Rent or Sell - huge mortgage or upgrade in Bay area?

12 Replies

Hi BiggerPocketers:

Howdy all? Here is my situation.

Current primary home (A) has 440K loan at only 3.6% 30 year loan. The property shows a zestimate of 1.5m though for all practical purpose it will probably go for 1.3m. It is in Santa Clara very well located and close to many tech employees , so its somewhat easy to get good tenants or rent out. We probably can get around 4K in rent per month and that should give about 700$ of positive cash flow.

Now we want to buy a new home (B) in Milpitas since we want a bigger home and better school. But this new property is 1.7m and taking a loan of 1.2m brings the monthly payment (mortgage + insurance + tax) to a whooping 7.7k. Now both of us are working so we might just be able to make it and take care of other expenses but our monthly savings will plummet. 

The question I am wrestling with and I am literally out of my mind thinking about it - shall I rent the current home (A) and hope that the property appreciation will make up for the lost savings and more (build a asset and income stream over time)  or should I sell it (A) and invest the proceeds in (B) and bring down the monthly expense. 

Any insight or advice will be much appreciated. 

Our family is bi coastal, and have properties in NYC and San Francisco. Appreciation is tremendous, in these crazy markets, The only problem is I foresee a real estate correction coming. Here in NYC we had one that started in 1986, with the bottom in 1993. Then another one briefly in 2006-2008. My home that I bought in foreclosure in 1993 for $200K is currently $1.3 million. So the last peak was a dozen years ago, and historically we're due for another.

If I were you, I would sell your current home tax free. The tax bill that passed this year limits home mortgage deductibility will have a negative effect for states like NY and CA with high real estate prices, and high real estate taxes. How much or how soon, we'll have to see. I'm OK as my home mortgage and rental mortgages are paid off.

I started real estate investing in rentals in 1983, and the markets fortunately peaked in 1986, following a dozen years of dizzying rise. The main blame for triggering that crash was laid to Reagan's tax plans. I'm not investing, retired, but if I were, I would keep my powder dry for now.

The other danger is relying on 2 high paying W2 jobs. When we started RE investing, the strategy is that we can live on one salary if it came to that. The excess we save and if we have vacancy or repairs, we got cash to handle. Being in NYC, we tried that for a short while, gave up both our cars, and I remember taking cabs to rentals when I had to lug things over to work on things.

You would be speculating entirely on appreciation not "investing" in a rental income property. This property if held will have negative cash flow requiring you to supplement your tenants rent monthly due to long term expenses. That is a given in your market.

No problem in speculating, provided real estate market does not adjust down but expecting positive cash flow on this property is a joke.

The opportunity value of your equity (10%) alone is costing you 8K per month in lost income. This property will cost you at minimum 50K per year to hold on to.

If you are not interested in investing your equity none of this matters as long as you can afford to supplement your tenants rent. Provided markets do not adjust some day you may actually benefit from holding, or worse case, your kids may sell it and live the good life. 

Originally posted by @Thomas S. :

You would be speculating entirely on appreciation not "investing" in a rental income property. This property if held will have negative cash flow requiring you to supplement your tenants rent monthly due to long term expenses. That is a given in your market.

No problem in speculating, provided real estate market does not adjust down but expecting positive cash flow on this property is a joke.

The opportunity value of your equity (10%) alone is costing you 8K per month in lost income. This property will cost you at minimum 50K per year to hold on to.

If you are not interested in investing your equity none of this matters as long as you can afford to supplement your tenants rent. Provided markets do not adjust some day you may actually benefit from holding, or worse case, your kids may sell it and live the good life. 

Agreed, that's the other big issue, cash flow, which OP realizes. Problem is rental would be on he high end and re renting quickly would be an issue in IMHO. Renter's in that dollar range tend to be fussy besides. Being a SFH, if you don't get an occupant within 60 days, property insurance would be an issue unlike a duplex.

Originally posted by @Thomas S. :

You would be speculating entirely on appreciation not "investing" in a rental income property. This property if held will have negative cash flow requiring you to supplement your tenants rent monthly due to long term expenses. That is a given in your market.

