Should I sell or keep my 2nd home in San Pedro, CA

16 Replies

I bought a house in Point Fermin, San Pedro, CA two years ago as my 2nd home. It's a SFR and around 2500 sf. Now I don't need it anymore. Should I sell or Keep it? If I keep it, should I do long-term rental or airbnb? TIA

@Samantha Chang   We need more information.  How much would it rent for (as either short term or long term rental), what are the mortgage, taxes, insurance and other costs associated with using it as a rental?  If you want to use it as a short term rental, do you have people lined up to do the cleaning and check ins and monitor bookings, plus furnish the house?

@Samantha Chang San Pedro is a great area that's had so much improvement over the last few years - you're in a good position just having bought when you did.  @Theresa Harris is right that we need more information.  First, what are your financial goals?  It sounds like you don't need immediate access to your equity, so you have flexibility, but knowing your goals (cash flow, using the equity in the house to re-invest in other real estate, or just offsetting its costs in the name of gaining more appreciation) will shape our advice.  Knowing a bit about San Pedro I'm assuming you've got a decent amount of equity in the property already.

Re: STR - see what the local regulations are before you go down this path. Is it permitted? If so, what laws do you need to abide by and how onerous are they? If the house is in a non-sketchy area, San Pedro is really close to a lot of desirable destination points (the port, the marina, Rancho Palos Verdes, weddings at Wayfarer Chapel, etc) and I think you would see good demand for it as an STR. You can look into a local property manager or just manage it yourself - you'll need a reliable cleaner/s and handyman, but with online tools like Takl, TaskRabbit, and TurnoverBNB you'll have good places to get started looking for them.

If you don't want to/aren't able to do STR for whatever reason, LTR may be a good solution - I doubt you'd cash flow, but you could largely offset your costs if you have an interest in keeping the property in order to realize future appreciation. You'll also see the tax benefits of having a real estate investment (you would with a STR as well, of course).

When I was living in LA I had my eye on San Pedro as a real up-and-coming area that's undergone a rapid transformation in the last few years; if I'd bought for an investment in LA, that's probably where I would've gone.  Personally, if I didn't have a need to use whatever equity was already in the property and it wasn't cost-prohibitive to keep, I'd hang on to it for awhile longer, as I expect more appreciation will be coming in the next several years.  

Where you are located and whether or not you can/want to self-manage would make a lot of difference. Do you want to be hands-on (STR and even LTR will require more effort on your part) or just rent out the home and not think about it?

Also was the home was bought in cash or do you carry a mortgage? 

I lived a few years near San Pedro and worked there a year. Although the Point Fermin neighborhood is one of the best neighborhoods of San Pedro it is still LAUSD schools. A family who can afford to rent a (2bed? 3 bed?) 2500 sq ft home is probably want to send their kids to PV, Torrance, etc. schools. Also I just did a search for your size homes for rent on Zillow in the Point Fermin area and nothing came up. San Pedro is kind of a far drive from everything with only one way (the 110) out so you would really need to find renters who work in the area.

As others have mentioned, it really depends on your financial goals! Besides the financials, make sure to factor in the opportunity costs of either holding or selling the house. San Pedro is a growing area and the market is at an all time high; if you choose to sell, that’s a large lump sum of cash you can use to invest elsewhere like out of state RE, stocks or bonds (if you’re close to retiring) or do a cash out refinance and rent it. Weight out every possibility and how it aligns with your financial goals. 

Thanks for all the information. My monthly cost for mortgage, insurance, taxes.....are less than $2800. I think I can rent it for $3300-$3500 per month(not quite sure). There won’t be too much cash flow but it’s okay for me. I want to know if it’s worth to keep this property in Pedro. I think if I sell it now I can make $100,000 before taxes. The house has 3 bedrooms and 3 baths with nice ocean/harbor views. Lot is small though. Only 2500 sq. 

Originally posted by @Samantha Chang :

Thanks for all the information. My monthly cost for mortgage, insurance, taxes.....are less than $2800. I think I can rent it for $3300-$3500 per month(not quite sure). There won’t be too much cash flow but it’s okay for me. I want to know if it’s worth to keep this property in Pedro. I think if I sell it now I can make $100,000 before taxes. The house has 3 bedrooms and 3 baths with nice ocean/harbor views. Lot is small though. Only 2500 sq. 

