Should I sell my primary residence or hold it?

Question

Pertinent information

Primary Residence: North Hollywood, CA - 2 bedroom 1 bathroom. 1100sqft on a 9000sqft lot

Estimated value - $1,000,000

Remaining mortgage - $520k

Open HELOC - 170k credit line. 70k currently used.

My wife and I bought our primary residence in 2017 for 705k. We did a pretty major renovation and then in 2019 it appraised for 910k and we got a HELOC for 170k. We used that HELOC to acquire two STRs. A 1/1 in Big Bear, CA, and a 2/1 in Joshua Tree, CA. We want to acquire two more STRs this year, but we also would like to get ourselves into a house hack. Our original intention was to hold on to this property and add an ADU or two, but now I'm wondering if we sell would that be a better use of our equity? Our house is near a newly developed mall (one of the main reasons we bought it) and we're seeing quite a few small houses being turned into multi-million dollar McMansions in our neighborhood.

What would you do?

Chris Olson · Answer

@Bill Brandt

That makes sense. Thanks for your insight!

Janet Behm · Answer

Chris, You are pretty resourceful, but, you don't want to become homeless.

Nearly every investor I talk to, says, "I wish I hadn't sold that property."

And finally, remember basis and how you will handle the capital gains.

Probably 85% of the people reading this, wish they had YOUR problem!

Zack Berridge · Answer

@Chris Olson use another $70k from HELOC to acquire another 2 STRs.  Then the remaining $30k for yet another STR.  Refi in a few years to pay off all HELOCS and stay out at your current place.

Bill B. · Answer

@Chris Olson

Yes Chris, if you’re not buying a smaller home you’ll probably pay about $100k in selling and buying costs. You’d probably end up with more money with just a cash out refi and a heloc. Certainly you would have “spent” $100k less.

Ending up with $200k more investable money but $300k less equity isn’t a win. It’s like paying 33% interest. Same issue s. Or taking the owner occupied tax discount. How long will it take for the rental to make $100k profit, just to be back where you are today.

Most expensive properties make horrible rentals but you could talk to a couple PM’s about how much you could rent your current place for and buy another with 5% down, keeping this property for 2 years. But that’s seems like higher risk than return. Could you rent a property equivalent to yours for a few thousand a month and use all the sales proceeds for investing?

TLDR: selling to buy another same price property seems like a good way to lose $100k and making it a rental for over 3 years is a way to “lose” $120k. If you can’t find a way to live in a $700k property and downsize, then just borrow as much as you can for as long as you can at the best rate you can.

Chris Olson · Answer

Thank you all for your responses. This is why I love the biggerpockets community!

@Bill Brandt - If we end up selling the house, our intention would be to pay off the HELOC balance, get into a house hack with 5% down or so, and use the rest to acquire more investment property. I'm not sure I fully understand what you mean by downsizing. Do you just mean getting into a property that's less expensive? The next property will likely be a similar cost or more, but we would have less money tied up in it since we would be putting 5% down instead of the 20% we put into this primary residence.

@Dan Heuschele - We don't love living in our current home and had always intended for it to be temporary. One reason is that there is an apartment complex next door, so we have about 20 windows overlooking our backyard. Another is that with two kids, we're outgrowing the space and so we're actively looking to get into our next house. A house hack of detached units in a nice area sounds ideal.

Dan H. · Answer

I likely would not add the ADU.  In most areas it is one of the worse RE investments due to the value added being less than the cost to do a hands-off ADU addition.  This initial negative position consumes the initial cash flow.  Add to this the detraction in value to existing unit, typically poor financing options, the effort of doing an ADU addition (comparable to BRRRR, but much worse returns) and it would be a pass.

2 of 5 rule would mean the gains (up to $500K for married) is exempt from gains tax.

What you do not indicate is whether you like living in your current home.  would you be happier in a home that could produce better wealth?  A house hack of detached units in a nice area.  Maybe consider buying a property in a nice area that someone else has already added the ADU and spent more than they will get for the ADU.

I have one of my ex-homes in my RE portfolio.  It has consistently been my worse performing RE.  This should be expected as it was purchased to be a good home for my family versus the other properties in my RE portfolio were purchased to be good investments.  Different purchase criteria.  Do what I recommend and not what I do in this case.  Your ex-home is not likely to be an optimal investment property (just like my ex-home).

good luck

Bill B. · Answer

If you’re going to downsize you get to take that $300k tax-free, both federal and state. That’s probably $120k savings. How long would it take for your rental to turn a $300k profit?

but…if you don’t plan to downsize you’re going to eat sales costs and spend a million for a new place, that’s a lose lose.

Lindsey Hughey · Answer

Slow your roll, I’m all for taking risk but when it comes to your house that is your domain.  Don’t be so quick to give it.  Just my interpretation of the situation.

Matt Pich-Maxon · Answer

Not financial advice, but it may be worth talking to a CPA regarding tax implications for selling a primary residence when the sellers realize large gains.

Also, given the tight housing market, many sellers you might wish to purchase from may have 0 interest in an offer that’s contingent on selling your property if you choose to go that route. Timing the sale and purchase of your current and new primary residence can be tricky in markets with normal inventory. If you’re considering these options, I know of some very interesting opportunities in this space if you ever want to look into it further, feel free to reach out.

Matt

DRE 02100289

Should I sell my primary residence or hold it?

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