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. Thanks in advance! James

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.

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.

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.

@Jimmy Watson You have a cash flowing property in California, which is tough. Ask Jay Hinrichs how he feels about the California property he has sold. My feeling is that the long term growth for Oceanside is good. LA and San Diego will merge and Oceanside is in the middle. So if that is what you are looking for I would stay put. You have locked in a low interest rate and have low property taxes. Also I suspect you can get more rent, but I don’t know the market. As you said rents are way up. Be careful about getting any advice from people that don’t know California. Other markets are very different. Good luck with whatever you decide to do.

@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.

It depends. What are you going to do with the money? What's the goal?

@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).

Keep it! You would be hard pressed to find the cash flow combined with rent and resale appreciation in the mid-west markets. We have two properties in the mid-west and the market is much more stable there - no where near the rent appreciation and price appreciation as here.

250K appreciation in 5 years with $400+/month CF. Time to exit?

Todor Ialamov

Real Estate Agent · Burlington MA · Member since 2018 · 114 posts · 142 votes

4y

@Jimmy Watson

It is time to cash out refinance and purchase another property.

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Roger PearcePro Member

Rental Property Investor · Atlanta, GA · Member since 2016 · 29 posts · 7 votes

4y

@Joe Villeneuve what a fantastic way to put it. Thank you!

0 Reply

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

4y

Quote from @Joe Villeneuve:

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.

You used 75% LTV on the existing property and 80% LTV on the newly acquired property, but I do not see that you reflect any selling costs. That typically will exceed the 5% delta, but there is a cost with obtaining loans (or 0 cost loans gets reflected in increased rate, regardless there is a cost).

The question on PV owned at end of this is whether selling costs is greater than 5% (difference between LTV on keeping property versus acquiring a new property) plus loan costs. I suspect the selling costs would exceed 5% plus loan costs but this is not the only item of interest. In the case of keeping the existing property, the initial equity value is higher. This is because for the 75% LTV on the currently owned property versus 80% LTV on the "replacement" property.

We (Joe and I) are in a similar camp of valuing leverage. We are in agreement that your high equity position in your current property is not the best (likely to produce best return) use of your money.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

4y

Quote from @Mike Dymski:

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).

if he can take the 250k tax free thats very compelling .. dont want to lose that 250k with no tax and money in your jeans is pretty cool

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Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

4y

Sorry about not mentioning the closing costs. Remember, I say the appreciated equity gain is the number I look for. I'm assuming the equity gained from the loan paydown is what covers the closing costs.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

4y

Quote from @Dan H.:

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.

Good luck

grass is not always greener I always cringe a little when CA investors want to dump their A B class and go to other markets for C class or even B.. there is risk there plus the cost of transacting etc etc.

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Matthew Failor

Member since 2019 · 16 posts · 14 votes

4y

Be careful with HELOCs as it will increase your credit utilization (the % of credit you are using versus the amount you have available to you). This can drastically reduce your credit score overnight. I have seen this with flippers and BRRRRs This can impact future deals and ReFis. Folks go to ReFi after a BRRR and cant because they maxed out CCs or HELOCs. Ideally it is best to not go over 30% utilization per my understanding.

I am in a similar boat. I have a townhome worth $310k - $330k that I owe $123k. So at least $187k in equity. It was my primary home and I am months away from the 2/5 rule. I love the home, it is in a tremendous location, and cashflows well. But, I plan to sell and try to sneak into a 1-2 Multi Families or buy 3-5 more SFHs. with plans for each door to cash flow at least $200. While my townhome cash flows $450.

I think of appreciation the way Buffet thinks of gold, what are you going to do with it? Fondle it?

Put it to work!

3 Reply

Andrew HoganPro Member

Rental Property Investor · Indianapolis, IN · Member since 2016 · 560 posts · 463 votes

4y

@Jimmy Watson agree with Jay, IF you sell to buy new deals, don't buy low quality assets.

That very low Return on Equity means your money could be working harder for you elsewhere...

1 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

4y

Explain...with number$

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Bob E.

Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes

4y

@Jimmy Watson Thank you for your service. In honor of your ending question I post the following classic from YouTube.

The Clash - Should I Stay or Should I Go (Official Audio)

Sounds like you have some options. If you have passed the expiration for your tax free sale you could 1031 this and literally buy a small apartment building. in the midwest. But remember the Midwest is cyclical.

A few things to consider before taking action. Real income (inflation adjusted) is falling, interest rates are rising, Consumer confidence has plummeted and EVERY spike in energy prices in the last 50 years has resulted in a recession. If you can sell tax free there will be opportunities after the next recession, there ALWAYS are, they may or may not be in real estate.

If you ever want to talk about Midwest investing feel free to reach out, we live in AZ and have investments in Michigan, Ohio, Wisconsin, and Indiana.

2 Reply

Marcus Auerbach

Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes

4y

Massive equity gains across the country is what will fuel the housing market for years - plus $55,000 in home value last year alone. People always forget to mention when they complain about paying $20 more for gas.