No problem in speculating, provided real estate market does not adjust down but expecting positive cash flow on this property is a joke.

The opportunity value of your equity (10%) alone is costing you 8K per month in lost income. This property will cost you at minimum 50K per year to hold on to.

If you are not interested in investing your equity none of this matters as long as you can afford to supplement your tenants rent. Provided markets do not adjust some day you may actually benefit from holding, or worse case, your kids may sell it and live the good life. 

Thanks for your reply. Sorry but when you say there is no positive tax flow can you elaborate it? Our current mortgage + interest + tax is 3K in this house and I can rent it for 4K. Even with some repairs and 3% standard vacancy rates my calculation was around $700 positive cash flow per month.

Also we are doing 30% downpayment in the new property so 8K pm (MIT) is the opportunity  cost for 30% equity and not 10% ,correct? 

Originally posted by @Frank Chin :

Our family is bi coastal, and have properties in NYC and San Francisco. Appreciation is tremendous, in these crazy markets, The only problem is I foresee a real estate correction coming. Here in NYC we had one that started in 1986, with the bottom in 1993. Then another one briefly in 2006-2008. My home that I bought in foreclosure in 1993 for $200K is currently $1.3 million. So the last peak was a dozen years ago, and historically we're due for another.

If I were you, I would sell your current home tax free. The tax bill that passed this year limits home mortgage deductibility will have a negative effect for states like NY and CA with high real estate prices, and high real estate taxes. How much or how soon, we'll have to see. I'm OK as my home mortgage and rental mortgages are paid off.

I started real estate investing in rentals in 1983, and the markets fortunately peaked in 1986, following a dozen years of dizzying rise. The main blame for triggering that crash was laid to Reagan's tax plans. I'm not investing, retired, but if I were, I would keep my powder dry for now.

The other danger is relying on 2 high paying W2 jobs. When we started RE investing, the strategy is that we can live on one salary if it came to that. The excess we save and if we have vacancy or repairs, we got cash to handle. Being in NYC, we tried that for a short while, gave up both our cars, and I remember taking cabs to rentals when I had to lug things over to work on things.

But if you foresee a crash in real estate market isn’t it better to keep the equity in two different properties instead of putting them all in the new property? 

Originally posted by @Andy Bills :
Originally posted by @Frank Chin:

Our family is bi coastal, and have properties in NYC and San Francisco. Appreciation is tremendous, in these crazy markets, The only problem is I foresee a real estate correction coming. Here in NYC we had one that started in 1986, with the bottom in 1993. Then another one briefly in 2006-2008. My home that I bought in foreclosure in 1993 for $200K is currently $1.3 million. So the last peak was a dozen years ago, and historically we're due for another.

If I were you, I would sell your current home tax free. The tax bill that passed this year limits home mortgage deductibility will have a negative effect for states like NY and CA with high real estate prices, and high real estate taxes. How much or how soon, we'll have to see. I'm OK as my home mortgage and rental mortgages are paid off.

I started real estate investing in rentals in 1983, and the markets fortunately peaked in 1986, following a dozen years of dizzying rise. The main blame for triggering that crash was laid to Reagan's tax plans. I'm not investing, retired, but if I were, I would keep my powder dry for now.

The other danger is relying on 2 high paying W2 jobs. When we started RE investing, the strategy is that we can live on one salary if it came to that. The excess we save and if we have vacancy or repairs, we got cash to handle. Being in NYC, we tried that for a short while, gave up both our cars, and I remember taking cabs to rentals when I had to lug things over to work on things.

But if you foresee a crash in real estate market isn’t it better to keep the equity in two different properties instead of putting them all in the new property? 

I went through two real estate crashes, one in 1986, the other in 2006. Personally, I'm a little leery of renting SFR for 4K, as you need renters with at least $150K in income to qualify. In bad times, renters like these are hard to find. People with income like these would sooner buy a home than rent.

In my case, if I believe a crash is coming I would conserve my cash, and invest in areas with better cash flow. Now, you can sell your home capital gains tax free, and put every thing into your new home. 

