Investor · San Diego, CA · Member since 2014 · 65 posts · 39 votes
Hi all,
I purchased a 3 bed, 2 bath condo in Oceanside, CA with a VA loan for 0 down in 2017 for $336,000. My mortgage rate is 2.75%, I owe 300K on the property, and the unit right next to me just sold for $530K a few months ago. I believe I could easily sell it for about 550-600K in this hot market right now. I'm really deciding if now is the time to sell but I just don't have enough experience to take the next step so I'm turning to you all for help. Here are the numbers:
Expenses:
PITI: $1695 / month
HOA: $325 / month
Property Management: $145 / month
Income:
Rent: $2,600 / month
Total profit: $435 / month (~$3,000-$4,000 a year due to occasional repairs).
With rents continuing to rise at unprecedented levels and home prices expected to appreciate another 15-20% this year for San Diego County, it seems silly to sell at this point with a cash flowing rental property. However, I just can't help but think about pulling out all of that equity seeing as my condo has nearly doubled in value in just 5 years. Being able to pull almost $300K from putting 0 down is extremely enticing but my greed is setting in about it doubling again in value in another 5 years (unlikely, I know- but let me dream).
Should I stay or should I go? I feel like best option would be to 1031 and go out of state, but I have analysis paralysis about where to start and I don't have a firm grasp on any other market.
Congrats on turning $0 into a $250k. You seem to be making good decisions so far; so, maybe people should be asking you for advice.
I recommend running your existing property and your alternatives through your deal analyzer and the numbers will speak for themselves.
This must have been your primary residence at one point with the VA loan; so, be sure to factor in the section 121 gain exclusion on the sale of a primary residence (tax free gain on $250k in appreciation is substantial).
Is it possible to Airbnb the property for more than it's currently renting for? If so, I would go that route as you could end up printing money that way. Your return on equity is extremely low, but the 2.75% interest rate is very hard to get rid of. Have you looked into getting a HELOC on the property so you can keep the 2.75% rate, as well as use the equity? Call some credit unions, you can likely get 80% LTV on a HELOC and use some of the equity that way, and not have to sell if you do want to keep it.
Great idea, but I don't think I'd make as much on an AirBnB as it's a little further inland and wouldn't be an ideal vacation rental- plus the feast/famine of AirBnB would stress me out a bit.
What exactly do you mean by my return on equity being extremely low?
I've looked into a HELOC, but the interest rates did not seem very favorable and I don't know where to immediately invest that money.
I purchased a 3 bed, 2 bath condo in Oceanside, CA with a VA loan for 0 down in 2017 for $336,000. My mortgage rate is 2.75%, I owe 300K on the property, and the unit right next to me just sold for $530K a few months ago. I believe I could easily sell it for about 550-600K in this hot market right now. I'm really deciding if now is the time to sell but I just don't have enough experience to take the next step so I'm turning to you all for help. Here are the numbers:
Expenses:
PITI: $1695 / month
HOA: $325 / month
Property Management: $145 / month
Income:
Rent: $2,600 / month
Total profit: $435 / month (~$3,000-$4,000 a year due to occasional repairs).
With rents continuing to rise at unprecedented levels and home prices expected to appreciate another 15-20% this year for San Diego County, it seems silly to sell at this point with a cash flowing rental property. However, I just can't help but think about pulling out all of that equity seeing as my condo has nearly doubled in value in just 5 years. Being able to pull almost $300K from putting 0 down is extremely enticing but my greed is setting in about it doubling again in value in another 5 years (unlikely, I know- but let me dream).
Should I stay or should I go? I feel like best option would be to 1031 and go out of state, but I have analysis paralysis about where to start and I don't have a firm grasp on any other market.
Thanks in advance!
James
It depends.
What are you going to do with the money? What's the goal?
Great idea, but I don't think I'd make as much on an AirBnB as it's a little further inland and wouldn't be an ideal vacation rental- plus the feast/famine of AirBnB would stress me out a bit.
What exactly do you mean by my return on equity being extremely low?
I've looked into a HELOC, but the interest rates did not seem very favorable and I don't know where to immediately invest that money.
Your return on equity is 1.6% ($400*12=$4,800, $4,800/$300,000=1.6%) which is pretty low. If you were to take that equity and deploy it across multiple properties I'm nearly positive you'd drastically be able to increase your cashflow.
