Santa Clara, CA · Member since 2016 · 5 posts · 1 vote
Hi All,
I have a condo in Silicon Valley (Sunnyvale) that we converted from a primary residence 2 years ago. The 2-out-of-5 years window for tax purposes is coming up, and we are trying to figure out what to do next.
I bought it ~10 years ago for $625K and it's ~$900-925K right now. We rent it out for $3400/month and profit $500/month. The property is walking distance from the new Apple campus and very easy to manage.
Whether or not we hold onto this property, we would like to invest in real estate.
It seems like our options are
Sell the property to avoid taxes, then look for new investment property
Hold onto the property. Hope prices continue to go up, do a 1031 exchange later. However, it seems it would have to appreciate a lot to make up for taxes. That said, prices are skyrocketing. If we did keep the property, we have also considered taking out a HELOC to invest in other property (not Bay Area).
Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
10y
Karen,
You bought at almost the absolute worst time, and you still got about $300k in appreciation in 10 years. Amazing isn't it? Bay Area real estate is quite forgiving over the long run if you can ride out the storm.
Assuming you put 20% down, that's about $2,500/mo in appreciation or 24% ROI annually. Do you see how $500/mo in cash-flow is not significant compared to the appreciation?
If you hold onto this place for another 10 years, there's a decent chance it'll worth $1.4M and rent is about $4,900/mo by then. That's about $4k/mo worth of appreciation and an additional $1,500/mo of cash-flow. If history is any indication of course. I have no crystal ball.
It's definitely not an easy decision. My stance is neutral in this case. If it weren't for the $250k (single)/$500k (married) tax-free exemption, I'd vote to keep it. Regardless of what decision you make, I hope it's the right one.
Investor · San Mateo, CA · Member since 2015 · 43 posts · 24 votes
10y
Hey Karen,
I live in that area as well. Sounds like the place will do well for you no matter which way you decide to go. I'm pretty inexperienced, but the way I view it is below. Would love more experienced folks' opinions as well.
Holding: 6k of profit each year, equity gain, and the possibility of appreciation with the completion of the campus. You of course open yourself up to the risk that Apple (or the general tech economy) deflates or heads into a downturn.
Selling: Cash money! My question here is where would your next investment property be? If it's in the same area then other properties will have appreciated as well. You also mention here that you could HELOC (or maybe refi) to invest elsewhere which also sounds viable. For 1031 I think you run into the same issue as selling with additional time constraints that the 1031 impose.
Real Estate Broker · Ben Lomond, CA · Member since 2014 · 62 posts · 47 votes
10y
Hey Karen,
I am an investor and local Realtor in Silicon Valley/Santa Cruz and as a Realtor I can say that the Sunnyvale area is hot BECAUSE of the Apple Campus along with good schools and a well run city. I would suggest you think of the idea of selling this way... With the profits from the sale can you reinvest those profits into even better returns for your dollars invested? If you think you can sell. If you keep the Condo, you can refinance out some equity to invest while holding it for cash flow. Have you run your numbers? $500/month pre-tax profits ($6000 year) divided by the $625,000 purchase price is only .01% return on your money. Just some thoughts.
Investor · Saratoga, CA · Member since 2015 · 21 posts · 4 votes
10y
I am an investor as well as a local Realtor. My thoughts are if you want investment - you can expect return in two ways
1) Appreciation - for which historically, CA has been good (even through an up and down cycle)
2) Cash Flow - CA is not cashflow friendly without risk - by which I mean that you have to put a low down, take a mortgage, and then from the rent deduct all expenses to get return on your downpayment. The risk here is if you get into any trouble (like a job loss or a downturn in economy), you will risk having a mortgage.
Keep these two factors in mind before selling or holding. There are some good areas - a little farther from Silicon Valley that also produce good cash flow and may appreciate in the long run. Roseville, CA is pretty hot now - with good schools.