Right now, I have a SFR I rent out, that command market rents of $2,500, that I rent to families with $100,000 income or better. I gave up renting to roommates, 2 or 3 would easily qualify in your case, but it's very unstable. For you to get that type of rent, you'll wind up renting to professional roommates, and it's hit or miss, and so far for me, mostly miss.

Keep it. It cash flows now. You have a low prop 13 protected tax base. You have a super low 30 yr fixed rate. Santa Clara is prime blue chip real estate. Yes we are at value highs now, and may even dip a bit in next 2-4 years. But I doubt it will even be a 10% reduction, and what do you care, you’re cash flowing. I bet you that 10 years from now you’ll be glad you kept it. Ask almost  anybody who sold their home on the peninsula or SF if they don’t regret it years later. And when you retire, bango, you are debt free and have a sh*t ton of equity, and a significant cash flow. I’d take that over a subject-to-market-whims 401k/retirement savings plan anytime. 

Another possible strategy that lowers the risk but also lowers the rewards is to keep your existing property and rent a house in Milpitas. You can rent or lease  a really nice big house in Milpitas for about $4.4k e.g.

https://sfbay.craigslist.org/sby/apa/d/large-execu...

If the economy really tanks you can move out your Santa Clara tenants and return there. Otherwise your monthly outflow is a more modest $3.7k net and you will still get any market appreciation on the Santa Clara house. Meanwhile you can invest the $500k downpayment in cheaper markets.

And yet another option would be to try to get a lease option deal on a Milpitas house that locks in a purchase price for say 5 years, by which time it may be a no-brainer to purchase if the market has appreciated, but if the market goes south you can treat it like a rental and walk away or renegotiate the deal (lower price).

@Andy Bills

Andy I felt I was reading my story :) We have a home in Santa Clara, have a $500K loan left on it for 3.5%, we just rented it out for $4300 & bought a SFH in Milpitas for better schools (I have 2 girls)

The way I look at it, we would never be able to buy a property for such a low price & at such a low interest so why sell it? and someone else is helping us paydown the mortgage for the Santa Clara home

We ended up buying a home with a huge lot size in Milpitas (12K) and now I am looking to add value to the plot by adding an ADU & expanding rooms & generating some rental income.

I know the market is high but I feel if you buy a property where you can add value it would be well worth it even in this market. 

@Andy Bills if you want to move ahead with your rental, there are certain number of issues you'll face.

1. Aside from the looming economic correction, if you sell it in the future, depending on when, you'll be liable to capital gains tax. Currently you don't, by the time you realize the property does not make a good rental, it may be too late.

2. How friendly is the area to tenants? The town I had an SFR rental, people don't care for absentee landlord or their tenants, said so to my face, and call the town on various issues, such as if the lawns are not mowed. They weren't mean, but that's how they feel. I used to have tenants mow, got too many complaints, now I have a landscaper do the mowing.

3. How friendly is the town to roommates. In the area where I have my SFR rental, laws restricts 3 or more unrelated people from renting a property. This is to prevent the proliferation of rooming houses as rents are so expensive that 3 or 4 people would have to share the rent. I mentioned earlier that you'll need a combined income to $150K a year to qualify for $4,000/month rent. Usually 3 or 4 roommates will rent under the radar till an unfriendly neighbor turns you in.

4. I have rented to up to 3 roommates, and the constant changes, due to arguments, job changes etc. always resulted in problems. One rental was over run with roaches at one point, to the extend when I had an exterminated came, he lifted a rubber mat by the sink, almost 50 roaches ran for cover. The tenants were there, I asked how it happened. The answer was the place wasn't cleaned for 4 - 5 months because the roommates had an argument over whose turn it was to clean. 

5. Had water bills billed to tenants little realizing when don't pay it, the tenant and town doesn't notify you. They add to my property tax bill with fines and penalties months later, and by then, the tenants moved out of state.

So my analysis is your better off get something where the rents run cheaper, less than $4,000/month. In other words, a rental type property. Your holding on to it because you feel you have a good interest rate on the mortgage. Here I rent out 2BR's for $1,500 to $1,700, and a SFR for about $2,500 and I avoid many of the issues mentioned. It's priced more for the middle income folks. Tenants don't need $150K a year income to qualify.

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