Sell or Keep primary home as rental

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Sell or Keep primary home as rental

Greg Spencer
Member since 2024 · 4 posts · 3 votes

Hey there,

I'm finding it difficult to keep my primary as a rental and purchase a new home.

I live in Santa Rosa, CA with my wife and son and we are looking for our next home with some more space.

Here is the breakdown for our current home.

Purchased date: 04/2020

3 bed, 3 bath

Purchase Price: $515,000

Amount on mortgage: $430,000

Current Value: $775,000 (based on 10 comps in sold in past 3 mos)

PITI: $2,800

Potential Rent: $3,500

HELOC: $190,000 (haven't touched yet)

Budget for new mortgage payment per month: $4,500

Houses we are looking to purchase are around $750,000+ in our area with a decent sized yard. I'm also looking at house hacking but its tricky at this price point. My next best alternative is Live In Flip which can be done but the issue I'm running into is how to afford both houses.

We have around $25,000 on hand plus I can pull out around $40,000 from my 401K loan. The cash on hand we are thinking of putting into a new roof since its needs one. So that leaves the 401K loan as the down payment but nothing left over for a rehab on the new home. I could use the HELOC for the rehab but the rate is 8.5% and would put us over our budget per month.

What would you do? Sell home and use tax free cash to purchase new primary plus a rental unit? Keep primary and try to make payments work for new home? Other ideas? I may have left out some other info but please ask away.

Thanks in advance!

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Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
1y

honestly with that much equity in it, I'd sell.  The amount you'd have to pay in capital gains after renting it for 5 years (and selling it down the road), won't be captured through rent.

You could look to buy a multifamily and live in it for a bit.  The rent from the other units should allow your to live for a lot less than you currently are. Save that money and buy a house a few years down the road.

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  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    1y

    @Greg Spencer The best use for the HELOC is to renovate something, add value, and refinance out of the HELOC. You could use it out of spite (DP or something) since you already paid closing costs to open it, but at 8.5% that really hurts.

    Based on the massive appreciation during the post COVID boom, and primary resident capital gains exclusion I'd sell. This property served you well and appreciated faster than anytime in recent history. Take the win. Leveraging the HELOC can be useful but you need to buy right. If you buy wrong (at market value) you're robbing Peter to pay Paul when you sell the current primary closing/paying off the HELOC. It just eats into what you receive at closing. Buy the next property below market value so you can house-hack, live-in flip, or do a combination if the wife to agrees with it. With family that's tricky, but it forces the needle in your direction. 

    1Reply
    • Greg Spencer
      OP
      Member since 2024 · 4 posts · 3 votes
      1y
      Quote from @Jaron Walling:

      @Greg Spencer The best use for the HELOC is to renovate something, add value, and refinance out of the HELOC. You could use it out of spite (DP or something) since you already paid closing costs to open it, but at 8.5% that really hurts.

      Based on the massive appreciation during the post COVID boom, and primary resident capital gains exclusion I'd sell. This property served you well and appreciated faster than anytime in recent history. Take the win. Leveraging the HELOC can be useful but you need to buy right. If you buy wrong (at market value) you're robbing Peter to pay Paul when you sell the current primary closing/paying off the HELOC. It just eats into what you receive at closing. Buy the next property below market value so you can house-hack, live-in flip, or do a combination if the wife to agrees with it. With family that's tricky, but it forces the needle in your direction. 


      I agree. The HELOC seems sketchy and could be stressful if something doesn't go as planned which is almost certain when fixing up a house. This property has served us well and was a good training ground for renovations, renting rooms and the general homeownership. You're right, I need the wife on board for house hacking which didn't go so well renting out rooms in our current house. Looking for more privacy in the next one. Thanks for your comment!

      1Reply
  • Samuel Cohen
    Santa Rosa, CA · Member since 2021 · 7 posts · 5 votes
    1y

    Hello, Local Realtor Sam Cohen here in Santa Rosa, CA! I would take advantage of the tax fee profit via a sale now and then purchase a 2-4 Unit Property House Hack or a SFH with ADU situation. Theres a 4Plex hitting the market soon in Bennett Valley under $1.2M you can use 75% of the expected rental income for 3 of those units to allow you to qualify at a higher purchase price. You can put down as little as 5% down on a conventional mortgage for the entire 4plex. If you want to talk strategy please reach out. I am an investor friendly agent and I invest in real estate myself so I can guide you through the process to maximize your financial buying power.

