invest your money with  a proven reposition deal with a lead that is proven and knows how to do the Apartment Complex business model for repositioning value plays.  You can really get a bigger bang for your buck that way.  On your own, true Multifamily (5 units or more in one complex has a lot of land mines you could step on if you do it alone on your first few deals.  Feel free to message me and we could talk more about your goals and what would be best for you.

I love this stuff!!

Swanny

@Nathaniel Donnelly , One thing to keep in mind about the 1031 exchange, is that you will have to purchase property, or properties that total as much, or more in value as the sale price / value of the property you have here in SD. You should check with a CPA BEFORE you try an exchange to get the specific details. I believe that even if you reduce the total loans on the newly acquired properties you could end up with a tax burden. So it would be the easiest to purchase something large, or 2 larger properties so you don't have to buy 10 SFR in Memphis (or whatever market you pick) within the allowable time period. Otherwise, you may have to suck it up and pay the taxes. Would this be a home that you could handle moving back into for 2 years, and then sell with the personal residence exclusion?

Hi Nathaniel

One alternative you could consider is to get a HELOC on the property. Fundamentally all you need to pay on that is the interest. I live in San Diego county myself and properties have been appreciating nicely, so I would not sell it if I can afford to hold it.

Naturally it depends to what extend the numbers don't work right now. Theoretically you could get a HELOC about $90K higher than your current ARM mortgage balance. As I said, you only need to pay interest into the HELOC. IN reality you would pay interest plus whatever principle you can based on your rental income. The $90K is used to buy a turnkey property in the Midwest, as other have suggested. Since you pay cash, you would collect almost all that rent as cash (after insurance, property tax and property management, i.e. using Memphis invest ore Spartan invest)..

I would suspect you would probably end up with at least $600/month cashflow out of that turnkey property. Now you probably pay more into your HELOC than you do currently into your mortgage. It will pay down typically in around 10 years.

The real kicker is that you now have two properties that have the potential of appreciating and the San Diego property is paid down by two tenants, one her and one in the Midwest.

No refi, no 1031, no taxes, none of that.

I know its a little unconventional but its what I would do. Ask yourself how likely it will be that you will get a similar property at the price of your current mortgage balance in San Diego in the future (unless you expect another 2008 crash)

My 27 cents. Happy to help if you like to discuss

Axel

Find out if you qualify for the 121 Exclusion (Primary Residence for 2 out of the last 5 years).  If not, the 1031 may be an option if you are looking to try another market out of state.  I often find that once you map out each strategy, and the impending tax consequences for each, the numbers will help you make your decision.  Best of luck! 

There is NO reason why anyone should be losing money with that much equity. There are plenty of amazing markets that will give you a significant return with a mere $200k. Memphis is one of them! I personally own a respectable amount of homes in Memphis and Detroit and feel the returns are SIGNIFICANTLY higher than the buy and hold opportunities anywhere in California! For the record, Memphis Invest is a great turn-key company!

313 461-9889

@Nathaniel Donnelly as everyone says, if you do not want to pay taxes you have to either have lived in the house for any 2 of the last 5 years, or do a 1031 exchange. The problem with the exchange is that in order not to pay taxes you will need to get a mortgage that is equal to the one you have now and pay the rest of the money you receive as a the down payment. If your credit is bad you may not be able to get a new mortgage, or it may be at a bad rate. Your best bet would be to move back into the house for the amount of time you need to to get your capital gains exclusion and then sell if you want to get the cash out. 

Originally posted by @Rashard Alomari :

There is NO reason why anyone should be losing money with that much equity. There are plenty of amazing markets that will give you a significant return with a mere $200k. Memphis is one of them! I personally own a respectable amount of homes in Memphis and Detroit and feel the returns are SIGNIFICANTLY higher than the buy and hold opportunities anywhere in California! For the record, Memphis Invest is a great turn-key company!

