Sell or Keep California House?

Question

My husband and I have been wanting to get into REI for a little while now. We have been researching and reading a lot (analysis paralysis!) and really want to take that first step. We live in Washington state, but we will probably invest in a couple properties out of state.

My question right now, though, revolves around a house that we own in California. I'm currently renting it to a family member under the agreement that he moves out in time for us to sell it within the 5 year window so my husband and I will have lived in it as a primary residence for 2 of the last 5 years (we moved up to WA a year and a half ago). We want that $500k non-taxed equity!

However, the house is in a decently rentable area and I refinanced during the low rate days at a 2.615% rate. I could probably rent it for $750-$1000 per month over what the standard monthly costs are right now (not including vacancy, maintenance, management company, etc). I haven't really run the numbers because until now I've never considered keeping it as a real rental. And my husband and I have both had *horrible* landlord experiences in California in the past, and we just don't want to deal with California's renting atmosphere. But the house is only 10 years old, it's huge, it's in a decent area that's still being developed (Eastern East SF Bay Area), and it has the potential to earn us some money.

Does the earning potential of the house make up for the headaches of renting in CA and having to pay a boatload of taxes on the equity when we eventually do sell? If we instead sell in the 5 year window, we could take that equity and put it into rentals not in CA and other investments. I just don't know enough to figure out what the right answer is and would really appreciate some insight and advice.

Thanks!

Sarah

Brad S. · Answer

Total estimated PITI = $2,483/mth

HOA - $124/mthTotal Monthly Expense (not incl, Vac & Coll, Mgt, or Capex) - $2,607

************Estimated Monthly Rental Income = $4,000 to $4,300Estimated Net Income - $1,393 to $1,693  ($4,000 - $2,607, etc)Annualized Net Income = $16,711 to $20,311

***********Estimated Current Sales Price = $830,000Est sales cost of 6.5% (5% commissions + 1-1.5% other costs) = $53,950Est Sale Net Proceeds - $776,050Est Net Cash (after loan payoff) = $461,050 ($776k - $315k)******************************Est % ReturnsAs a Rentalbetween 3.62% to 4.41% ($16,711 net inc/$461k net cash from sale, etc)Again, this does NOT include vacancy, collections, management, or capex, etc.******************************************

So, essentially as a market rental, you'd be investing your $461k potential cashout @ 4.4% or less. Or you cash out with the $461K (with no tax consequences), and invest somewhere else for a better return and potential. We are not likely to have a big, quick run-up in prices in CA like we just had, for a long time. Affordability (incomes, lower rates, house prices) needs to catch up first. Now, some other areas and/or states, may be poised for good growth and have better return (%) potential.

My guess is there are better potential areas with more upside potential and less risk, and a better return. There are also many more passive investments which would pay more than your current return (>= 4.4%), like real estate funds, syndications, mortgage lending, even treasury bonds are paying more right now. I know of a couple of specific very trustworthy operators/funds that are paying between 8-12% preferred returns with participation in potential appreciation. Now, you won't get the other real estate benefits in a passive investment, but you have less risk exposure also.

Anyway, hopefully this gives you a clearer idea of your situation. I am happy to discuss any specifics more, if you like.  :)

Wale Lawal · Answer

@Sarah Maze

If you're trying to decide whether to keep your California property as a rental or sell it for tax-free equity, there are a few things to think about. You should do a careful financial analysis to see how much rental income you might make compared to the expenses and potential challenges of being a landlord in California. You'll need to think about things like vacancy rates, property management fees, maintenance costs, property taxes, insurance, and any repairs or upgrades that might be needed. Selling the property within 5 years could give you tax-free equity, but if you decide to keep it as a rental, you'll have to consider potential taxes.To better understand the real estate market trends in the area, it's important to analyze factors such as property appreciation potential, rental demand, job growth, and economic stability. Take a look back at your past experiences with landlords and think about your long-term investment goals, including diversification, risk tolerance, and the possibility of higher returns in different markets. To get personalized advice, it's recommended to seek guidance from a financial advisor or real estate professional.Good luck!

Zeke Liston · Answer

That's great to hear you've done so well on this property, Sarah. I've heard so many nightmare stories about being a landlord in CA. I would personally try to avoid that at all costs. If it were me, I would sell it and invest in Ohio or another cash-flowing Midwest state with landlord-friendly laws.

Jacopo Iasiello · Answer

Hi Sara, Ultimately, the decision to keep the property as a rental or sell it within the 5-year window will depend on a combination of financial, market, tax, and personal factors. Take the time to thoroughly evaluate these factors and consider seeking advice from real estate professionals and financial experts to make the best decision for your situation.

Basit Siddiqi · Answer

When you mention $750 - $1,000 over the standard monthly costs, are you only factoring in the mortgage payment or also factoring in repair / capex / vacancy reserves?Furthermore, you should calculate your cash on cash return instead on what the FMV is of the property instead of what you brought it for.The value of $500,000 tax free is about $125,000 if you assume 15% federal taxes and another 10% in california state taxes.

Brad S. · Answer

Well, I am also in the business and part of my job is having access to the data. But, i apologize if it was too intrusive to post some of the details. Let me know if you want me to try and take some specifics out.

I'm also happy to discuss any details with you, if you like. I have close associate that is that area.

Tim Ryan · Answer

Sell it! Get out of Calif rental business.  I am in Los Angeles and only own rentals in other states. You could do far better elsewhere with that capital for sure.  There is a process to picking the market to work in and buying for both cash flow and appreciation (many people think the midwest or south is only for cash flow - not true).  I can tell you more about how I have invested far away from where I live if you are interested.

Sarah Maze · Answer

@Brad S. Thanks for running the detailed numbers! It's pretty crazy the amount of information you can find on the internet. :P That helps back up our decision to sell the property.

Bradley Buxton · Answer

@Sarah Maze

It seems like you sell the house based on the headache and the amount of equity can be deployed to continue growing your portfolio.  You can take that equity and invest in other assets out of CA into something that will complement your other investments. With that equity you can be in a more landlord friendly state and split between cash flow and appreciation or expand into a small multifamily. Beside the Midwest take a look at the Reno, NV market. Close to WA, landlord friendly, low taxes, strong job and population growth.  Based on your portfolio design you can find a cashflow or appreciation small multifamily or several single family.

Sarah Maze · Answer

Thank you for that. I asked my husband if we would choose to repurchase that house at that interest rate as a rental and he immediately responded "No" without any hesitation, and I was right there with him, so I think that helped us both understand where we want to go with this. We both like the idea of diversification and not renting in California, for sure.

Sell or Keep California House?

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