Primary Home Purchase Did Not Work Out, Turn it Into Rental?

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Marc Zak · Answer

Thank you Wayne.

What do you guys think of the concept of spending 100k (already committed and in process) for a basic renovation or spending the extra 60k (not committed yet; would be a total of 160k) to make it a little nicer (with minimal increase in property value).

My mom pointed out that the extra work would extend the renovation process, and it's been difficult to live here while renovating.

Adam King · Answer

It would be very difficult to make that determination without knowing where that 60k is going.

As a flipper I would expect 60k to increase my value by at least 60k and ideally 120k. There are ways to work around the renovation process and timelines. This would be reworking the sequence in which the remodel is done, delaying work until you are going on vacation, doing 1 room at a time, and being willing to live in the secondary bedrooms while the primary is being worked on.

As I said, I have done some form of extensive renovation on every property that I have ever lived in, and I can give advice on how to traverse your next steps if that would help you.

Jeremy Horton · Answer

I'd stay in it as a primary - seems to be the smallest L out of the options

I don't care for the losing money (negative cashflow) option - sure you can offset some taxes but at the end of the day you're still losing money. I also wouldn't sell for a loss (assuming you'd buy into something new since you still want a primary).

If you go with option 3, you still get a primary house, you'll get a nice place - I'm assuming the renovations will take some time to complete, and you may be able to come out on top in a few years.

Marc Zak · Answer

Thanks for your input Adam. I agree with what you said and I'm leaning toward option 2 or 3.

Adam King · Answer

Hi @Marc Zak,

I am sorry to hear that your Dream of a Home near the beaches here in San Diego has not gone well so far.

I am a lifelong San Diegan, and my first ever Condo was only a few blocks to the beach, so I totally understand the desire to be where you are at!

I am going to go through the options you posted in order:

1.) If you sell for the same price you purchased it for and get a good deal from whatever realtor you choose your fee's and taxes are going to be ~$90-95k. In cases like this where you have exposed more even more problems within the house, that you will now have to disclose, it is not likely that you will be able to sell it what you paid for it.

2.) Per the link you posted, it looks as though you will lose $30-35k the first year. Self managing and doing a cost segregation may be a viable option to completely erase that loss, especially when you factor in Loan Paydown and Appreciation. The cost segregation, may let you write off as much as 200k against your taxable income from your W-2 (Keep in mind, if you do go to resell the home, the government will attempt to recapture this unless you 1031)

3.) This may be your best bet, especially if you are able to stay at least 2 years then you will have a $250,000 exemption against any gains you have. While there is no way to predict the future, San Diego has an annualized 6% appreciation for the past 30 years. If we use that number moving forward that is ~$100k per year that you live there in equity gains.

I have renovated every home that I have ever lived in, if you ever need advice on how to navigate that or on how to improve your property to ensure the most gains, reach out to me at any time!

Marc Zak · Answer

Here are the details:

I have recently been able to pursue my dream of a home near the beach in San Diego. This is my first primary residence; I also own two investment properties in lower cost areas that cash flow well.

The home cost 1.7 million dollars and needed about 100k in repairs on top of that to get it livable. About 60k more would make it nice.

However, the whole process of renovating has gotten me soured on the place, and it turns out to have a few issues that may not be able to be fixed.

I’m debating between selling the property and turning it into a short term rental. I think I can get 10k / month as a short term rental.

My options include:

• 1) Sell now and lose 100k including the renovation costs and closing costs (unless I get lucky and find someone willing to buy above market)
• 2) Turn it into a short term rental for a year and see how it goes. The calculation above is for the place as an airbnb. Any potential loss could be offset by bonus depreciation against my W2 salary. Even though the place has negative cash flow, that could be offset by appreciation.
• 3) Stay in the place as a primary residence and hold on until I could sell it at net neutral (maybe 3 more years pending how the San Diego market does)

Any advice would be appreciated! Got myself into a bit of a bind here :)

Theresa Harris · Answer

That report shows a gross income of $10K a month and $13K in expenses ($9K of that is a mortgage). I'm going to guess based on that you are looking at a STR. You still have a net loss of $2.7K a month. That is not a good rental-sell it.

Primary Home Purchase Did Not Work Out, Turn it Into Rental?

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