Sell highest value property? Cash flow vs appreciation dilemma.

Buying & Selling Real Estate
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Sell highest value property? Cash flow vs appreciation dilemma.

Chris May
Rental Property Investor · Durham, NC · Member since 2016 · 354 posts · 288 votes

I realize there's no "right" answer to this question, so I'm just looking for opinions or angles I haven't thought of.

We owner occupied a duplex a few years ago in the SF Bay Area. We've since moved to North Carolina, are owner occupying another duplex here, and the California property is fully rented. We did a ton of work to the CA property, so that combined with the incredible appreciation out there in the last few years, we're sitting on a pretty remarkable paper gain.

We've racked up quite a bit of debt rehabbing both the CA and NC properties. Right now we're fine--rents cover the expenses on our CA property (barely), but the prospect of a potential recession and a short term rent dip have me a little concerned. We've increased our financial independence moving to NC (lower cost of living and wife no longer works), but part of that means having slightly less income to cover economic shocks.

The CA duplex is also really hampering our ability to finance additional properties. It feels like we're stuck and just have to ride out another decade or so to realize gains from the property.

So here's the plan: 

  1. Sell our CA property
  2. Do a 1031 exchange and buy 2 SFRs in North Carolina as rentals for all cash. Put another 50% down on a vacation rental somewhere fun (probably the Caribbean). Live there 1-2 months of the year, rent it out the rest of the time.
  3. Pay off all debt (except for a modest mortgage on our NC duplex).
  4. Further increase our financial independence by significantly increasing our cash flow from rentals while decreasing risk.

The thing that's agonizing for us is we were hoping to retire (early) in the CA property. It's an absolutely beautifully restored building and we love the neighborhood. We're also giving up future appreciation if we sell now. Of course, if we retire there then we're not selling ever. I also don't know how realistic it is that we'd be able to cover the mortgage if we moved back into the property while semi-retired.

I feel like the right answer is selling the CA duplex, but again, it's killing me.

Thoughts? Help!

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Brant Richardson
Investor · Santa Barbara, CA · Member since 2013 · 658 posts · 315 votes
7y

Chances are, if you sell your place in the Bay Area then you won't be able to get back into the area.  Hold onto it for now, maybe after a few more years in NC you will decide you don't want to go back and you can sell it.  Or in a few years rents will be even higher and it will start to cash flow.  In the short term, if your wife got a job it would improve your debt to income ratio as well as provide some more cash and maybe you could make another deal happen in NC.   She could quit as soon as the deal was completed.  Do you own both sides of the duplex in NC?  If not then maybe you would be better off with a property that gives you a home as well as a rental unit.

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  • Brant Richardson
    Investor · Santa Barbara, CA · Member since 2013 · 658 posts · 315 votes
    7y

    Chances are, if you sell your place in the Bay Area then you won't be able to get back into the area.  Hold onto it for now, maybe after a few more years in NC you will decide you don't want to go back and you can sell it.  Or in a few years rents will be even higher and it will start to cash flow.  In the short term, if your wife got a job it would improve your debt to income ratio as well as provide some more cash and maybe you could make another deal happen in NC.   She could quit as soon as the deal was completed.  Do you own both sides of the duplex in NC?  If not then maybe you would be better off with a property that gives you a home as well as a rental unit.

    5Reply
  • Chris May
    OP
    Rental Property Investor · Durham, NC · Member since 2016 · 354 posts · 288 votes
    7y
    Originally posted by @Brant Richardson:

    Chances are, if you sell your place in the Bay Area then you won't be able to get back into the area.  Hold onto it for now, maybe after a few more years in NC you will decide you don't want to go back and you can sell it.  Or in a few years rents will be even higher and it will start to cash flow.  In the short term, if your wife got a job it would improve your debt to income ratio as well as provide some more cash and maybe you could make another deal happen in NC.   She could quit as soon as the deal was completed.  Do you own both sides of the duplex in NC?  If not then maybe you would be better off with a property that gives you a home as well as a rental unit.

    I think you're touching on the dilemma. Why would I want to be in the Bay Area market when I've already made a handsome profit. I'm tempted to take the gains and turn it into cash flow on homes in NC that I own free and clear. 

    Sure, it could keep appreciating, but what if there's a recession? Will I be kicking myself that I left myself exposed to that much risk?