In terms of the HELOC, one of the nice things is you don't have to pay interest on the money unless you're using it. So you not knowing you're going to put the money next is OK, you don't have to pay anything unless you're using the money.
I purchased a 3 bed, 2 bath condo in Oceanside, CA with a VA loan for 0 down in 2017 for $336,000. My mortgage rate is 2.75%, I owe 300K on the property, and the unit right next to me just sold for $530K a few months ago. I believe I could easily sell it for about 550-600K in this hot market right now. I'm really deciding if now is the time to sell but I just don't have enough experience to take the next step so I'm turning to you all for help. Here are the numbers:
Expenses:
PITI: $1695 / month
HOA: $325 / month
Property Management: $145 / month
Income:
Rent: $2,600 / month
Total profit: $435 / month (~$3,000-$4,000 a year due to occasional repairs).
With rents continuing to rise at unprecedented levels and home prices expected to appreciate another 15-20% this year for San Diego County, it seems silly to sell at this point with a cash flowing rental property. However, I just can't help but think about pulling out all of that equity seeing as my condo has nearly doubled in value in just 5 years. Being able to pull almost $300K from putting 0 down is extremely enticing but my greed is setting in about it doubling again in value in another 5 years (unlikely, I know- but let me dream).
Should I stay or should I go? I feel like best option would be to 1031 and go out of state, but I have analysis paralysis about where to start and I don't have a firm grasp on any other market.
Thanks in advance!
James
It depends.
What are you going to do with the money? What's the goal?
Preferably take the money and either dump it into a small multifamily, several SFH rentals in a midwest market, or throw it into the stock market. That's the hang up for me though... no idea where to invest out of state (so many options and no idea how to build a team I can trust).
Great idea, but I don't think I'd make as much on an AirBnB as it's a little further inland and wouldn't be an ideal vacation rental- plus the feast/famine of AirBnB would stress me out a bit.
What exactly do you mean by my return on equity being extremely low?
I've looked into a HELOC, but the interest rates did not seem very favorable and I don't know where to immediately invest that money.
Your return on equity is 1.6% ($400*12=$4,800, $4,800/$300,000=1.6%) which is pretty low. If you were to take that equity and deploy it across multiple properties I'm nearly positive you'd drastically be able to increase your cashflow.
In terms of the HELOC, one of the nice things is you don't have to pay interest on the money unless you're using it. So you not knowing you're going to put the money next is OK, you don't have to pay anything unless you're using the money.
Ah, I see what you mean. Thanks! Do you factor in appreciation on the property (nearly double) as a return on the investment? I am sure I could cashflow a lot higher in other properties but I think the appreciation would be lacking. Perhaps that's the wrong mindset though.
Thanks for opening my eyes to that aspect of the HELOC. I had no idea you were only charged on what you used.
Great idea, but I don't think I'd make as much on an AirBnB as it's a little further inland and wouldn't be an ideal vacation rental- plus the feast/famine of AirBnB would stress me out a bit.
What exactly do you mean by my return on equity being extremely low?
I've looked into a HELOC, but the interest rates did not seem very favorable and I don't know where to immediately invest that money.
Your return on equity is 1.6% ($400*12=$4,800, $4,800/$300,000=1.6%) which is pretty low. If you were to take that equity and deploy it across multiple properties I'm nearly positive you'd drastically be able to increase your cashflow.
In terms of the HELOC, one of the nice things is you don't have to pay interest on the money unless you're using it. So you not knowing you're going to put the money next is OK, you don't have to pay anything unless you're using the money.
Ah, I see what you mean. Thanks! Do you factor in appreciation on the property (nearly double) as a return on the investment? I am sure I could cashflow a lot higher in other properties but I think the appreciation would be lacking. Perhaps that's the wrong mindset though.
Thanks for opening my eyes to that aspect of the HELOC. I had no idea you were only charged on what you used.
Appreciation would factor into your ROI (return on investment) but not your ROE (return on equity), your ROI is likely very high and will continue climbing as the home appreciates more, but your ROE will lack as the cashflow (NOI) isn't going up very much, unless you expect a large bump in rents soon.
Could you buy another home that both appreciates and cashflows? Potentially a short term rental in a high demand area? Say you were able to get $150K in equity from a HELOC, that could get you a $1M+ property with a 2nd home loan.
Congrats on turning $0 into a $250k. You seem to be making good decisions so far; so, maybe people should be asking you for advice.
I recommend running your existing property and your alternatives through your deal analyzer and the numbers will speak for themselves.
