Eager to start multiple BRRR process. Should I sell or rent

10 Replies

Hello BP Community,

I am eager to get a new deal and one issue that I am currently looking at is my rental in LA County.

Renters are moving out in Nov and and weighing my options to sell or continue to rent it out.

Currently $100 neg cash flow, but aiming to break even after with new tenants.  (Mortgage-$2800).

Loan balance:  $430,000; Comps on recently sold:  $620-630K.

I've owned the property since 2015, but had to move due to military transfer (rented and non owner occupied Jan 2017-Present).

I was wondering if someone can provide me some insight on what to do, sell or continue to rent.  I am not opposed to looking in other markets, even outside of CA. 

Thank you all!!!

-Mike

@Michael if you're hoping to break even, but have ~$200,000 in equity...I would say sell, and use the equity to invest in a market that will cash flow. If you lived in the property for 2 of the last 5 years you can avoid paying capital gains tax, and if not you could look into a 1031 exchange. I have some buddies in LA I could point you towards if you would like help selling.

Sell. This is no brainer especially if you can meet the 2-5 years rule. You could pay zero capital gains tax. I agree with @David Pere , take that money to another market or find deals when the housing market cools off.  

Promotion
BiggerPockets
The one-stop-shop for REI
Find Local Home Improvement Pros!
Check out our network of trusted, local contractors for all of your home improvement projects.
Find a Contractor

@Michael Encoy,  Yep imagine having $200K in the bank and not getting paid any interest on that money (wait that's the way it usually is:).  Would you accept that?  Sell and if you qualify take the primary residence exemption.  If you don't qualify or if you also want to defer paying the depreciation recapture tax on the roughly $30K of depreciation you've taken, then you can always do a 1031 exchange and defer all.  It's not tax free but at least it's tax deferred indefinitely and going from negative to positive return isn't a bad thing.

Originally posted by @David Pere:

@Michael if you're hoping to break even, but have ~$200,000 in equity...I would say sell, and use the equity to invest in a market that will cash flow. If you lived in the property for 2 of the last 5 years you can avoid paying capital gains tax, and if not you could look into a 1031 exchange. I have some buddies in LA I could point you towards if you would like help selling.

David,

Thank you so much for your input.  Unfortunately we I don't think we meet thie 2 of 5 year rule.  We lived there from Oct 2015-Jan 2017.  However, I'm looking to see if I can be excempt since we moved due to being sent to a new duty station per IRS:

Section B. Determine your non-qualified use gain. Complete this section only if there is a period, after the year 2008, when neither you nor your spouse (or your former spouse) used the property as a main home, and that period of non-use occurred during the 5-year period prior to the date of sale and before the time when you or your spouse (or your former spouse) used the property as a main home.* Otherwise, skip to Section C.
*Note: If the period of non-use was for 1) 2 years or less and due to a change in employment, a health condition, or other "unforeseen circumstance" described in Does Your Home Qualify for a Partial Exclusion of Gain? , earlier; or 2) for 10 years or less and due to a "stop the clock" exception for certain military, intelligence, and Peace Corps personnel described in Service, Intelligence, and Peace Corps Personnel , earlier, then you may skip Section B

If so, a sale might be in my future.  

Thank you,

Mike

Originally posted by @Dave Foster:

@Michael Encoy,  Yep imagine having $200K in the bank and not getting paid any interest on that money (wait that's the way it usually is:).  Would you accept that?  Sell and if you qualify take the primary residence exemption.  If you don't qualify or if you also want to defer paying the depreciation recapture tax on the roughly $30K of depreciation you've taken, then you can always do a 1031 exchange and defer all.  It's not tax free but at least it's tax deferred indefinitely and going from negative to positive return isn't a bad thing.

Dave,

Thank you, sir.  Its a good way to look at it. If I qualify I'll definitely sell.

-Mike

Originally posted by @Jaron Walling:

Sell. This is no brainer especially if you can meet the 2-5 years rule. You could pay zero capital gains tax. I agree with @David Pere , take that money to another market or find deals when the housing market cools off.  

Jaron,

Thank you for your response.  Definitely looking into a more favorable market in terms of value and prospective deals.  

-Mike

@Michael Encoy

Do you ever want to live in the property again? Is there some non-financial reason not to sell? If not, you can sell and have a nice little fund to BRRRR with. Make sure you max out the value on this one first though, treat it like your first BRRRR. It's going to have a great ROI.

Originally posted by @Lee Ripma:

@Michael Encoy

Do you ever want to live in the property again? Is there some non-financial reason not to sell? If not, you can sell and have a nice little fund to BRRRR with. Make sure you max out the value on this one first though, treat it like your first BRRRR. It's going to have a great ROI.

Lee,

Yes. It was an option after retirement from the military.  However, I was just quoted to refi with my current lender:

IRRL NAVY FEDERAL:

30 YEAR:
.5 DISCOUNT POINTS 1 ORIGINATION FEE(PAID AT CLOSING $31,510)
RATE: 3%
MONTLY: $1829.76

3.375 &(NO DISCOUNT ORIGINATION FEE)
RATE: 3.375
MONTLY: $1918.69

VA CASHOUT STANDARD
3.375%

With this new loan, I would be positive in cashflow (about $800/month for a $2800 rent) if I opt for a non-discounted rate.  Less cashflow if I cashed out some funds to add to what i have currently saved ($50K) to work on another deal.  I will also do some shopping with other lenders, of course.  

Thank you, Lee.

  -Mike