    1Reply
  • Brant Richardson
    Investor · Santa Barbara, CA · Member since 2013 · 658 posts · 315 votes
    7y

    People in the Bay Area will keep renting in a recession.  Both markets will go down in a recession.  The reason to still be in the Bay Area is because ultimately you want to return there and you could get priced right out of the market if you sold and tried to return later.

      I personally live in Santa Barbara and do my investing in Kansas City so I can certainly understand taking your money out of California.  For me it would be a no brainer, in your situation I would proceed with the plan you described above.  Better price/rent ratio in NC, no mortgage interest to pay and you could do all the property management/maintenance yourself for overall way more cash flow.  I like cash flow better than hoping for appreciation.  

       I guess it depends on how sure you are about returning to CA, a really expensive part of CA like the Bay Area in particular. 

    1Reply
  • Brian Sparr
    Real Estate Agent · Cary NC & Walnut Creek, CA · Member since 2009 · 99 posts · 84 votes
    7y

    Hi @Chris May - where in the Bay Area is it?  If you're in Oakland, you just lost your rent control exemption for owner-occupied duplexes...

    I run a team in the Bay Area and another in the Raleigh metro and we're right in the middle of working with a number of our Bay Area investors on exchanging out of their local properties and into multiple places in the Triangle ... we're increasing their cash flow and putting them in position for more capital growth (when using conservative estimates).

    Unless you're dead-set on returning to the Bay Area and wanting to be in that same property, I'd seriously consider exchanging out now.  If you're in any of the rent controlled cities, not only do you have the downside risk for the value of the property dropping, but you also have the downside risk of rents dropping and you getting longterm tenants in that prevent you from achieving market rents once the prices start to rise again.

    If you want, shoot me a msg with your property address and I'd be happy to give you some more detailed thoughts...

    0Reply
  • Chris May
    OP
    Rental Property Investor · Durham, NC · Member since 2016 · 354 posts · 288 votes
    7y
    Originally posted by @Brian Sparr:

    Hi @Chris May - where in the Bay Area is it?  If you're in Oakland, you just lost your rent control exemption for owner-occupied duplexes...

    I run a team in the Bay Area and another in the Raleigh metro and we're right in the middle of working with a number of our Bay Area investors on exchanging out of their local properties and into multiple places in the Triangle ... we're increasing their cash flow and putting them in position for more capital growth (when using conservative estimates).

    Unless you're dead-set on returning to the Bay Area and wanting to be in that same property, I'd seriously consider exchanging out now.  If you're in any of the rent controlled cities, not only do you have the downside risk for the value of the property dropping, but you also have the downside risk of rents dropping and you getting longterm tenants in that prevent you from achieving market rents once the prices start to rise again.

    If you want, shoot me a msg with your property address and I'd be happy to give you some more detailed thoughts...

     Yes, it's in Oakland and yes, that is definitely a concern. 

    Luckily we have two tenants who pay market rates (for now), but as you mentioned, if the market dips and they move then we'd have to lock in new tenants at lower rates pretty much in perpetuity.

    0Reply
  • Robert C.
    Investor · San Francisco, CA · Member since 2016 · 338 posts · 444 votes
    7y

    @Chris May, I’m a little biased since I’m not an east bay investor. But if you’re in a situation where the finances are making you sweat, I would probably not hold onto the Oakland property if it’s only break even after several years. Plus, how far away is your early retirement? If it’s still 10+, who really knows what you might want or what you can afford by then! Might as well use your prime earning years to accelerate your wealth where you might have more control.

    Couple other thoughts that might influence your decision:

    1. Can you take advantage of capital gains exemption from living there 2/5 years?

    2. Can you increase the income on the Oakland property to make you more comfortable either by refinancing (rates have dropped!) or adding rent?

    3Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    7y

    If you really want to move back, then holding it is your best option to keep pace with the local market.  But what time frame are you looking at?  If you are more than 10 years out, you may want to consider selling it.  check what the tax implications are.

    0Reply
  • Frank Wong
    Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
    7y

    Hi Chris,

    I think for the most part it sounds like you are leaning towards selling your duplex in the Bay Area. This is how I read things.

    1. You sell. You get to free yourself from large mortgage debt. Get 2 houses free and clear in NC and get a vacation home. CASH FLOW increases because of the new free and clear properties and debt drops and lifestyle increases.  This sure sounds like a winner to me. 