This must have been your primary residence at one point with the VA loan; so, be sure to factor in the section 121 gain exclusion on the sale of a primary residence (tax free gain on $250k in appreciation is substantial).
@Jimmy Watson I’ve regretted every home I’ve sold. It’s tempting to cash in, but probably better to let it ride and stack up that appreciation. You’re outpacing inflation and getting some positive cash flow (not always doable in a high appreciation market).
Hold that bad boy. The appreciation may slow down but it won’t go down. Same with rental rates. And seeing as you don’t have a vision or plan post exit means selling just doesn’t make sense.
@Jimmy Watson As a general rule, if you don't know whether to sell or not in San Diego, more often than not, the answer would be not to sell.
The options to look at first would be cash out refinance or HELOC (if it makes sense, I like HELOC for short term loans only). If the above doesn't get you enough funds to purchase that next property then it's worthy to consider selling and doing a 1031 exchange, unless you qualify for sec 121 tax exclusion for selling a primary.
Cash flow is nice, when you are young and investing in real estate, you will become a lot more wealthy through appreciation than cashflow. The wealthiest people in the world who invest don't make their billions in the stock market from dividends (equivalent to cashflow in real estate), they do so through appreciation of the value of the stock (similar to appreciation of real estate value).
I would not advise to sell your place in San Diego to put it into a random low priced market that you are not familiar with strictly for cashflow, unless you absolutely need the cashflow. Imagine how many decades of $100 or $200/month cashflow it would take to make the $250k you made in 5 years.
If that was the only property that was appreciating at that pace, then I would keep it...but I'm sure it isn't. I bet most if not all of the properties in that area are appreciating the same.
Since appreciation is a product of the rate and the total property value (not the equity), it is in your best interest to max out the potential total PV you can get. The potential PV you can get is based on the DP (20%) of the total PV...as long as the PV is 5 times the DP. Once you buy a property, your DP immediately converts to the initial equity...it's the part you paid for. This means the equity is what you are paying for a property. As the equity goes up, the value of that equity is really the PV of that property. The problem is, the equity goes up $1 for every $1 of appreciation. This means you are adding PV at a smaller rate than when you bought the property, so the value of your equity is actually going down.
So, for your property, you have about $250k in equity for a property that is only worth around $550k...that's a horrible ratio (almost 2 to 1)...and means you are (and have been) losing money for years. That equity should/could buy you a PV of around $1.25M (20% DP)...not just $550k. What would/could the total CF be if you had properties worth 3 times the one you have now?
Add this to your thoughts: If your current property appreciated 10% next year, but the new ones you buy if you sold this one only appreciated 5% next year (more likely it would also appreciate that same 10%), you would have new PV's as follows:
1 - Keep the property - Current $550k PV x 1.1 (10% appreciation) = new PV of $605k
2 - Sell property - Using $250k equity as 20% DP gets you a PV of $1.25M; $1.25M x 1.05 (5% appreciation) = new PV of about $1.2M plus
3 - Sell property - Using $250k equity as 20% DP gets you that same PV of $125M; However, if the property appreciated at 10% like the current property would (more likely scenario) you would have a new PV of $1.25M x 1.1 = new PV of almost $1.4M.
I agree with @Joe Villeneuve sentiment but will point out you can increase the LTV via refinance or HELOC (HELOC on investment properties are harder to find than on owner occupied properties, but there are some).
The implication being that the returns of option 2 or 3 can be achieved without selling. Seeing that the cost of refinance or HELOC are lower than RE commission and other costs associated with selling, you can achieve slightly more by not selling.
I have 2 issues about keeping the property. 1) you likely qualify for the 2 of 5 year gains exemption 2) I have one of my ex-homes in my portfolio. It is by far my worse performing RE (but still has done great). This is because it was purchased to be a good home for me and my family. That was the primary motivation of the purchase. Versus my properties purchased solely for investment were chosen because they were good investments. My ex-home is my only SFH investment property. Its cash flow per equity is pathetic; the only reason it has been a great investment is that it has appreciated over 500% (purchase $167K, worth ~$950K today - 3/2/2 in Claremont by Mesa College). My San Diego investment properties have similar rates of appreciation but much better cash flow.
Whether you decide to sell or keep the property, San Diego is a great market for RE investments. I would not sell to look at other markets. If I sold, it would be to achieve a better return in the San Diego market.
