Rent out or sell to reinvest equity gains elsewhere?

Question

Hi all,

Long time forum lurker looking for advice on how to move forward from my first home. Property is located in northern Sacramento in California. Employment sectors for Sacramento are founded in government sector employees and are very stable; in addition, a number of large businesses have moved into the area. However, the CA state government and even more so the Sacramento local government are not landlord friendly and every year new restrictions are placed on the ballots. A citywide homelessness action plan was recently approved by the city council that places a 200 person safe land/lot location on the outskirt of my subdivision. This may or may not impact rental returns, but I assume it will limit equity gains in the future.

My current decision is whether to rent this property out (which was always the goal) and move into a new home, or sell this property to capture the equity gains and invest in something else for better returns. I have lived in the property for the last five years. Big ticket maintenance item repairs are not expected for years - most are within 7y (roof/hvac) or newer (floors, windows, water heater). I am flexible with where/how I live to make either option work. I have other money to use on a new down payment without the sale of this home if needed. I am familiar with the concepts, but currently have no experience in landlording or investing in outside markets. Any feedback on which avenue to move down and how to better utilize the cash if selling is elected is greatly appreciated!

The numbers:

• Property value: $421,000
• Mortgage: $241,000
• Potential cash from sale: $154k (after fees)
• Potential gross rent: $2,100-$2,300 (used $2,200 for calcs)
• Potential net rent: $277/m (excluding equity gain on mtg)

• Estimated monthly costs

• PI: $1027
• Property Taxes: $233
• Home/Flood Ins: $112
• PM (10%): $220
• Vacancy (5%): $110
• Maintenance (10%): $220

Nicole Masters · Answer

HI David! Great question!

I personally am always on the side of holding the property as you can use it to cash out refi/HELOC for another property. It sounds like that's what you ended up doing?

David Smith · Answer

Appreciate the feedback @Will Fraser @Evan Polaski . It's nice to have opinions on both sides. Ironically, I actually did a cash out refi just about a year ago to date to bolster the fund pool for the next move and to reduce my rate. At this time last year, this property appraised at $305k. One year later and I have a cash offer of just over $420k on the table that triggered me to consider selling where the plan had previously been to hold long term. That appreciation here has been nothing short of explosive as a region this year. That being said, sale rates have fallen and price reductions are now more common on listings, I previously noted City plans in the area that could impact growth, and it's anyone's guess what happens to markets over the next year.

Evan Polaski · Answer

@David Smith, I actually vote sell. You believe equity growth will be limited, so let's assume 3% per year. You are currently earning 2.15% return on equity (277*12/154000). Now, if you anticipate property values to grow 3% per year, this would result in about $12k of additional equity value each year, or another 7.8% of your current equity, creating a roughly 10% annualized return. But each year, unless rents can grow faster than appreciation, you will be

You could refi and get another 95k-ish out of the asset. This would take your monthly mortgage P&I to $1420/mo at 3% interest 30 yr fixed. Now you are out of pocket every month, and still not accounting for any future Capex budget.

Will Fraser · Answer

Welcome to the light, @David Smith! Sure beats lurking in the shadows :)

Personally I would look to maintain ownership as long as possible (unless I were, say . . . fleeing the state), but I would want to do that while maximizing overall investment ability. So, ideally that would be a cash-out refinance of your personal home to the highest LTV you can get on a conventional loan and then moving to a home that has an investment play associated with it (a house-hack or something else). Then I'd recommend looking to rinse and repeat every 2-3 years and be on your merry way.

Rent out or sell to reinvest equity gains elsewhere?

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