Suggestions or Advice Please?

Question

hello everyone!

Currently we have a second house that we use as a rental, purchased 6 years ago for $365K, we currently owe $240K and comps for similar size house for sale are in the area range around $550K in San Diego (where the rental is located).  We are considering purchasing our first apartment complex and would like to know what's the best way to tap into our rental for cash to use as a downpayment for our future apartment unit (looking for 5-10 unit in San Diego).

We would love to keep this rental as this was our first home 6 years ago, but to have the amount need for a downpayment for our apartment complex, we think our only option is to sell our rental since we have some equity in it?

Any suggestion/advice you can give would be greatly appreciated, thank you Forum users!

Mr. DvD

Cody L. · Answer

Hearing about $500k homes renting for $2200/month is going to give me nightmares.   If I saw someone dressed up as that deal for Halloween I'd run away screaming.

De Van Do · Answer

Thank you for all the great advice! My wife and I were pretty much preparing to sell the house as well, but she suggested that it wouldn't hurt to ask just in case we missed something and were making a mistake. We are both really new to all this and just wanted to make sure we are making the right first steps to help us get started in RE. She already looked into all the other financing options (HELOC, refinance, and 1031) and after reviewing all the options we also came to the conclusion of selling it being the best option. It's good to get our decision verified here.

Currently the house is being rented out by family friends (which is why rent was so low) who we have already notified to vacate by next March, so that we can prepare and sell by Spring/Summer next year when the market picks up again. Additionally, we have only 1 year left before we get hit with that 30% tax on capital gains, so we hope that all goes well and we can sell for a good price.

Our next plans are to either invest the gains into a multifamily in San Diego (possibly a fourplex as that's what our money can afford) or apartment complex out of state (Nevada, Texas, or Alabama). We are in the process of researching and educating ourselves during this waiting period (till March) so that we can be prepared as much as possible before taking the next big leap into our first true RE investment. With that being said, any suggestions and advice is truly appreciated.

Dan H. · Answer

If we use your value of $550K, the rent to value is 0.04% which is poor but somewhat to be expected for SFR in San Diego county.  At an 80% LTV this RE investment is cash negative.  To put this in perspective, there are entire markets that use 1% to determine a good investment in safe areas (not in San Diego).  Your property is not even 50% of this.  I would not purchase your house as an RE investment but it could make a good home for someone.

So your return on value relies on appreciation (rent and market appreciation).  This has historically been a successful plan in San Diego county.  However, a small multiplex (duplex to quad) would have a significantly better rent to value (better monthly cash flow) and similar appreciation.  In addition, finding SFR with 0.04% rent to value ratios is not hard.  What I am trying to show is that, regardless of what you think of San Diego as a location for RE investing (and I am mostly positive on San Diego RE investing), there is nothing special about your current home as it comes to an RE investment except for potentially sentimental value; you can easily find a better RE investment in San Diego.

If you decide you want a similar investment in San Diego, after selling your current investment, it should not be hard to obtain.  Of course, you will lose selling costs but there are some lower cost options there.

Good luck

Ellis Hammond · Answer

@De Van Do @Dan Heuschele is the man. Lot of wisdom in the above.

I also own a duplex here in San Diego and it has served as our first home as well but like yourself I am looking to scale our portfolio and to get the most cash for our next purchase. We have decided in the coming months our best option is to sell and use that cash to roll into something bigger.

Also worth noting, the equity you have (myself included) is not going to be enough for a downpayment on 5-10 units here in San Diego. Most banks are wanting 40-45% down for financing here in San Diego or to really stand out in a competitive market one can offer all cash.

Id be happy to talk more about making that transition into larger apartments and ways we can bring value to each other in this process. Reach our directly and I can share my info.

Kevin Fox · Answer

Hey @De Van Do

I would be more than happy to help you crunch the numbers on the various scenarios available to you.

I will shoot you a PM now so that we can chat in greater detail

De Van Do · Answer

@Bruce May thanks!  will remember to ping you when we'er ready!

Bruce May · Answer

@De Van Do my company has a low qualifying rental loan at 75% of appraised value. It might be the ideal way to get into your first multi-family property. Connect with me when you are ready for your loan.

De Van Do · Answer

thank you @Thom MacFarlane for the input!  Something to consider as well..

Thom MacFarlane · Answer

DVD -  Refinancing an rental property you can get a loan up to 75% of appraised value.  Anticipated rate would be between 5.25% & 5.75% for a 30 year fixed depending on points & fees. At a $550,000 valuation . loan of $42,5000, you  would  net less than $190,000 for for your intended multifamly purchase.

In my opinion , a better bet would be to 1031 exchange your rental home . A Mira Mesa home, properly priced, should close inside of 60 days.

Dustin Lauer · Answer

Might be easier to finance if you do not live in one of the units and you just rent where you live.  Might sound counterproductive but where you live is often a liability and home prices may not be increasing as much these days compared to how they have been.  Financing as an investment I would estimate (even though I do not know San Diego well for financing) that you could get up to 75% purchase financing with at least a 1.2 Debt Service Coverage Ratio (which may also be tough in higher priced markets)

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