Strong CA equity, what would you do?

Question

Hey Everyone,

Curious to know what you would do in our scenario. I love hearing the different approaches and the beauty is there is no perfect answer.

We own a SFH in Bay Area with around $600,000 in equity (principal residence, 2.5% rate). Selling another property for another $85,000 equity. We are considering selling everything and accelerating the portfolio expansion by simply renting and forgoing a principal residence, putting everything toward new deals. I'm less concerned about what to do after, given the variety of investing options but given CA rents don't cash flow without creativity, I'm curious if you would do something differently. Thanks all.

Brad S. · Answer

Well, one of my concerns would be giving up the secure homebase for the unknown circumstance of becoming a tenant, and giving up the security of knowing how much your monthly housing expenses will be, control of where you live, how you live, what you can and can't do with your rental home, etc.

Are you planning on renting in the same area, or moving to a different state or less expensive area? How much are you projecting rent to be? I would put those #'s into the equation, and then look at the #'s and plans and see how they relate to your overall goals and potential returns on what you would do with the cash you would get from the sale.

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Let's look at your current housing expenses.

Mortgage - $3,418

Taxes - $1,210

Insurance - $150 (estimated)

Total piti = $4,778

Your monthly principal paydown is around $1650 (and will keep going up slightly over time) So, your effective monthly housing expense (not including utilities or future tax/insurance increases) is $3,128/month ($4,778-$1,650)

I would look at the potential of building an ADU and possibly a JADU on your property, to help lower your housing expense. If you build an 800sf ADU at around $240k, you may be able to get around $2,500/mth for it. $240k loan (or heloc) may be around $1,600/mth, estimated at 7% rate (I don't know what heloc rates are now).

Then, your net housing expense would go to around $2,228 ($3,128 - $900 from ADU) and if you can do a JADU, your expenses would go down even further. And if you look at the potential ADU cost, that is around the 1% rule ($240k cost for $2,500/mth).

Alot depends on what your plans are, where you would move, how much rent would be, what you would do with your cash if you sold, etc?

Joseph P Finkelstein · Answer

If I were going to move everything, I would try and start renting now both for your own property and your personal living. If you do that for 2 yrs then you can qualify the property as an income property and do a 1031 exchange.

It's a bit slow, but you have great debt on the property and the extra equity over time would give you a nice chunk of cash that you could then plug into the 5+ (or comercially financed) multifamily space.

What makes the 5+ space great is the loans require you to cashflow by default, and propertys trade more on a metric basis. That means if you are able to find a situation where you can improve the building and raise rents, you have a mores stable idea of what valuation might be. Then sit, wait, collect, 1031 rinse  and repeat.

Nathan R Andersen · Answer

We did have a similar scenario in our house in California that we purchased for $250k 6 years ago that is now worth $500k (much more but a well and solar in the desert is apparently worth nothing to an appraiser -_-) We got a HELOC on our residence for $180k and have used that to purchase two multi family homes. The multis cashflow roughly $500/mo each, and we have additional HELOC money to fix anything needed and just plan to use the maintenance, vacancy, and profits to pay back the HELOC (hopefully in 3 years) and plan to BRRRR a property with the remaining capital once we find a deal that works. All of this is out of state btw.

I'd get a HELOC on that property and use the capital to purchase something with a decent enough cashflow to pay back the HELOC. I would also buy another primary residence if you sell, use that low down payment to get something that will appreciate, and then buy other things or just simply house hack or move every year and continue purchasing for small down payments and rent it out when you leave.

All this is based on zero knowledge of your situation.

Davis Pemstein · Answer

Thanks @Nathan R Andersen. The obvious other choice is to tap into equity and go for BRRRR-like method repeatedly. $500 is a tall order to find, true net in this market, for quality neighborhoods.

The low down payment or even 20% down figures don't work with Bay Area rents. That's part of the motivation to move. It doesn't pencil. We'd be out of pocket for yearly R&M and then really under for CapEx costs when they show up.

I'm definitely concerned about leaving a 2.5% rate behind, which is my biggest mental snag. I'd love to keep it forever but then we're negative cash flow each month, plus the HELOC costs. But all good suggestions and appreciate the response.

Dan H. · Answer

Curious what market do you feel has similar appreciation as the Bay Area?   In my opinion (and core logic’s numbers) there is no market with similar appreciation.  core logic shows San Francisco is top appreciation market since 1990, since 2000, and since 2010.  That is quite the trifecta.

Simon Ashbaugh · Answer

Sell and build a massive, cash-flowing, appreciating, portfolio in Ohio!

Davis Pemstein · Answer

I’m not aware of the numbers but I would have to agree that Bay Area is tops for appreciation. But the point I’m trying to confirm is appreciation is only appreciation if you use it. Thus we’re realizing it and rolling into forced appreciation projects. These are all great perspectives!

Davis Pemstein · Answer

Great responses @Brad Sand and @Becca F.. If there was ADU specific financing, that might be attractive (none that I'm aware of?). Perhaps a lot split with SB9 could work as well. My thought is this; let's say I do exactly what you're proposing. I have 1 or 2 units on my lot now both being rented, little bit of cash flow (consider how expensive R&M is here in Bay Area, 1964 build). It's a poor CoC deal and you're hoping for appreciation in the 2-5 year window. We can save a little each month to buy something in the midwest but it's at a snails pace.

We would rent in the same area, around ~$5k. That's the minimum going rate for families. The plan is to take $400-500K and purchase R-2 lots to build 5-10 units. Projected CoC is 30-50% pending how you structure the debt, reno costs, etc. This would be in CA.

You could do this one or two at a time out of state, utilizing HELOC but aggregate cash flow for certain cheaper markets, say midwest, is so small, the scale just doesn't make sense to me. We're talking $6-8K net in CA.

While I can agree with everyone that keeping a prized bay area property has grandeur, the opportunity costs, to me, appear very high.

Becca F. · Answer

@Davis Pemstein

I kept the SFH in the Bay Area (owned free and clear with low property taxes), took out an equity line for renovations, and am renting it for market rate now. I sought advice from numerous people and over 80% said keep it.  There's absolutely no way I'd ever get another house like that in the Bay Area if I had sold it. I sold another Bay Area property and am on hold with purchasing anything now, just researching areas and seeing what my financing options are.

I plan on leveraging more equity out of that house and buying out-of-state, mostly likely Midwest, but considering Florida (Panhandle area) and Tennessee. I have a SFH rental in Indiana which cash flows nicely, not great but I bought it for less than the price of a high end Tesla at a low interest rate so it was a good purchase for me.

When you said you're thinking of renting, are you moving out of state?

Remington Lyman · Answer

I plan on holding all the properties I bought with 30-year fix rate notes at low-interest rates. I am just going to snowball them and buy more later. It is more of a slow and steady approach

Strong CA equity, what would you do?

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