Real Estate Agent · Lincoln, CA · Member since 2014 · 225 posts · 43 votes
10y
roseville is cooling off a bit for the seasonal slow down, so some opportunities may arise over winter. That being said, roseville is right around 0 cash flow for the most part. Even with 20% down the rent will cover piti (or sometimes just under) & thats it, for 90% of the rentals out there. If you want more risk, with a higher chance of sub-par tenants, you can get houses in older, less desirable areas in & around roseville. If you used to live in your rental, at least get closer to the 2 of last 5, so you can avoid cap gains. If you are making $500/mon, maybe keep it. However, maybe try a refi, take some cash out & invest that cash elsewhere? That cash is stuck in the equity, so what is your % return on that equity? I guess you are thinking about it in option 2. (300k & you make $500/mon? Thats not good) a 300kgood house in roseville wilrent right around 1400 +/- 100. Antelope is cheaper & also good rents (but less desirable area & hence tenants). I did see some halfplexes a while back in rocklin that made sense
Investor · Arroyo Grande, CA · Member since 2016 · 16 posts · 1 vote
10y
With the $300k you could cash out either thru sale or HELOC you could go out of state and buy 10 properties at least that would cash flow $200-300 a month minimum. I say cash out your equity.
Residential Real Estate Broker · Novato, CA · Member since 2016 · 1 post · 0 votes
10y
Hi Karen, You can sell within the next year and take advantage of both tax breaks: the 250k (500k if you're married filing joint) gain exclusion along with the tax deferral provisions of 1031. You could therefore pull significant cash out tax free and exchange the rest into 1031 replacement property. Tax law specifically allows for this "combo" treatment.
Professional · San Francisco, CA · Member since 2014 · 876 posts · 301 votes
10y
Hi @Karen Y. Silicon Valley can be a fantastic place to invest if you have the capital and you must be prepared for your investment being entirely correlated to the tech industry. If you're an accredited investor and were to sell you might consider redeploying your proceeds into DSTs. They are hands-off, institutional grade real estate investments, and they allow you the option to diversify. You can buy into institutional grade $50-125M projects with as little as $100,000. Professionals with decades of experience and very impressive track records do all the heavy lifting for you. You get potential cash flow, tax shelter and appreciation. Loans are non-recourse. Feel free to connect with me here on BP and let me know if I can help.
I live in the Bay Area but prefer markets with well diversified industries- 5 or more different industries such as education, financial, technology, military, etc. No one industry should dominate the local economy. In this way, if one industry goes sideways, your investment is somewhat protected from lost tenants and lower rents.
Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
10y
Karen,
You bought at almost the absolute worst time, and you still got about $300k in appreciation in 10 years. Amazing isn't it? Bay Area real estate is quite forgiving over the long run if you can ride out the storm.
Assuming you put 20% down, that's about $2,500/mo in appreciation or 24% ROI annually. Do you see how $500/mo in cash-flow is not significant compared to the appreciation?
If you hold onto this place for another 10 years, there's a decent chance it'll worth $1.4M and rent is about $4,900/mo by then. That's about $4k/mo worth of appreciation and an additional $1,500/mo of cash-flow. If history is any indication of course. I have no crystal ball.
It's definitely not an easy decision. My stance is neutral in this case. If it weren't for the $250k (single)/$500k (married) tax-free exemption, I'd vote to keep it. Regardless of what decision you make, I hope it's the right one.
If I could do it over, I would have created a "taxable event" by selling the condo to a company that I owned. I would take the tax free advantage yet still controll the asset. Then when I wanted to sell in the future, the company would do a 1031 into another like asset.
Santa Clara, CA · Member since 2016 · 5 posts · 1 vote
10y
Thank you for all the advice and thoughts, and apologies in advance for the lengthy delay in responding. I was trying to absorb all the BiggerPockets advice and do some research/follow-up before responding. And then we suddenly realized there's a condo lawsuit to factor in.
