Moving - do we rent or sell and invest outside CA
Developer · Chandler, AZ · Member since 2015 · 12 posts · 3 votes
Moving - do we rent or sell and invest outside CA
Most Popular Reply
Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
7y@Keith Gilbert, there are a NUMBER of things to consider that make your friends' comments invalid. I'll name a few:
- As you stated, the difference in property taxes is HUGE!
- Per your own words, you are not sure if you will go back or not.
- CA Prop 60, transfer of property tax for seniors. Let's say you move BACK to Long Beach for a year and then buy your dream place in Seal Beach. Your taxes are now lower. Look it up. One time exemption, so you better make it good. ;-)
- If you 'leave' and sell, the appreciation in Cali might be as such as you might not EVER be able to buy back in.
For ALL these reasons, and a few more, I keep my property in San Diego.
What I would do is get it back on a 30 year term (you don't want to pay it off anyway, you will owe tons to STATE of California), and strip it for $100k when I want to invest elsewhere. Or pay off your primary residence since you probably can't itemize anyway. Paying off a rental completely in Cali is a bad idea, but that's another story. ;-)
I visited AZ a LOT before living here. I've been here 10 years now. It has LOTS of both 'good and bad', like any place does. But the heat becomes unbearable year after year after year.
And that is why I STILL have a 'foothold' in San Diego.
In your case I would Re-Fi as is on a 30 yr term. Your PITI would be around 2600, based on 4% interest rate.
If your rents are 3400 a month, the numbers work as follows:
Income: 40,000
PITI: 31,200
Cashflow: 8,800
Tax liability
Income: 40,000
Interest: 17,472
Prop Tax: 6,800
Insurance: 1000
Depreciation: 14,500
Tax Deductions: 39,772
Net Tax Liability: $228.00
So, you can basically put $8,800 in
your pocket every year and pay no tax on it. All except $228. Where/how else can do that?
Now add 3-5% annually to the income line. What does that look like after 5 years, 10 years?
In your case you have already made the investment/hard part. If you want to have a chance to go back someday AND make money in the meantime, this is it.
If you need/want $100k, go strip it for $100k and invest it elsewhere.
If your rents are more that 3400 a month, you will pay some tax. But MAYBE you can find some expenses or upgrades that can write off the difference? ;-)
In any event, I hope I have given you a few things to think about.
58 Replies
- 7yMindy JensenPro MemberBiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
Someone mentioned a 1031 Exchange earlier in this conversation.
1031 is not a valid option when the original intent was not as an investment. Section 121 exclusion is a MUCH BETTER option for primary residence.
Right, @Dave Foster?
Originally posted by @Alan Grobmeier:
@Matt R. I was told about the 'dry heat'. Yeah, sticking your head in the oven is dry heat too. I don't normally do that unless I am cooking something.
Almost everywhere has 'good and bad'. The weather in SoCal can't be beat anywhere on the planet for 12 months. I have traveled to every state in the US and 20-something countries. I haven't found anything like it.
The minus is that the food costs, taxes, gas prices, immigration, and other stuff appear to be out of control. And that's why I wouldn't stay 100% of the time. ;-)
I hear ya, sounds like a great plan. One time I cruised my motorcycle thru some LA County desert stuff and it felt like someone was blowing a hot hair dryer on me. Not cool in both ways. And West coast continental mediterranean climate is found in other countries. South of France, Spain etc...in small pockets across the globe. SD just happens to be in the heart line of that climate and really America's finest city in many ways.
I mean look at this place. 400 years ago the King of Spain was like dock and claim asap.
This is a great thread and my first post on Bigger Pockets.
Like the original poster stated, I too have considered selling my home in San Diego and moving, however I know I want to come back to California one day if I leave the state. My fear is that I'll WILL BE priced out if I do (heck I already am), therefore I won't sell it.
I paid $525k for it almost 4 years ago and it's worth nearly $700k now (something I couldn't afford to buy today) on a single income. Instead, I plan to equity strip it and use the funds to purchase cash flow positive rental properties in lower cost areas outside of California.