REFI doesn't get your the same results as selling.
REFI $550k property (PV now) at 75% pulls out $412k. Subtract balance owed ($300k) and you're left with only $112k as a DP. That DP (20%) = added PV of $560k. Add that to the current $550k and your new total PV would only be $1.11M. Using same appreciation as above:
1 - Keep the property - Current $550k PV x 1.1 (10% appreciation) = new PV of $605k
2 - Sell property - Using $250k equity as 20% DP gets you a PV of $1.25M; $1.25M x 1.05 (5% appreciation) = new PV of about $1.2M plus
3 - Sell property - Using $250k equity as 20% DP gets you that same PV of $125M; However, if the property appreciated at 10% like the current property would (more likely scenario) you would have a new PV of $1.25M x 1.1 = new PV of almost $1.4M.
4 - REFI current property and add new property with Cash Out from REI, new total PV = $1.11M; $1.11M x 1.1% (10% appreciation) equals $1.22M. Also, with the higher mortgage pmt. the CF on the current property will go down.
I would look into two scenarios to boost your monthly cash flow and lock in the high ARV:
1. Sell a turnkey rental with 20% down. The monthly cash flow is from the new investor. You can sell the home a little above ARV with a positive cash flowing property. You can then keep this down payment and sell off monthly payments from the investor. For example, investor pays you $20K down. Sell off the next 36 months of cash flow, and receive $40K-50K from a note investor. After these months, the cash flow is back to you. Rise and repeat.
2. Sell a stream of rental income to a note investor. For example: sell 36 monthly payments for a large dollar amount now. take the funds, buy another rental, rinse and repeat. In 36 months, the original property cash flow reverts back to you. Do it again, take the funds, buy another rental.
I would pay close attention to the proposed California new tax on property owned three years or less. This is more for flips than rentals, just be aware that you will need to hold any property you buy for at least this long- if it passes.
@Jimmy Watson a key point that is being overlooked are your potential capital gains taxes. Did you live in this property for 2 out of the last 5 years? If so, if you sell now, you don't pay capital gains tax. No need for 1031. If that's the case, if I were in your shoes, I would sell and reinvest. No brainer IMO. It's not going to double again in 5 years, stop dreaming lol. In fact, the way things are going, this market is setting itself up for not only a slow down or leveling off, but possibly even a retraction in certain areas. We won't repeat 2007-2009, but certainly this pace will not continue with rising interest rates and the Fed managing inflation. I like multifamily as a safer play heading into the next 2-5 years with the supply/demand housing chain.
How you choose to reinvest is up to you. @Joe Villeneuve analysis is spot on. Equity is dead money that's not working for you, so you should do something to reinvest and restructure. You have lots of options of where, and what properties, and the only true answer won't come until hindsight.
What are your goals? How many other properties do you have? How do you want to grow? My bias is not to sell, especially in these high appreciation markets. Tap the equity to do your next deal instead. There can be a case for any option, so you have to align it with your goals. For example, you may have a bunch of single families and are getting your feet wet with multi's in a new or different area - then you may want to sell some of the singles to make the pivot. If this is your first property or if you have only a few, I would figure out how you buy more to keep growing with the equity you have, rather than sell. Get a good plan for what you want to do next and then the answer will be easy.
I guess to provide you with any kind of advice meant for your situation, I would want to know a few things about you and your investment strategy.....
First, where will you go? You mentioned that it is a cash flowing rental, but also stated that you bought with VA. So, are you still living there as well, or did you move out and convert it to a rental? I would hate to hear that you sold your only home and moved into an apartment or something.
Second, what is your end goal? Both for the property, and for your investment strategy? This is something you should have in place, and it guides you through the process.
For the property......You should have a target for each and every property that triggers a time for you to evaluate a sale (notice I didn't say just sell, but rather EVALUATE a sale). This trigger point could be several things like appreciation, increased expenses including HOAs (those HOA fees can creep up before you know it, and make the property less desirable for a new Buyer to take on). Having those target points for each of your properties will allow you to sit down and evaluate whether the property still makes sense as an investment, or whether your funds from the investment would be better served elsewhere.