Based solely on these numbers, it would be better in my opinion to sell and use that $100k profit to reinvest in another high yield investment (many choices there). With ~$2800 in hard costs and $3500 rent max, you still have repairs, maintenance, vacancies, legal, accounting, property management (even if you self manage, you still need to pay yourself for that as it takes time). If you have $100k in equity already (after resale costs), then you can do a lot more with that than some tiny cash flow.

On the other side of the coin, you should find out how much expected appreciation this home may have as well (no way to know for sure but law of averages for area can help) as this could be a good payday down the road if you add it to the small cash flow years down the road.

 

Also, if you can prove you lived there for 2 of the previous 5 years, you can have a nice tax exemption of $250k if you are single, $500k if married and avoid any cap gains on your $100k profit making the argument for selling even higher (based only on the info you provided thus far).

@Samantha Chang with the market booming in the southbay I would consider selling it or pulling out the equity and investing the cash in more popular areas that area fast growing, like Long Beach, Lakewood, or Bellflower. From a rental perspective these home are tend to have a better occupancy rate and they are appreciating at +6% a year. The cost are about $100k more on market but off market you can find some deals around $450k that comp out at $650+. I think it is worth exploring weather you keep it and do a Heloc or sell.

If you were you, I would hire a broker to look at a couple of reinvestment options, ask the broker to build a simplified spreadsheet model to compare the returns of the three investments (the two new one and the existing). Besides the money, you might also want to consider other valuable things associated with the investments: time, happiness/proud, risks(uncertainty of each of these three deals), etc.. Finally I agree with people here that San Pedro is a dynamic area. Congrats!

@Samantha Chang It really depends on your goals and how much time you are willing to allocate. Will brought up an excellent point about the tax exemption. If you qualify for that, that would push me more towards selling the house while you have the tax exemption still. I agree that there are many other investments out there that will yield you more return with much less effort.

If your goal is to get even deeper into real estate, then another option is to sell the property and purchase a multifamily property. Being in Southern California, the returns will be less than stellar and it would be time consuming. The new California Rent Control Laws will make it more difficult too. But you would gain landlord experience to help you grow your real estate portfolio.

Absolute best area for short and long term investment if you have enough

capital is San Pedro. Last affordable coastal property in Los Angeles.

over 1Billion dollars worth of construction in or around the water front

is set to begin or be completed in 2020-22. Property that is 500K now

will double in 5 years or less. Urbanize LA Articles on San Pedro

@Samantha Chang It really depends on how much equity you have, your age, and what your future financial goals are. How much is your mortgage payment? I can give you idea of what the rent would be. Reach out to me if needed. 

@Samantha Chang Instead of saying what you should do. I am gonna offer what I would do in your situation lol if you dont mind.

It depends on your attached/detached garage. I would turn them into ADU/JADU. Let's say one-bed studio rent for $1400. 2-bed rent for $2000. and 3-bed rent for $3000. Cash flowing at $6400/month. Mortgage plus your maintenance and repair lets say 2800+300. You are looking at $3,300 in cash flow. Now depending on the situation and what you want to do...I would use the surplus toward the mortgage itself. To pay off the house asap. Then go after a HELOC while looking for another place to repeat the same. Btw you don't get tax if you cash-out refi or HELOC your house.

This is one way of looking at it, really depends on people's tolerance with being a landlord and what they want to do with their money. After all my experience, I have learned that I don't want to sell any assets I own and I repositioning my strategy toward keeping everything

Suggestions to explore building an ADU above would definitely be worth looking into. I love the San Pedro market and believe it will continue to grow in demand as the waterfront development is finished. I would explore the possibility of adding an ADU and holding out for increased equity/cashflow. I sold my sister a duplex in San Pedro a few years ago and she has had massive appreciation, and we have seen the area improving. Making $100k would be great, but to be totally honest if your not taking that money to a different market then it's probably not worth it. You would need $100k to buy a $500k property, multi's in San Pedro are averaging $580-600k right now. Don't sell without a plan, explore all options, and good luck. @Will Barnard had good tax advice above, also if you do not qualify for the owner occupant exemption a 1031 exchange may be an option.

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