I don't know if I would label the midwest cyclical, just because it was the big looser when we exported all industrial manufacturing to Asia in the 80s. Milwaukee lost jobs by the 10,000 every year back then. Alot has changed in the last 10 years. Now our unemployment is below national average and we have a very diverse mix of industires.

I see a lot more people move to Milwaukee post covid as a result of remote work and lower cost of living. Also plenty for fresh water, no smoke or fires and no hurricanes or earthquakes. And the cooler climate makes people more productive. I may be bias, but I am bullish for the midwest and Milwaukee in particular have no plans of selling, just the opposite.

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Austin McClainBusiness Member

Real Estate Agent · OH · Member since 2021 · 350 posts · 603 votes

4y

If you're looking out of state, Columbus Ohio is a great market. For the condo, you could run numbers on what a cash-out refi would look like to keep it and buy more. The rate would be higher, but if it can cash flow, you could keep it and get appreciation from two markets.

[email protected]614-710-4827

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Jimmy Watson

OP

Investor · San Diego, CA · Member since 2014 · 65 posts · 39 votes

4y

@Landon Bleau great points, thank you. I see what you’re saying and I’ll need to explore these possibilities.

0 Reply

Jimmy Watson

OP

Investor · San Diego, CA · Member since 2014 · 65 posts · 39 votes

4y

@Mike Dymski thank you! You’re correct on it being owner occupied before it turned into a rental. Thanks for the tax tip !

0 Reply

Jimmy Watson

OP

Investor · San Diego, CA · Member since 2014 · 65 posts · 39 votes

4y

@Scott Thomas thank you! I’m more along the lines of keeping it as well.

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Jimmy Watson

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Investor · San Diego, CA · Member since 2014 · 65 posts · 39 votes

4y

@Twana Rasoul thank you- very good points about the cash flow. I haven’t thought about it that way.

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Jimmy Watson

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Investor · San Diego, CA · Member since 2014 · 65 posts · 39 votes

4y

@Joe Villeneuve what you’re saying makes 100% sense and I want to do that… I just don’t see how it’s possible. While I would have enough for a down payment on a 1,000,000+ property, I just wouldn’t be able to afford the mortgage. Unfortunately, 1.25 mil only gets you a decent sized single family home in a decent neighborhood here in SD, so I couldn’t get a multi and rent it out (unless it was in a less desirable area).

Any it’s on how to make this work when my income prohibits me from being able to afford a mortgage worth more than $3200 / month?

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Jimmy Watson

OP

Investor · San Diego, CA · Member since 2014 · 65 posts · 39 votes

4y

@Richard Balsam never thought about the turnkey stuff or knew about the note investors and selling rental income up front. I’ll have to look into that- thank you!

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Jimmy Watson

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Investor · San Diego, CA · Member since 2014 · 65 posts · 39 votes

4y

@Zack Karp great points, thank you!

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Jimmy Watson

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Investor · San Diego, CA · Member since 2014 · 65 posts · 39 votes

4y

@Cara Lonsdale thank you so much for the very informative and helpful reply! Gave me a lot to think about and I really appreciate how detailed you were with everything. I definitely need to sit down and think about everything long and hard.

0 Reply

Jimmy Watson

OP

Investor · San Diego, CA · Member since 2014 · 65 posts · 39 votes

4y

@Joshua J Cawthorn thank you! I hear you on this low inventory… my gf is searching for a property and is getting beat out every offer she makes (sometimes by over 200k!)

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Jimmy Watson

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Investor · San Diego, CA · Member since 2014 · 65 posts · 39 votes

4y

@Axel Meierhoefer thank you!

To answer everyone’s question in regards to living in the property for at least 2 years, the answer would be no but I believe I still meet the requirement. Reason is because I bought the property, and then immediately received orders to deploy. I returned and then I was stationed overseas in Ukraine and later Indonesia. I believe that since I was forced to leave my residence for the military, that I would still qualify for the tax exemption but I am not too sure.

I definitely want to look into buying more properties with my VA but it doesn't look like there is anything I can buy in SD with the prices where they are right now! I've been looking but everything is crazy.

Will definitely DM you in the future to discuss further! Thank you

1 Reply

Jimmy Watson

OP

Investor · San Diego, CA · Member since 2014 · 65 posts · 39 votes

4y

@Matthew Failor thank you! Hahaha, love that Buffett quote.

0 Reply

Jimmy Watson

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Investor · San Diego, CA · Member since 2014 · 65 posts · 39 votes

4y

@Bob E. Thank you! Definitely feel like a recession is on the horizon. If only I could time it perfectly!

0 Reply

Bob E.

Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes

4y

@Jimmy Watson I follow Steve Van Metro on You Tube. He seems to have a reasonable take on macro economics. Todays video is This Will Crash the Housing Market

Timely of him to post this today.

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250K appreciation in 5 years with $400+/month CF. Time to exit?

250K appreciation in 5 years with $400+/month CF. Time to exit?

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