 I realize you use the word “feel ...” but you realize every reputable study shows that Ca historically whoops Memphis in return on buy n hold.  Refer to Case Shiller for returns of coastal So Cal compared to Memphis.  All 3 top cities for buy n hold return this century are Ca cities.  

To suggest Detroit has out produced Ca for any moderately lengthy duration is ignorant of reality that can be shown with a few minutes of research.  

Are you aware of the appreciation in coastal So Cal or San Fran over the last 3, 5, 7, 20, 30, 40, 50 years? Research appreciation for Los Angeles, OC, San Diego, San Fran. Research historical ROI on buy n hold for those same cities.

I realize BP is full of opinions and many are incorrect but this one is so extreme I felt obligated to point it out.  

@Dan Heuschele I totally agree. That's why I sugegsted a strategy that allows Nathaniel to keep his house, get things paid and still develop even more equity. I think that's an option that would be least painful and very successful in the long run. I have two properties in CA and would not want to give them away.

@Dan Heuschele I completely agree. My opinion and thought process was formed with his particular situation at hand. Why would he remain in negative cash flow when he could be Making hefty returns monthly? If you have the means to invest in California and are able to wait patiently for the appreciation, then by all means have at it and make a killing, but if you’re losing money monthly and have equity sitting there, why not put it to use in a market that can give you a respectable 12%/15%/20% from day one? With price points as low as $20k in decent areas, his $200k in equity could be making him $3,000 per month NET going off our 50% rule here...after all expenses.

If you have the time, funds, and patience, hold out and let it grow where it’s at!

313 461-9889
Originally posted by @Nathaniel Donnelly :

Hello all! Been a while since I've been on, but I'm looking to get active once more.

Situation: My significant other bought her house in San Diego in 2006 and survived the 2008 crash by refinancing with an ARM that had an amazing rate. It was the right thing for her to do at the time, and she weathered the storm and now has roughly $200k in equity in the home. However, the ARM's interest rate has now increased to a point where the mortgage has eclipsed the rental income as of January 1st.

Although I promised myself years ago to NEVER SELL A HOME, my initial thought now is to sell immediately, but I'm not exactly sure how much we will have to pay in taxes if we do. We have not used it as our primary in the last two years.

I'd like to turn the profits into an out-of-state property, possibly with Memphis Invest, but we also have a bit of debt to settle as well work that needs to be done to our primary SFR that would take precedence.

Refinancing to a fixed-rate mortgage isn't an option as my latest entrepreneurial experiment failed and we took more than a few 30-day lates on some things over the last year or so. (We have recovered since ;-)

Anyone feel like chiming in with some helpful knowledge?  Thanks in advance!

 Cash out and invest in SFRs in the Midwest! You can get about 10 of them with $200,000 if you leverage them! Good luck!

Tom Ott, Real Estate Agent in OH (#2016003865)
440-749-4043
Originally posted by @Nathaniel Donnelly :

Hello all! Been a while since I've been on, but I'm looking to get active once more.

Situation: My significant other bought her house in San Diego in 2006 and survived the 2008 crash by refinancing with an ARM that had an amazing rate. It was the right thing for her to do at the time, and she weathered the storm and now has roughly $200k in equity in the home. However, the ARM's interest rate has now increased to a point where the mortgage has eclipsed the rental income as of January 1st.

Although I promised myself years ago to NEVER SELL A HOME, my initial thought now is to sell immediately, but I'm not exactly sure how much we will have to pay in taxes if we do. We have not used it as our primary in the last two years.

I'd like to turn the profits into an out-of-state property, possibly with Memphis Invest, but we also have a bit of debt to settle as well work that needs to be done to our primary SFR that would take precedence.

Refinancing to a fixed-rate mortgage isn't an option as my latest entrepreneurial experiment failed and we took more than a few 30-day lates on some things over the last year or so. (We have recovered since ;-)

Anyone feel like chiming in with some helpful knowledge?  Thanks in advance!