    2Reply
    • Greg Spencer
      OP
      Member since 2024 · 4 posts · 3 votes
      1y
      Quote from @Samuel Cohen:

      Hello, Local Realtor Sam Cohen here in Santa Rosa, CA! I would take advantage of the tax fee profit via a sale now and then purchase a 2-4 Unit Property House Hack or a SFH with ADU situation. Theres a 4Plex hitting the market soon in Bennett Valley under $1.2M you can use 75% of the expected rental income for 3 of those units to allow you to qualify at a higher purchase price. You can put down as little as 5% down on a conventional mortgage for the entire 4plex. If you want to talk strategy please reach out. I am an investor friendly agent and I invest in real estate myself so I can guide you through the process to maximize your financial buying power.


       I would be interested in hearing a little more about that 4plex. 

      0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    1y

    honestly with that much equity in it, I'd sell.  The amount you'd have to pay in capital gains after renting it for 5 years (and selling it down the road), won't be captured through rent.

    You could look to buy a multifamily and live in it for a bit.  The rent from the other units should allow your to live for a lot less than you currently are. Save that money and buy a house a few years down the road.

    3Reply
    • Greg Spencer
      OP
      Member since 2024 · 4 posts · 3 votes
      1y
      Quote from @Theresa Harris:

      honestly with that much equity in it, I'd sell.  The amount you'd have to pay in capital gains after renting it for 5 years (and selling it down the road), won't be captured through rent.

      You could look to buy a multifamily and live in it for a bit.  The rent from the other units should allow your to live for a lot less than you currently are. Save that money and buy a house a few years down the road.


       Yes, I agree selling down the road I would be more costly than just selling now and avoiding capital gains. I hear a lot of people saying to hold on as long as you can but I feel my situation is a little different based on the equity built over the past 5 years. Thanks for posting!

      0Reply
    • Theresa HarrisPro Member
      Member since 2019 · 15k+ posts · 11k+ votes
      1y
      Quote from @Greg Spencer:
      Quote from @Theresa Harris:

      honestly with that much equity in it, I'd sell.  The amount you'd have to pay in capital gains after renting it for 5 years (and selling it down the road), won't be captured through rent.

      You could look to buy a multifamily and live in it for a bit.  The rent from the other units should allow your to live for a lot less than you currently are. Save that money and buy a house a few years down the road.


       Yes, I agree selling down the road I would be more costly than just selling now and avoiding capital gains. I hear a lot of people saying to hold on as long as you can but I feel my situation is a little different based on the equity built over the past 5 years. Thanks for posting!


       I think if you have a little bit of equity in the home, then keeping it as a rental is the way to go.  For your situation though, as you said, you have a lot of equity in it and given you need some of the money to buy your new home, selling is a better option.

      I have rentals where the prices have gone up a lot, but they were bought as rentals and therefore it is different. Plus if I was to sell, I'd have to buy in a different area to get further ahead (single family homes in that area start at $600K-vs $225K when I bought them)-and no way with today's interest rates, could I do a 20% down payment on that and come close to covering my costs. (I'm in Canada and our mortgages work differently than in the US.)

      0Reply
  • Aaron ZimmermanBusiness Member
    Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
    1y

    I would sell. Roll that equity into the next property and since it's your primary, you can exclude up to $500k in gain if married. 

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  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    1y

    @Greg Spencer Exactly man. Unless you have more renovation experience I'd forget the HELOC. Besides, it's not costing you any money. I'd look for a value-add, house-hack, or live-flip type opportunity, and sell the current primary. You're making sacrifices and stepping up the ladder. It's not a dream home purchase.

    Before my wife and I got married I was constantly doing live-in flips. Instead of renting my old house (3% rate, would have good CF) we sold it and took advantage of everything mentioned above. It was a fun stepping stone. 

    0Reply
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