That answers the property question, but then ask yourself what YOUR long term goal is....?? Are you looking to roll and flip until you have 1 house that is paid for that you can live in? Is the goal to live on the income produced by the investment? Are you looking to grow to a larger property or get into commercial perhaps? Determining this will help you decide. For example, if your end goal is to have properties that support you in retirement (or before), then selling may not be the best move. You have a low principal balance and a killer interest rate that will most likely not be duplicated anytime soon. (Today's rates have VA loans in the 4% range!) So, selling, no matter what the highs or lows, mean nothing if you intend to keep the property as an income stream during retirement. Instead, take the cash flow and bank that into the next property to purchase to build your portfolio, while maintaining a pace you can support financially in the event there is a turn in the market (yes, the rental market corrects too). Don't over extend yourself and put yourself in a position to be over leveraged while you are building. Your house hack strategy is a good one. Since you used your VA, maybe an FHA or conventional with low down payment would be the next move. However, IF your goal was just to make some money in Real Estate to better your position in life, or supplement your job income, then selling might make the most sense to give you a good savings cushion.
Alternatively, before considering a sale, make sure you have evaluated several deals as a replacement to confirm that there is, in fact, a replacement property (or properties) that will make sense for you. Keep in mind the interest rate is shifting, and the market continues (at least for now) to appreciate. So, figure your deals from a conservative standpoint and leave plenty of room for escalating expenses as a result of these things.
Lastly, BPers are great at telling people what to do based on what they themselves would do. But only you can answer the question of what to do based on what your long term goals are. So, sit down with a piece of paper and figure that out first (if you haven't already), and THEN see how a sale fits in, or keeping it fits in. Then BE HAPPY WITH YOUR DECISION! You can only make the best decision for yourself in that moment, and with the info in front of you. It is true that you could sell now, and 2 years from now the property could've doubled. However, you can't live like that. Make the best decision for you, and be confident with the decision, and move forward.
Best of luck to you, and let us know what you decide.
The challenge I think you're going to run into is replacing this property. In this market, you'll have no problem selling and, likely, for a pretty sweet profit. What would you do with the money? Being a buyer in today's market is tough. You'd have an advantage because of your cash profit from the equity gain, but you'll be competing with many other cash-heavy buyers in a market where inventory is dangerously low. So you'll end up spending more money on less desirable properties.
If you have a lead or access to some other sweet deal, then it may make sense to exchange your current property. Since your place currently cash flows positively and, if there's nowhere specific you want to park your money, I'd say there's no reason to sell. Like many others have posted, take advantage of today's historically low rates and refinance out some cash or consider using a HELOC to shop for an additional investment.
there are very few circumstances where someone loses eligibility for VA loans. Others have asked if you still live in the property and only estimated the $2600/month for rent or actually collect that amount. That and your goals are really the most important issue to know to make a decision.
I can tell you that almost all long-time real estate investors have consistently told me is: "I should not have sold this or that well-performing property". I live pretty close to you in Escondido and we both know that there is no way the demand can be filled through construction in our area, so prices will keep climbing. Same for rents.
If you still live in the property you described you should find another property and use your VA loan again. Ideally, you would have done that after 25 months of living in the property you asked about and keep doing that every 25 months as long as you can stand it.
Converting to HELOC is ideal for you because you don't have any of your own money locked in the property to begin with.
With the money from the HELOC you can buy multiple well-performing properties out of state that generate cash flow for you and leads you to ultimately not have to pay for the property you are currently living in.
I am retired Air Force myself and have built a portfolio of TK properties that pay m,y expenses. If you like to discuss this further, feel free to DM me.
there are very few circumstances where someone loses eligibility for VA loans. Others have asked if you still live in the property and only estimated the $2600/month for rent or actually collect that amount. That and your goals are really the most important issue to know to make a decision.
I can tell you that almost all long-time real estate investors have consistently told me is: "I should not have sold this or that well-performing property". I live pretty close to you in Escondido and we both know that there is no way the demand can be filled through construction in our area, so prices will keep climbing. Same for rents.
If you still live in the property you described you should find another property and use your VA loan again. Ideally, you would have done that after 25 months of living in the property you asked about and keep doing that every 25 months as long as you can stand it.
Converting to HELOC is ideal for you because you don't have any of your own money locked in the property to begin with.
With the money from the HELOC you can buy multiple well-performing properties out of state that generate cash flow for you and leads you to ultimately not have to pay for the property you are currently living in.
I am retired Air Force myself and have built a portfolio of TK properties that pay m,y expenses. If you like to discuss this further, feel free to DM me.
"I can tell you that almost all long-time real estate investors have consistently told me is: "I should not have sold this or that well-performing property"."