 Memphis Invest is a good company. Have you considered raising the rent? You might be surprised how some CA tenants can absorb rent increases given their current only other option is to find another higher priced rental home in a very competive rental market. Good luck! 

Plenty of great advice and debate from all of you. BP never lets me down! I sincerely appreciate all of the input from you all, and now I feel we have some great information (as well as a meeting with our CPA yesterday) to make an informed decision.  I'll keep you all posted as to what we end up doing.

A very sincere thanks!

if it was fixed I would hold. I feel w/ the arm I would go 1031

Originally posted by @Nathaniel Donnelly :

Plenty of great advice and debate from all of you. BP never lets me down! I sincerely appreciate all of the input from you all, and now I feel we have some great information (as well as a meeting with our CPA yesterday) to make an informed decision.  I'll keep you all posted as to what we end up doing.

A very sincere thanks!

Nathaniel,

I love this response from you to all the advice because you state something that more investors need to read, understand and follow.  You are making "...an informed decision".  There is no need to rush.  Be patient.  I can tell you that fixing your negative cashflow situation is paramount, but you are sitting with a property in a high-demand area, which has seen significant appreciation since 2007.  (That is a general statement without knowing exactly where the property is located).  Selling it may be the best option - or may not.  Investing in Memphis may be the best option - or may not.  

The nice thing is you are sitting in a great location with a lot of active and passive investors right here on BP. You can get some great advice for the price of a cup of coffee, a beer or a meal.  Ask for the opportunity to sit one on one with a few investors you meet here on BP who have accomplished what you are looking to do.  Then you can be sure to hone in even further on what is the best plan for you all while continuing to gain knowledge and information for that plan.

Lastly, you cannot buy 10 properties passively in the Midwest with $200,000 - certainly not if you expect to have any success.  Buying turnkey properties all in for $50,000 or $60,000 in the Midwest may be the riskiest of all things you could do with that equity.  I would not even consider it if I were in your position.  Whatever you do, please do not entertain that idea.  The economics simply do not work and that would be like trading your cow for magic beans.  There is no bean stalk with a golden-egg-laying goose at the top.  I don't know enough about your situation to give you good advice on what to do specifically, but I don't need any more info. to advise you on what not to do.

I just love that you are being patient and seeking advice.  Keep doing that.  Be patient.  That is the best way to go about big decisions like this because that asset with that level of equity can certainly be a game changer for you.  Best of luck ~

I believe short-term or long-term goal should be one of the factor here. If your goal is to generate cash flow, then SD is not a market for that. If your ultimate goal is to hold and retire, then SD will be great. In 10 years, do you prefer to own in SD or in other states?

Originally posted by @Nathaniel Donnelly :

Hello all! Been a while since I've been on, but I'm looking to get active once more.

Situation: My significant other bought her house in San Diego in 2006 and survived the 2008 crash by refinancing with an ARM that had an amazing rate. It was the right thing for her to do at the time, and she weathered the storm and now has roughly $200k in equity in the home. However, the ARM's interest rate has now increased to a point where the mortgage has eclipsed the rental income as of January 1st.

Although I promised myself years ago to NEVER SELL A HOME, my initial thought now is to sell immediately, but I'm not exactly sure how much we will have to pay in taxes if we do. We have not used it as our primary in the last two years.

I'd like to turn the profits into an out-of-state property, possibly with Memphis Invest, but we also have a bit of debt to settle as well work that needs to be done to our primary SFR that would take precedence.

Refinancing to a fixed-rate mortgage isn't an option as my latest entrepreneurial experiment failed and we took more than a few 30-day lates on some things over the last year or so. (We have recovered since ;-)

Anyone feel like chiming in with some helpful knowledge?  Thanks in advance!

Have you actually sat down with a loan guy and tried to refi or are you just assuming that the rate is gonna be high because of a few 30 day lates?  Like everyone said last 2 out of 5 years exempts you up to 500,000 if married and 250,000 if single. 

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