Best of both worlds to me. I still get to keep my place, but rent it out, all the while using the equity in it to buy more properties. Man I love real estate investing and I'm just getting started! :)
- Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes7y
My vote is sell it. People rarely buy there personal residence at a price that makes it a good rental. And we are somewhere near the peak of a housing market. Time to unload.
Originally posted by @Keith Gilbert:
We are moving from Long Beach, CA to Chandler, AZ. We are trying to decide what to do with our current house.
I asked a friend and he posed an interesting question. Imagine you had $350k (which is the cash our equity in our home) would you use that money to invest in a single family home in Long Beach? Our plan was to rent it out, but we have the house on a 3% 15-year note and it would only break even or be a slightly negative cash flow (not counting debt reduction or appreciation). I don’t see our house appreciating much more given it’s one of the nicer houses in a very blue collar neighborhood.
Should we hold onto it? I’ve always believed in never selling. If we do sell it, how would you recommend investing the $350k. We don’t need the money for our AZ house. However if we did put it into our AZ house we would have an extra $4k per month to invest.
DO NOT SELL! In fact, NEVER SELL. If you do, YOU will regret it. Avoid taxes however possible.
I can show you all kinds of way to make money without selling.
and
NO, DO NOT 1031 Exchange. The entire idea does not make sense. Never has. It ONLY makes sense when one market is peaking (where you're selling) and another market is in a recessionary phases (where you're planning to buy). That rarely occurs. Most good markets move through real estate cycles along with each other...
Cycle Chart
- Rental Property Investor · San Diego, CA · Member since 2019 · 2 posts · 1 vote7y
Keith, Sell it (1031 qualify?) And go to Indy SFH's. Why? Since you agree that you're at the top of the valuation expectation in CA, now is the time to move that money into cash flow properties - obviously out of state. (I'm working with two others in your situation.) Indy is one of the best, if not thee best for long term stability. As most people see, CA is a great place to visit, but not for cash flow passive RE investing. Way too many challenges now and coming down the pike.
Go where you can get great CASH FLOW, 8-10% CAP. Use that cash flow to visit CA as needed from AZ. :) Cash flow = long term peace of mind. Run the numbers on the 350K. (In our world it's approx $44K in cash flow) We are investors ourselves. 500 investor turnkey transactions. How we do it for ourselves is how you get it done. Done4uHomes.com All the best to you.
- Real Estate Agent · Fort Lauderdale, FL · Member since 2018 · 360 posts · 213 votes7y
If is going to be that tight, I recommend to sell, and invest in the surroundings of AZ, is a good market and that money will extend and allow you to have more props... ( more cashflow)
- 7yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
Spot on @Mindy Jensen, Tax free from the sale of a primary residence is always better than tax deferred from the sale of an investment property. No 1031 for this property. If @Keith Gilbert sells the gain would be tax free as long as it was no more than $500K.
The 1031 Investor5140 Reviews - Realtor · Lake Stevens, WA · Member since 2018 · 122 posts · 91 votes7y
Originally posted by @Keith Gilbert:
We are moving from Long Beach, CA to Chandler, AZ. We are trying to decide what to do with our current house.
I asked a friend and he posed an interesting question. Imagine you had $350k (which is the cash our equity in our home) would you use that money to invest in a single family home in Long Beach? Our plan was to rent it out, but we have the house on a 3% 15-year note and it would only break even or be a slightly negative cash flow (not counting debt reduction or appreciation). I don’t see our house appreciating much more given it’s one of the nicer houses in a very blue collar neighborhood.
Should we hold onto it? I’ve always believed in never selling. If we do sell it, how would you recommend investing the $350k. We don’t need the money for our AZ house. However if we did put it into our AZ house we would have an extra $4k per month to invest.
Sell tax free if it's been your primary residence for at least 2 of the last 5 years and then reinvest in cash flowing multifamilies. That $350k could get you a few duplexes in AZ if leveraged properly or even a small apartment complex. You will cash flow so much more this way and build more equity. It's a no brainer.
- Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes7y
@Kyle Wells you would be lucky to buy 2 duplexes in AZ for $350k. Prices here have SKYROCKETED. Cap rates have been smashed as more and more money chase smaller returns. :-(
Most renters are finding stuff unaffordable, just like the coasts. The only difference is we don't have nice weather in the summer. Unless you call 'nice & hot', nice. ;-)
- Realtor · Lake Stevens, WA · Member since 2018 · 122 posts · 91 votes7y
Originally posted by @Alan Grobmeier:
@Keith Gilbert, there are a NUMBER of things to consider that make your friends' comments invalid. I'll name a few:
- As you stated, the difference in property taxes is HUGE!
- Per your own words, you are not sure if you will go back or not.
- CA Prop 60, transfer of property tax for seniors. Let's say you move BACK to Long Beach for a year and then buy your dream place in Seal Beach. Your taxes are now lower. Look it up. One time exemption, so you better make it good. ;-)
- If you 'leave' and sell, the appreciation in Cali might be as such as you might not EVER be able to buy back in.
For ALL these reasons, and a few more, I keep my property in San Diego.
What I would do is get it back on a 30 year term (you don't want to pay it off anyway, you will owe tons to STATE of California), and strip it for $100k when I want to invest elsewhere. Or pay off your primary residence since you probably can't itemize anyway. Paying off a rental completely in Cali is a bad idea, but that's another story. ;-)
I visited AZ a LOT before living here. I've been here 10 years now. It has LOTS of both 'good and bad', like any place does. But the heat becomes unbearable year after year after year.
And that is why I STILL have a 'foothold' in San Diego.
In your case I would Re-Fi as is on a 30 yr term. Your PITI would be around 2600, based on 4% interest rate.
If your rents are 3400 a month, the numbers work as follows:
Income: 40,000
PITI: 31,200
Cashflow: 8,800
Tax liability
Income: 40,000
Interest: 17,472
Prop Tax: 6,800
Insurance: 1000
Depreciation: 14,500
Tax Deductions: 39,772
Net Tax Liability: $228.00
So, you can basically put $8,800 in
your pocket every year and pay no tax on it. All except $228. Where/how else can do that?
Now add 3-5% annually to the income line. What does that look like after 5 years, 10 years?
In your case you have already made the investment/hard part. If you want to have a chance to go back someday AND make money in the meantime, this is it.
If you need/want $100k, go strip it for $100k and invest it elsewhere.
If your rents are more that 3400 a month, you will pay some tax. But MAYBE you can find some expenses or upgrades that can write off the difference? ;-)
In any event, I hope I have given you a few things to think about.
$8,800/year in cash flow (this also doesn't take into account upfront refinancing costs that would likely eat most of that first year cash flow) on $350k in equity is a measly 2.5% return on equity. Pass. Put that money into properties that will cashflow $30-35k/year somewhere else. Why settle?
- Realtor · Lake Stevens, WA · Member since 2018 · 122 posts · 91 votes7y
Originally posted by @Alan Grobmeier:
@Kyle Wells you would be lucky to buy 2 duplexes in AZ for $350k. Prices here have SKYROCKETED. Cap rates have been smashed as more and more money chase smaller returns. :-(
Most renters are finding stuff unaffordable, just like the coasts. The only difference is we don't have nice weather in the summer. Unless you call 'nice & hot', nice. ;-)
I'm not saying pay all cash. I'm saying use leverage and put down 30-50% of the purchase price. That would get him properties totaling $700k-1.15mil. That's some serious cash flow opportunity there.