    2. The argument for not selling. Lost appreciation. Sure but you can also get appreciation in NC which is also a growing market. Appreciation is not guaranteed.   You won't be able to move back to CA.  You can always rent nothing wrong with that. It's possible you can get priced out and never buy again. WHO CARES. Its all about Cash Flow and lifestyle. 

     Keep it and you are trapped and if any downturn you could be in an awkward situation of over-leveraged debt.  Sell it your lifestyle and financial freedom increases.  Equity in your home is fake money unless it pays you.  

    5Reply
  • Stephen Betteridge
    Rental Property Investor · Philadelphia PA · Member since 2018 · 8 posts · 5 votes
    7y

    @Brant Richardson

    I agree with this approach, the ability to manage and take care of the properties in NC with way better cash flow makes a lot of sense. I think it gives you more flexibility down the road and will give you more hands on experience with the NC properties

    Brian makes a good point as well about the rent control. That seems like a huge factor in wanting to get out of that area.

    I feel like the situation as you described it is at risk (or already has) become too emotional. If you are planning to / want to move back there then the decision is based more on emotion instead crunching the numbers on how to get to your final goal. I think if you lay out what your long term goal is, and attempt to look at it unemotionally, it will give you a better feeling of which direction is right for you now.

    2Reply
  • Chris May
    OP
    Rental Property Investor · Durham, NC · Member since 2016 · 354 posts · 288 votes
    7y
    Originally posted by @Stephen Betteridge:

    @Brant Richardson

    I agree with this approach, the ability to manage and take care of the properties in NC with way better cash flow makes a lot of sense. I think it gives you more flexibility down the road and will give you more hands on experience with the NC properties

    Brian makes a good point as well about the rent control. That seems like a huge factor in wanting to get out of that area.

    I feel like the situation as you described it is at risk (or already has) become too emotional. If you are planning to / want to move back there then the decision is based more on emotion instead crunching the numbers on how to get to your final goal. I think if you lay out what your long term goal is, and attempt to look at it unemotionally, it will give you a better feeling of which direction is right for you now.

     It definitely is emotional, ha. We bought it with the intention of renting it until we're ready to retire, so selling now feels like we're upending our plan. It would probably be pretty hard for us to get back into that area later on because we're already down to 1 income. Would probably be tricky to qualify again.

    Appreciate your thoughts.

    0Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    7y

    @Chris May

    Chris, if you planning on putting part of your 1031 in to the Caribbean, talk to @Dave Foster.

    I BELIEVE, your only choice there is the USVI. There are a couple other remote islands but I wouldn’t call them part of the Caribbean. 

    0Reply
  • Chris May
    OP
    Rental Property Investor · Durham, NC · Member since 2016 · 354 posts · 288 votes
    7y
    Originally posted by @Bill B.:

    @Chris May

    Chris, if you planning on putting part of your 1031 in to the Caribbean, talk to @Dave Foster.

    I BELIEVE, your only choice there is the USVI. There are a couple other remote islands but I wouldn’t call them part of the Caribbean. 

     I was planning on Puerto Rico. I assumed that was allowed since it's a US territory. Is that wrong?

    1Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    7y

    @Chris May

    For some reason I don’t THINK so, which is why USVI is confusing. Guam is other island I know for sure, but I think there’s one more remote one. 

    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @Bill B. and @Chris May, if you want to read the ridiculousness that are the treasury regs to to 832 and 935.  Guam, USVI and Northern Marianas (as of 2008).  It all has to do with how taxation is handled as spelled out in the treaties between the countries.  And unfortunately Puerto Rico does not qualify.

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  • Chris May
    OP
    Rental Property Investor · Durham, NC · Member since 2016 · 354 posts · 288 votes
    7y
    Originally posted by @Dave Foster:

    @Bill B. and @Chris May, if you want to read the ridiculousness that are the treasury regs to to 832 and 935.  Guam, USVI and Northern Marianas (as of 2008).  It all has to do with how taxation is handled as spelled out in the treaties between the countries.  And unfortunately Puerto Rico does not qualify.

     Whaaaat. Bummer! That's completely absurd but good to know. Thanks for the info!

    0Reply
  • Gino Vargas
    Accountant · Hobe Sound, FL · Member since 2015 · 15 posts · 1 vote
    7y

    @Robert C.

    I think I would take advantage of the 2/5 year. Married couples 500k profit. Tax free.

    0Reply
  • Chris May
    OP
    Rental Property Investor · Durham, NC · Member since 2016 · 354 posts · 288 votes
    7y
    Originally posted by @Gino Vargas:

    @Robert C.