In July, the HOA filed a lawsuit against the developers for $2.2M in construction defects. Estimated cost/homeowner would be $17-34K in assessments (let's say the $2.2M is inflated 2x). The initial hearing is in mid-October.
Zillow estimates ~$935K, but that's without accounting for the lawsuit. We understand financing is difficult but still doable, but considering the market also seems to be cooling a bit (not just seasonal) it seems the impact could be significant.
To the previous points raised (thank you again!)
1. We don't know where the next property would be. We had looked at Roseville/ Sacramento area, Denver, San Diego, Austin but hadn't found anything. We know we need to focus, but are struggling w/ that initial step of figuring out where
2. @Michael, @Steve - Thanks for the suggestions, have a meeting w/ our tax adviser and will ask.
Santa Clara, CA · Member since 2016 · 5 posts · 1 vote
10y
One other thought is we have parents who own a rental property in the area and will be relocating to the property shortly. Not sure if there are any strategies such as tax laws that deal w/ inheritance, family transfer of properties, etc that might apply
Real Estate Investor · Rancho Santa Fe , CA · Member since 2016 · 323 posts · 107 votes
9y
It sounds like you get a decent. rent as long as time keep moving forward and we become a more modern tech society your property will go up, i will hold it for a 4-5 years, till the next market regeneration. @Karen Y.
Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
9y
Cupertino SFH has not moved up at all for the last 12 month. 94087, 95014, and 95129. Palo Alto homes have been going in the wrong direction last 18 month. On the average homes have dropped in price more than >10+% in one year.
People expect home appreciation because of Apple jobs need to rethink. Is every condo going to be over $1M? Affordability is the key for home ownership. I would think people looking for income will go to duplex (no hoa fee). Majority investors have followed the same path. I would think Gilroy, Morgan Hill around $1M+ with ~$2000 rent X2. is doable. They were about 1/2 that during the Great Recession. No way that Sunnyvale condo would fetch $450K then. Some like to buy a Victorian house by SJSU and rent out the rooms, basement. Upkeep is higher than your condo because of age.
In July, the HOA filed a lawsuit against the developers for $2.2M in construction defects. Estimated cost/homeowner would be $17-34K in assessments (let's say the $2.2M is inflated 2x). The initial hearing is in mid-October.
If people are still able to get vanilla 30 year fixed Fannie financing, I'd sell that puppy ASAP before structural litigation involving that development becomes more widely known by lenders. When the lender asks the HOA "is there pending litigation?" they might currently think they can answer "no" because there hasn't been the first hearing yet or something. Plausible deniability, if that's what they are using to justify answering "no," kind of goes away when it's been in front of a judge.
Projects in which the HOA or co-op corporation is named as a party to pending litigation, or for which the project sponsor or developer is named as a party to pending litigation that relates to the safety, structural soundness, habitability, or functional use of the project. (See section below for additional detail.)
["section below" to follow]
non-monetary litigation involving neighbor disputes or rights of quiet enjoyment;
litigation for which the claimed amount is known, the insurance carrier has agreed to provide the defense, and the amount is covered by the HOA's or co-op corporation's insurance; or
the HOA or co-op is named as the plaintiff in a foreclosure action, or as a plaintiff in an action for past due HOA assessments.
Fannie Mae is of course not the only loan type, there are folks doing portfolio loans that are ARMs or have higher interest rates. Generally when people see that difference in the financing, they look to the seller for a substantive price discount to cover the otherwise higher monthly payment. The smaller your pool of buyers is, the lower the price you can expect.
Real Estate Agent · Palo Alto, CA · Member since 2016 · 16 posts · 6 votes
9y
Probably makes sense to talk to an estate planner to look at a complete multi-year picture. Ping me for a name. The lawsuit will affect you on the sale (disclosure requirement) and if you keep the property you might get a special assessment which does seem substantial. I agree with one of the folks here that other real estate is out there with much better returns. All things to consider.