- Developer · Chandler, AZ · Member since 2015 · 12 posts · 3 votes7y
Originally posted by @Alan Grobmeier:
@Kyle Wells you would be lucky to buy 2 duplexes in AZ for $350k. Prices here have SKYROCKETED. Cap rates have been smashed as more and more money chase smaller returns. :-(
Most renters are finding stuff unaffordable, just like the coasts. The only difference is we don't have nice weather in the summer. Unless you call 'nice & hot', nice. ;-)
Alan I couldn’t believe the rental prices in AZ right now. My house is a few miles from the beach and completely remodeled with high end everything. For that I can only rent for maybe $3,700. What I would have to pay to get a comparable “nice” rental in Tempe or Chandler would be $3,000-3,500 and that is over 400 miles from the ocean. It’s ridiculous.
- Crestline, CA · Member since 2018 · 63 posts · 70 votes7y
I vote keep the Long Beach house.
Among many reasons listed by others above, here's a small additional one: your trips back to Long Beach from AZ could then all be tax deductible if you're checking on, or dealing with, your rental property.
- Developer · Chandler, AZ · Member since 2015 · 12 posts · 3 votes7y
IF we were to sell. We would have about $350k to invest in another market. We would also have another $60k to invest each year after maxing our all our tax deferred investments.
We've invested a portion of our SDIRA into an LLC that is purchasing and selling land. It is doing really well. We also have another $75k of the remaining SDIRA in Vanguard VTSAX. I was holding that money until we found a good way to put that into real estate. But investing SDIRA money into real estate seems difficult.
The majority seem to suggest selling our house and putting it into a multi-family property. Any other strategies based on the additional amount we have to invest?
Thanks for all the responses so far, this has been super helpful.
- Rental Property Investor · San Diego, CA · Member since 2017 · 439 posts · 578 votes7y
Find an investor that has held on to RE in Southern California long term that regrets it..... you won’t be able to. Especially in Long Beach or any coastal city. I’d refi and invest out of state with those proceeds. The neighborhood is blue collar now but at 850k.... you aren’t getting blue collar people buying into that neighborhood anymore. The refi will put cash in your pocket, you’ll be essentially breaking even on rent, you’ll be able to enjoy the appreciation when the time comes and you can always move back in the future if need be.
- Flipper/Rehabber · Amboy, WA · Member since 2019 · 33 posts · 28 votes7y
I think the thing that is being overlooked by those voting to keep the house in CA is that the real estate investments will long term (or maybe short term) be able to pay for a return to the CA market at the time of your choosing.
Maybe I'm oversimplifying matters, but that's how I see it.
- Real Estate Broker · Santa Ana CA [South Coast Metro] · Member since 2016 · 459 posts · 202 votes7y
Its like a happy riddle when you have choices, its fun to figure out.
I kick myself many times for selling property all over LA over the years.
But you have to look at your long term goals and what's important, no one knows what the market is really going to do over the next 3-7 years, its all up in the air, so best to plan for what you need right now.
If you sell you get the homeowner exemption that is great you are taking money off the table and can invest in other markets - like AZ it's hot [ pardon the pun]. You can get a rental or sfr and rent out and get cash flow and ride the appreciation much faster and higher [ percentage wise]. LA is maxed out on affordability and buyers and renters are feeling the strain, can it go higher it seems so rents just keep going up like crazy but sales are slowing and prices will too.
Do you want to be a long distance landlord
Do you want the freedom to take cash off the table and wait for a deal
Keep us posted
- Real Estate Broker · Santa Ana CA [South Coast Metro] · Member since 2016 · 459 posts · 202 votes7y
Originally posted by @Daniel S.:
This is a great thread and my first post on Bigger Pockets.
Like the original poster stated, I too have considered selling my home in San Diego and moving, however I know I want to come back to California one day if I leave the state. My fear is that I'll WILL BE priced out if I do (heck I already am), therefore I won't sell it.
I paid $525k for it almost 4 years ago and it's worth nearly $700k now (something I couldn't afford to buy today) on a single income. Instead, I plan to equity strip it and use the funds to purchase cash flow positive rental properties in lower cost areas outside of California.
Best of both worlds to me. I still get to keep my place, but rent it out, all the while using the equity in it to buy more properties. Man I love real estate investing and I'm just getting started! :)
If you can not afford to buy your neighbors house is something to give pause. Who is going to buy your house and what kind of income do they need and how long is this going to last.
