Rent vs sell a high cap gain property

Buying & Selling Real Estate
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Rent vs sell a high cap gain property

Billy Bey
Rental Property Investor · Lake Forest, CA · Member since 2017 · 5 posts · 5 votes

Hey all. First time poster here. Been listening to the podcasts as I hope to get into investing soon. Question for the group. 

I bought my current place, a 3BR Santa Monica condo back in 2010 when I was single. Have a wife now, a little one and hope to have another and we've started to look into new homes in the orange county area to give us more space and get me closer to my new job. 

Anyway, here's the question. Do I sell my condo or rent it out? I've been looking to get into real estate investing, so this could be a good entry point. But I also have seen significant appreciation (>$500k), so am wondering if it makes sense to sell and realize the appreciation and avoid taxes on the gain. I could then just invest somewhere else when the socal market moves. 

I would be able to cash flow the property, but the 2 year primary residence rule means I couldn't rent it out for more than 3 years before losing the tax avoidance. 

Any thoughts? I'm leaning to selling and avoiding taxes on the big gain. Any reason why I should convert this to a rental?  Thank you!!

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Sean Tarpenning
Turnkey Investment Provider · Kansas City, MO · Member since 2015 · 1k+ posts · 116 votes
8y

I would sell!  Capture your profits. You can find much higher returns in other markets if you are looking to be a property manager...which is another thing to think about!

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  • Lindsey Iskierka
    Real Estate Agent · Long Beach, California (CA) · Member since 2016 · 73 posts · 43 votes
    8y

    Hi Billy!

    Have you been living there since 2010?  If so, you won't be hit with capital gains taxes when you sell and earn your profit.  If you're seeking newer construction in OC, I would suggest putting a good size down payment to keep your mortgage payment lower and give you room to save for an investment property.  Or put down just some of the profit and use the rest of the proceeds to purchase another rental property.  

    How much would you cash flow if you were to rent it out?  

    1Reply
  • Billy Bey
    OP
    Rental Property Investor · Lake Forest, CA · Member since 2017 · 5 posts · 5 votes
    8y

    Hi Lindsey. Yes been living here since 2010. I think the property could cash flow about $200-500/mo after mortgage, HOA, insurance, mgmt and reserve. Agree that if I sell today I pay no taxes on the first $500k gain. My dilemma is if I turned it into a rental, I'd lose that if I rented it out for more than three years, it wouldn't qualify as primary residence anymore. So that's why I think selling is better option.

    I like your idea of putting more down on the new property to make it easier to convert to a rental down the road. 

    0Reply
  • Sean Tarpenning
    Turnkey Investment Provider · Kansas City, MO · Member since 2015 · 1k+ posts · 116 votes
    8y

    I would sell!  Capture your profits. You can find much higher returns in other markets if you are looking to be a property manager...which is another thing to think about!

    4Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    8y

    Based only on producing a descent return on your equity you would need at least $2000/month positive cash flow. If the property were worth 500K total your rent would need to be $6500/month for this property to be a descent income investment property. My guess is that the only value in the property is in speculating on appreciation. 

    I would sell but in truth I am not a faith investor.

    1Reply
  • Seth Borman
    Rental Property Investor · Phoenix, AZ · Member since 2016 · 553 posts · 314 votes
    8y

    I would sell and then hold the money until the market corrects. It seems to be softening a bit, so now would be a good time to exit.

    2Reply
  • Joe HomsBusiness Member
    Flipper · Mission Viejo, CA · Member since 2014 · 2k+ posts · 1k+ votes
    8y
    Billy Bey no brainer here. Sell and take your profits and decide with the money in the bank on your next move. Good investing.
    [email protected]949-625-4533
    4Reply
  • Bob LangworthyPro Member
    Accountant · Brunswick, ME · Member since 2017 · 352 posts · 242 votes
    8y
    I would look to do a 1031 exchange into a better property. Maybe a tri-pled or a quad. Those returns are very low. How much equity in the house?
    1Reply
  • Peter M.
    Rental Property Investor · DFW, TX · Member since 2013 · 953 posts · 910 votes
    8y

    @Bob Langworthy Can you explain why you think a 1031 would be a good idea in this situation? If @Billy Bey can keep 500k of his profit tax free, then wouldn't all of the strict 1031 rules be more of a hindrance? 1031 is meant to defer taxes; if he sells using the homestead exemption he doesn't pay the tax in the first place. Am I missing something?

    As for what you should do Billy, I say sell. Put a little towards the down payment of your new home and use the rest to buy up investment properties.

    2Reply
  • Billy Bey
    OP
    Rental Property Investor · Lake Forest, CA · Member since 2017 · 5 posts · 5 votes
    8y

    Thanks Peter. Was wondering the same thing about the 1031. I think a lot of people didn't realize the tax change that no longer required an exchange to avoid cap gain tax on principal residence. 

    I'm glad to hear everyone agrees with the conclusion I came to as well. Pocket the gain, avoid the taxes, put some down on the new place and use the remainder for some investment properties. 

    Appreciate all the responses. Looking forward to jumping into the investing side of real estate soon! 

    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    8y

    @Peter M., The benefit to a 1031 would only extend to the amount of gain over the $500K gain that @Billy Bey gets to take tax free right now.  The primary residence exclusion of sec 21 which has been in place since 1987 would allow him to take $500K of gain right now tax free but the remainder over that would be taxed.

    If he chooses to convert the house to a rental for up to three years he can still sell and use both the primary residence exclusion and shelter the remainder of the profit in a 1031.

    So it comes down to your interpretation of the market now

    -sell now and get $500K tax free and pay some tax.

    -wait and accept some market risk to get $500K tax free and defer the rest.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    1Reply
  • Bob LangworthyPro Member
    Accountant · Brunswick, ME · Member since 2017 · 352 posts · 242 votes
    8y

    @Peter M., I skimmed through the original post too quickly (tax season haze) and thought he had been renting it out. No 1031 with a primary residence. Section 121 exclusion is the way to go. 

    0Reply
  • Will Johnston
    Investor · Washington, DC · Member since 2014 · 107 posts · 25 votes
    8y

    I would sell if for no other reason than the rent control laws in Santa Monica. Even if the unit isnt subject to rent control due to the age of your building, given the effort to overturn Costa-Hawkins, I’m nervous about buy and holds in California. I live in OC and invest in Washington DC, which does have rent control, but California sounds like its ready to take it to a whole other level.

    1Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    8y

    @Billy Bey, so, your net $500k equity could earn you (say) $400/m? 

    That's a return of less than 1% per year! 

    Would you really want to gamble on continued appreciation, instead of cashing out?

    [You got lucky in 2010, buying right at bottom prices. Don't waste that luck now!]...

    1Reply
  • Dylan VargasPro Member
    Rental Property Investor · Chico, CA · Member since 2016 · 625 posts · 336 votes
    8y

    @Billy Bey Welcome! Take the money and run! Fast!!!! After selling you can take your time and find a bargain property and gain immediate equity. May be a good time to rent as well and see what happens in the market. Good luck and keep us posted.

    1Reply
  • Tim Jones
    Flipper/Rehabber · Merced, CA · Member since 2016 · 221 posts · 115 votes
    8y
    K.I.S. Buy low, sell high. As another poster suggested you could put a large down payment on your next primary residence. You could then slap a HELOC on it for access to your money... Best of luck to you, TJ
    1Reply
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