    I think I would take advantage of the 2/5 year. Married couples 500k profit. Tax free.

    That would be great but unfortunately we're about 4 months short of 2 years.

    0Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    7y

    If you didn't own the CA property now, would you buy it at today's price?  It's the same as keeping it.  That's your answer.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Chris May:
    Originally posted by @Gino Vargas:

    @Robert C.

    I think I would take advantage of the 2/5 year. Married couples 500k profit. Tax free.

    That would be great but unfortunately we're about 4 months short of 2 years.

     boy that's too bad sure would have waited 4 months to move.. although if its a duplex I suspect only half the property qualifies.. 

    500k tax free  in CA is about as good as it gets.  And even in Oregon were I am at.. so this will be my 5 th one … not all 500k gains but significant all the same.. 

    I made the move form Napa valley  and sold out CA and don't regret it.. granted I would have 1 mil in equity now but the 500k made on it at the time tax free propelled me forward just like it will for you in NC

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  • Gino Vargas
    Accountant · Hobe Sound, FL · Member since 2015 · 15 posts · 1 vote
    7y

    Tax planning is very important. 

    0Reply
  • Mike Bolen
    Investor · Napa, CA · Member since 2016 · 97 posts · 62 votes
    7y

    Sell CA property and 1031 the entire amount into a single property, do not split the funds and buy a larger 6 unit or bigger in NC and enjoy the cash flow and stability. As that pays itself off that cash flow could pay for a new place in CA in your retirement years. 

    1Reply
  • Chris May
    OP
    Rental Property Investor · Durham, NC · Member since 2016 · 354 posts · 288 votes
    7y
    Originally posted by @Jay Hinrichs:
    Originally posted by @Chris May:
    Originally posted by @Gino Vargas:

    @Robert C.

    I think I would take advantage of the 2/5 year. Married couples 500k profit. Tax free.

    That would be great but unfortunately we're about 4 months short of 2 years.

     boy that's too bad sure would have waited 4 months to move.. although if its a duplex I suspect only half the property qualifies.. 

    500k tax free  in CA is about as good as it gets.  And even in Oregon were I am at.. so this will be my 5 th one … not all 500k gains but significant all the same.. 

    I made the move form Napa valley  and sold out CA and don't regret it.. granted I would have 1 mil in equity now but the 500k made on it at the time tax free propelled me forward just like it will for you in NC

    I hear you on waiting the extra 4 months. As you mentioned, only half the property would have qualified and we had a pretty unique opportunity in North Carolina that we couldn't really pass up. It made forfeiting that tax exception palatable. We also didn't think we'd ever think about selling, but here we are!

    0Reply
  • Javier D.
    Investor · FL · Member since 2017 · 266 posts · 220 votes
    7y

    @Chris May

    I love your plan. Look at it this way:

    From what I keep reading in this site is the Cali lovers buy properties with negative cashflow for appreciation purposes. You bought low and will sell high. You can always use your Other asset’s cashflow to rent in Ca should you ever move back as planned. You can always buy again and you can always find good deals if you’re patient.

    Or you can buy a safelite auto glass franchise and become a billionaire in SF with all the homeless people breaking into cars. Take your pick.

    2Reply
  • Tanner Marsey
    Rental Property Investor · San Diego, CA · Member since 2017 · 439 posts · 578 votes
    7y

    You bought this property in ca as an investment I assume. If you sell it now.... sounds like it was a good investment for ya. It all depends on your goal. Make the move that aligns most with your future goals. Sell it.

    0Reply
  • Adam SchneiderPro Member
    Lender · Raleigh, NC · Member since 2012 · 957 posts · 639 votes
    7y

    @Chris May -- The good news is that you have good choices to consider. Some people are not that fortunate. You are essentially asking the BP community whether the asset in CA should be held onto because it fits your life plans a decade from now, or whether the asset in CA should be sold because it fits your investing strategy goals today. I'm guessing that you'll primarily have BP folks treat the decision from an investment angle, and the answer is to sell. Having lived in CA, and now living and investing in NC, I appreciate the agony of the decision as CA market values take such gigantic swings and provide currently for little affordable inventory. One other thought would be to look at how things would shake out if you went back to CA in ten years and chose to be a tenant instead of a property owner (way more flexibility). Ten years seems like a long time to hold onto a property just to have an affordable place to live in today's environment when you have so many reasons to sell and operate your REI.

    2Reply
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