- Real Estate Broker · Santa Ana CA [South Coast Metro] · Member since 2016 · 459 posts · 202 votes7y
Originally posted by @Matt R.:
I just saw a LA Times front page headline, I think for changing zoning for sfrs to become upto 4 rentable units. This changes the whole face of what a CA sfr is on paper at least.
that is interesting, this is different than ADU laws. This will piss off many people.
- Real Estate Broker · Santa Ana CA [South Coast Metro] · Member since 2016 · 459 posts · 202 votes7y
Originally posted by @Keith Gilbert:
IF we were to sell. We would have about $350k to invest in another market. We would also have another $60k to invest each year after maxing our all our tax deferred investments.
We've invested a portion of our SDIRA into an LLC that is purchasing and selling land. It is doing really well. We also have another $75k of the remaining SDIRA in Vanguard VTSAX. I was holding that money until we found a good way to put that into real estate. But investing SDIRA money into real estate seems difficult.
The majority seem to suggest selling our house and putting it into a multi-family property. Any other strategies based on the additional amount we have to invest?
Thanks for all the responses so far, this has been super helpful.
If you are not in a hurry to sell, look into investing in opportunity zones.
- Investor · San Jose, CA · Member since 2015 · 89 posts · 46 votes7y
@Keith Gilbert
For me, it’s a no brainer, money goes so much farther if you invest out of state. I would sell and buy multiple houses out of state all cash. Or you can buy more with leverage and buy multi families or a nice size apartment building.
I’ve done my share of investing in California and now I am all in on out of state properties. I’m looking to sell a California house or two to maximize my cash flow out of state.
- Rental Property Investor · North Vernon, IN · Member since 2018 · 136 posts · 192 votes7y
I would definitely sell. I say that mostly because I like positive cash flow. Your personal goals may be different than mine but I’ve acquired everything I need to be financially free or close to it and it’s seems like you are very close to that point yourself(if you sell). Take the 350k to Arizona and be extremely patient, find low maintenance B class rentals with new roof and HVAC and buy them with at least 50% down. You can probably get a couple nice nearly passive investments that are cash flow positive. Then keep saving to buy the next b class investment, and just repeat the process until you have 10-15 with a very comfortable debt to equity ratio. Then retire and play golf or something.
- Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes7y
@Rob Massopust, I have been a long distance landlord for a decade now. Many YEARS I never even visited the property. I had a tenant that stayed 9 years. Never a problem other than maintenance. It's actually pretty easy if you set up the right systems and have choose a decent tenant.
Last spring they moved out. I had made a decision to sell. Or so I thought. The property needed serious updating. I spent about 90k, going thru the whole house. By the time I was done, NOTHING was more than 5 years old. The property was 'bulletproofed'.
I sent a small crew from AZ because I found CA contractors to be both expensive and unreliable. I can't even tell you how many times I was 'ghosted' by contractors.
Anyway, as the property took 'shape', my attitude changed. It was no longer a millstone, but a gem. And a goldmine.
After I was done I raised the rent by $1000 a month. My neighbors thought I was crazy. But I had a couple of open houses and got at least 15 applications and choose 1 of the 15.
@Keith Gilbert, I know that a vast number of ppl on this forum are telling you to sell, that the roi is too low, etc.
The real deal is that CA is a 'slow roll' that ALWAYS appreciates over the long term. Over AZ, Midwest 'cashflow' plays (most of which are scams, IMHO), mountain cabins, the latest and hottest places or anything else. The only other place you can compare to is NYC. And they ain't building more land in Manhattan either! ;-)
You can increase your income line 3-5% annually while all other expenses stay pretty constant. Which also doesn't happen anywhere else. Even in AZ. That 2% ROI of today can increase rather quickly under those circumstances. My parents purchased the property I now own in 1975. They paid $47k. Show me that ANYWHERE else.
Today I am in the 'never sell' camp.
I KNOW I would have been 'sorry' today if I sold a year ago as I had originally planned.
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