San Jose to Rent or Sell / Monterey to Buy or Rent
I'm a newbie looking for seasoned RE advise. I faced a situation that will require our family to live in Monterey. I been learning about RE on the sidelines for some time and felt that this might be an opportunity which pushes us to actively participate.
We own a condo in San Jose / Good Samaritan Hospital Area (95124). The condo appreciated from our initial purchase in '07 over 30% and has over $150K equity built in now. The same condo will rent out at ~$2.5K a month, which will produce a negative cash flow. That said with a negative cash flow it will be still much less (30%) of our actual today expenses of paying for it monthly (PITI+HOA).
Life happened and we need to spend next 2-3 years in Monterey. At first, I thought to rent San Jose condo out and buy sfr/duplex/triplex in Monterey and live hack by renting a portion of it out. It seems that If I buy a property there using HELOC from SJ property as downpayment we will likely cashflow negative in Monterey as well. Yet putting two negative cashflows together we likely be less out of pocket then the expense of paying monthly for property in SJ. In this scenario, both properties appreciate and potentially bring tax benefits of write-offs.
The alternative to that would be to just rent out SJ and rent in Monterey, but that seems to be more expensive rent+negative cashflow from the rental in SJ and no appreciation in Monterey.
Am I missing something? Do my eyes are covered in the veil of ignorance? How would you deal with this situation? Please speak up. Any suggestions are appreciated.
One question to ask yourself: If you didn't already own the SJ property, would you buy it today? From your description, it doesn't sound like a great investment as a Buy & Hold, so I'm guessing your answer would be "No." If that's the case, it seems like you should sell it. You can then buy your duplex/triplex in Monterey. Even if you have a slightly negative cash flow while living there, your payments should be relatively small. And if you move in 2-3 years, renting out all units should produce positive cash flow.
Yes, you get some tax benefits from owning investment property, but don't over-estimate those numbers.
I was looking at Monterey, Oceanside, even Sand City homes under $900K recently, the used SFHs are fairly old(~60 years). New ones with a Ocean View are all close to $1M. Rent is certainly lower in Monterey may be $2K or less than central SJ. If you try double negative cash flow you can be in a real bind.
The rental market in SFBA has not been that good since late 2015. I have 2 rentals in 95008, 95128 that have been on the mls for >1+ months with price reductions. There are only people leaving not coming for jobs. Housing is too costly. Techies do not come here for jobs. Point is what do you do when your SJ 95124 condo is vacant? What you really need to do is quantitatively work out bother scenarios with tax consequence.
Monterey housing prices are not much lower than South Bay. Many are owned by out of the area home owners. There is more demand near the University by old Fort Ord.
Your Cambrian Park unit probably will not have much more equity gain as over-valuation will soon be felt. Even those who bought at last peak 2006-2007 are unloading if they don't live there.
My office is not far from you on Hamilton/ Bascom. Needing help contact me.
Good luck
Sam Shueh Realtor
Realty One Group
Hi @Dmitry Kisselev, Here are my thoughts...have you considered that once you convert SJ into a business all the expenses of that place are tax deductible, and you also get depreciation? These can shelter other income. Additionally, if youre managing that "rental business" from your home in Monterey, part of that home is a tax deduction as an office expense. Before youre convinced that its all negative, you should talk to your tax advisor.
The reason people get rich with property isnt just the rental income. Its using the property costs/loses to shelter other income to avoid paying taxes. Just look at our distinguished President, as an example of someone who used real estate to get rich and avoid paying taxes. (Yes, I know he inherited it.)
@Dmitry Kisselev - why hold onto a condo in SJ with negative cash flow in a market like this? How about selling off the condo in SJ, then opting for a bigger property in Monterey with the additional lump sum from the condo?
You can take all those free cap gains on the condo and get into a Quadruplex, which would be less competitive / more economically feasible to househack than a Duplex.