Sell, cash out and Rent in SF?

9 Replies

I'm new here but already learning a ton. Here's my situation.

-We bought a 2bed/2bath SFH in San Francisco in 2011 for $600K which has appreciated to around $1.3M or so. We have a $490K mortgage (3.5% fixed) and a $140K HELOC (4.5% variable; used to renovate residence and buy vacation rental). We rent it out on Airbnb when we travel and have made between 15-20K per year.

-We own a vacation rental in Sonoma county that is cash flow positive. 

-I have access to a below market variable rate (currently at floor of 2.75%; cap is 10%) loan that only requires 10% down through my employer for a purchase of a new residence.

I'm trying to plan out the best financial moves going forward. We would ideally like to buy a 3 bedroom in SF (have a 4 year old boy and 1 year old girl) but currently, it's too expensive where we'd like to live. We may have to move out of SF but would like to avoid that if we can.

I've considered the following:

1) Stay in our current 2bed/2bath as long as possible (likely 5 years max) or until the market softens

2) Sell now, rent in SF, avoid taxes and free up gains for other investments and wait for a market to soften in SF or move out of the city in a couple of years if it doesn't.

3) We'd love to keep current home as rental after buying new home. This would be great but would likely mean not buying as nice of a house for ourselves and definitely leaving SF. Rents have softened recently so we'd be close to break even on this but presumably this improves over time.

I've been racking my brain about this lately because we are going to leave the country for 5 months starting in August. This seems like an ideal situation to sell if we decided to go that route since we're already doing some packing up even if we rent out our house while gone. 

The most conservative thing seems to hold on to the house as we are paying down principal and have options if the market does drop in the future. It seems most risky to sell now and rent because the market can keep climbing, further putting us out of range. Any other things I should consider? Any other advice?

Thanks!

@Adrian Aguilera , my guess is that if you buy where you want to live, it'll hold its value at least as well as your current home, and your vacation rental (providing that you buy a project/discounted home that has all the potential that you need). My instinct suggests: sell both of them, and put it all towards that forever home that may very well become increasingly out of reach if you don't. [I dislike your sell-then-rent idea, for the reasons per your last paragraph].

You might ask: what if the economy tanks, later? I daresay that then, your current two properties would fare at least as badly as your carefully researched next primary will. Remember also, when the economy does crash, banks stop lending! Would you be immune to their vagaries?

You might also ask: What about the cash flow I'd be losing? I reckon a better question is: What will happen if you don't buy that bigger home where you really want to live?!

Welcome to BP. Congrats on your wise buys to date. Keep it up!... 

I have been there so can offer some perspective. I live and invest in the SF Bay Area, never sold any of my homes. Just rented them out as I moved on to purchasing the next one. This all started in 1999!!!! I have also been lucky to add some investment properties on top. Upside is benefits from appreciation over the years.

Downside is compromising on the size of the primary residence. In the end, there are only so much funds to access and invest and maintain a healthy debt to asset ratio.

Ideally, given how amazing the SF Area is, you should be holding on to all your Bay Area assets for the longer term but I feel at this point in the cycle, best to cash out and buy your dream home that suits your family needs.

Frankly my kids don’t care about the rental properties I own. They don’t live there, they rarely even see them. They could care less about the appreciation etc. They are just puzzled however as to why our home is smaller and more modest vs those of my friends.

There may be other opportunities to invest down the road either locally or for sure out of state. Good luck !

I would consider making your current residence a rental sooner than later and renting your needed larger residence.

In CA your primary’s mortgage interest and real estate tax benefits will be materially reduced beginning this year by the new RE/SALT limits.

As a rental property, the interest and real estate taxes will help shelter your new rents from tax, which you can use in part to offset your rental residence costs presuming you cash flow positively.

You’ll still benefit from asset appreciation by owning the 2b/2b but you’ll improve your residence, income, and tax offsets.

Do explore refinancing or expanding your HELOC while still an owner occupier for simplicity of process.

And you might explore whether, in addition to your new rental residence, you can use the employer funding for an additional residence that has rental potential in a lower tax state (e.g., Texas/Utah) if you are permitted to work remotely for a portion of your time to reduce your CA state income tax burden.

We used an approach similar to the above while living in London having lived in New York/New Jersey.

Buying in London was appreciation attractive but the downside was cramped quarters.

We opted to rent, which resulted in better accommodations cheaper, and used excess funds plus rents from the rental of our US primary to acquire more US rentals.

We filed taxes per day per geography/country to manage costs down. Took paperwork but nothing back breaking.

Good luck.

don’t sell! That home alone could help you retire early. Plus the taxes on selling would be murder. Buy the best house you can that you want to live in. Maybe wait a bit as the market is softening for higher end homes. Use the company loan to get in at 10%. If you and wife are making good income now with jobs, push the mortgage up a bit now to get the home you want (or close to it.) then you can coast for awhile, as you have your primary, vaca, plus investment prop. You’ll basically be set. And in 10-15 years it’ll be game over with all your collected equity, meaning multi millions. You’ll be done!

Thanks for the feedback, it's helpful to get some perspective. I agree that holding on is the smartest choice. One element that is a bit tricky is that the employer loan won't count my current primary home as rental income unless I have 2 years of rental. That would make it harder to get a larger loan so I may need to rent for that amount of time anyway. @Jonathan Cope Your idea of renting sooner may make sense for multiple reasons! Unfortunately, I have to purchase the new home locally so options are more limited.

Originally posted by @Niels Bjørn Toppenberg :

Have you looked into adding another room to your home by expanding it?
It would be expensive but might be cheaper than buying a bigger house.

 We did consult with an architect and the options aren't ideal in terms of layout but it is possible (and expensive). Another problem is that we are next to a highway so I'd like to avoid that long term. 

I would refinance, cash out, keep the property
Buy a nice house in Marin county for 900k
( if you have a child, the school and weather are amazing)
I did the same 3 years ago when I left the city after 8 years and never looked back.
I promise there’s life after the city!

Feel free to call me
I’ll be happy to assist
Noa