Should I sell my first home purchase in SF Bay Area?

Question

Hi all,

I am a Newbie first-time homebuyer/landlord here, hoping for some wisdom from the community.

I bought my first primary residence in Nov 2021 for $850K (20% downpayment) in San Pablo, California. I lived in it for 2 yrs. Then started renting it out last year 2023 November for $4700/month (renter pays all utilities) due to life situation change (moving in with my bf). I have priced the property according to comparable homes in the area.

My question: should I sell the house b/c it doesn't seem profitable?

More details:

Mortgage (principal + interest): $2930/mo

Property taxes: $15K/year

Home insurance: ~$1K/yr

Cost of home ownership/month: $4280/yr (not counting for any tax deductions related to the interest and property tax)

If I account for $20K of interest and $10K of property taxes as an income deduction, then I can reduce the cost by ($30K x 35%) divided by 12 = $875 per month = $3400/mo cost of owning the house

Rental income after 35% federal income tax + 9.3% state income tax = $2618/month (!!)

SO, I am paying $782/mo to rent my house to the renters (not including any maintenance costs)!

I have not factored in depreciation yet.

Am I thinking about this correctly?

Seems like I should offload this property as soon as I can recoup the purchase + real estate fees + closing costs? Or should I not even wait for that (eg the opportunity cost of my $200K now in equity could be spent elsewhere)?

Currently the house is valued at $805K according to Zillow (vs the $850K that I "bought" it for).

Thank you in advance for your input!

Newbie first time home buyer and first time landlord.

Allan C. · Answer

@Blisseth Sy your math isn’t correct. Taxes should be on net gains, not gross. Recalculate your NOI by subtracting costs from revenue. Remember that principal payment is not a cost, but you eventually include depreciation.

You should not have positive earnings once you account for depreciation, thus you should not have income tax. So the real question is whether you are cash flow positive after accounting for maintenance and capex, and what your goals are.

However, it’s not all about free cash flow because you have principal pay down from the tenant. You likely have a good interest rate based on purchase date, and you have a property tax basis that stays low if the market ever recovers. It’s true your early year ROI will be low, but the fact that you are at break-even or even slightly positive CF in CA within 2 years is reasonable.

Compare principal paydown on this 1 asset to how many assets in other markets you’ll need to manage in other markets to have comparable earnings. Also decide if free cash flow is the primary driver or lower priority.

Matt K. · Answer

Might as well go through the exercise of seeing what you could likely walk away with...and then what you could do with that money.

If you can't hit a number that works, keep renting it...if you get the magic number sell it and move on.

Becca F. · Answer

I know this post is almost a month old but how long are your tenant's leases? You said there's a tenant in a lower unit so there are 2 different tenants?  Do the leases revert to month to month if they don't give you notice of if they want to renew or not.

You may want to research landlord-tenant laws in San Pablo but I know that in Oakland and San Francisco (where I have my rentals), I would most likely have to pay out a relocation fee if I wanted to sell, which could cost in the thousands, depending on number of tenants, minor children, if any have a disability, over age 65.

How old is this property? Is it recently renovated? Do you anticipate a major expense like new HVAC or roof soon?

If it were me, I would keep it. I'm not a huge fan of out of state investing and I have 3 properties in Indiana, too many issues with being 2000 miles away.

Also no one has brought this up but you said you moved in with your bf. Not to be pessimistic but what if your relationship doesn't work out? Where would live if you no longer have the San Pablo rental?

Jessie Dillon · Answer

i haven't checked your math but generally this comes down to: "should i keep a rental that i'm losing money on every month?" -- and honestly, it's not always a bad thing! maybe you're losing a few hundred in cash every month, but i'd be willing to bet the appreciation, debt paydown, and tax benefits combined are seriously outweighing that. you could look at this like putting the negative cashflow every month into an invisible savings account for the future, like a retirement account. this obviously only works if you can comfortably lose that cash every month. you could also consider not renewing the lease and doing STR or MTR in that property? and if that's not feasible & you can't / don't want to lose the cash monthly, selling and even losing a little of what you put into it might be worth it to you. if you could sell today, how much would you walk away with, and what could that money do for you in a higher-cashflow area? something to consider!

Blisseth Sy · Answer

PS Interest rate on the $680K loan is 3.125%; I have paid off $48K of the principle and have $631.8K left on the loan. Per month, $1260 of principal is paid and $1650 of interest is paid.

Blisseth Sy · Answer

More about the property: it is 3bd/2ba upstairs and a finished basement downstairs (~700 sq ft). My idea was to live upstairs, maybe rent 1 bdrm for $1250/mo (util included); and rent the downstairs for $1750-$1800/mo (all utilities included). House has solar panels so PGE in non-winter runs at $30 max.

My idea originally when I was single was to keep living in this property until it appreciated enough (eg 5 to 10 yrs) to sell it.

However, I realized that the air ducts and soundproofing of the top part of house vs bottom part of house makes it such that it's not a great rental as the way I described. The bottom tenant's noises and smells (eg cooking) come up to top floor. Thus, it makes more sense to rent the house as a single unit. Which makes the profitability of the house much less than what I thought it would be when I bought it.

Cost to improve sound proofing and separate air ducting would be quite large, given BayArea contractors' costs.

Blisseth Sy · Answer

Thank you so much Allan! I will DM you.

Roger Grubb · Answer

You have a lot of money tied up into a non performing property. Some people are afraid of remote property management but I am not. There's many states that offermuch much much much much better return on your investments than what you currently have and without all of theEviction headaches that California has.

We are out at Point Pinole but have 10 doors in Fl and Wi currently.

Basit Siddiqi · Answer

Real estate generates a return through cash flow + appreciation.It appears that cash flow is negativeAppreciation appears to be 0% over 2-3 years based on zillowThe question is what you beleive the future will hold for cash-flow and appreciation.Cash-flow will likely continue to be negativeThe question is what do you think about the appreciation for the bay area.If the property continues to stay at $850,000, it will likely not be a good decision to hold on to the property.If you think the property can appreciate to $900,000, $950,000 over a few years, then it can potentially be a good reason to hold. The thing with investments, is no one knows the future.I personally would sell because I am not bullish on large cities until there is a sign that return to office work is stabilized.

Should I sell my first home purchase in SF Bay Area?

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