What to do with primary residence

Question

Hello BP Community,First post from a hopefully soon to be real estate investor. Firstly, thanks so much to BP for providing this amazingly informative and collaborative platform for real estate investing… what an awesome community it is!So I’m working on step 1 of the BP Path to Purchase… putting together my finances, budget, and timeline. Here’s how my things look for me currently… -~$100K cash-~$70K in 401K-Own a house in Silicon Valley (4bd 2ba - SJ Cambrian area) that I purchased for $499K in 2003 (now valued at ~$1M). Current mortgage balance is $456K.-Other than the mortgage on the house I have no debt and credit score of ~830.-I currently work full-time and my annual savings is ~$10K.My goal in getting into real estate is to merely replace my income so that I can live off passive income and quit my job. The approach I’ve mainly been considering is BRRRR with multi-family (duplex, triplex, fourplex) and I was envisioning putting $50K down as 20% on a $250K property, spending another $20K to rehab, then living in one of the units and renting the others. This seems pretty straight forward. My quandary involves what to do with my current primary residence. I was planning on holding on to it and rent it out (~$3850/mo) but unfortunately when I run the numbers via the BP Rental Calculator there is a pretty big negative cash flow (~$600/mo) so that would obviously be a pretty bad investment decision. I’m guessing most REI folks would say ditch the property but I am constantly being told by family, friends, and randoms that I should NOT sell my house… main reasoning being that owning a house is like gold in silicon valley and that I would not be able to afford to buy back in if I decided to move back. The alternate option I came up with was to remain in my primary residence and rent out the spare rooms to get more cash flow coming my way. I’d be interested in hearing others thoughts and perspectives if anyone has any.Thanks in advance for any feedback!-Dave

Tobias Falzone · Answer

I also think the expenses you are using to calculate cash flow are high. Most of the value in bay area properties are in the land. I prefer to calculate capex as a percent of the replacement cost of the building.I would also recommend looking at the tax implications of selling now vs later since your capital gains are so substantial. If you are married, you may be able to pull out $500k tax free, potentially saving 100k+ in taxes, if single, that drops to $250k, but still saves a lot. If you rent it out for more than 3 years, that tax benefit will disappear.I would make up a spreadsheet and make up different scenarios, projecting out 5 or 10 years. See how much you have in cash flow or net worth after those periods of time. That sort of analysis helps put things into perspective when I am balancing different options.

Brent Coombs · Answer

Aah - your current 3.99% is better than I thought, but I'd forgotten to factor in that you would have borrowed a somewhat higher amount than you currently owe. If you were to refi the current $156k out to 30 years starting now, at the same interest rate, your principal & interest payments might go down ~$125/m (only). Would that swing the debate you're having with yourself? I believe @Chris Mason is a VERY active/knowledgeable Lender in your neck of the woods, so could be worth a personal message behind the scenes? [Chris, if I'm speaking out of turn, my apologies].

Joseph Hennis · Answer

Tobias mentioned the $100k in taxes above... That might be the driving factor for making this decision. If you are married you can avoid those taxes altogether.Just get started with BRRRR, you can even refinance your personal residence without renting it out (if you still want to live there) to give you the capital to purchase other properties.One thing to consider about your plan for BRRR, the buy. repair part... Is more difficult to do with loans... You mentioned 50k down on a 250k property, but if it needs significant repairs it won't qualify for conventional loans. You will need alternative financing. It's not impossible just more difficult and costly. If you refinance your primary first (maybe with a HELOC or home equity loan), you would be able to buy properties cash (or with very little financing), greatly simplifying the BR in BRRRR.

Dave Woolley · Answer

@Tobias Falzone, @Chris Mason - Yeah I figured my expenses were high but was just following along with advice from BP in making conservative estimates. Thanks for the advice on taking a longer term perspective and analyzing different scenarios. I'll definitely do that. I'm an analysis paralysis type though so need to balance that if I ever want to make the leap! ;-)@Brent Coombs - My current interest rate is 3.99%@Anthony Gayden - Yeah I probably could have dumped a lot more more into my 401K but took the approach to only contribute as much as my employer would match and stock the rest as cash so that I could remain liquid. It's definitely time for me to make some adjustments in my approach!Thanks again for the replies and advice all!

Anthony Gayden · Answer

@Dave WoolleyIt looks like you have some investments but I notice that you only have 70K in your 401K. I am assuming that you have a relatively high income if you bought a house for 499K in 2003. Why have you been contributing so little to your 401K?I'm a real estate investor, but I believe strongly in having a diverse group of investments.

Brent Coombs · Answer

Any chance of refinancing your loan to a lower interest rate? Even a reduction of 0.5% might show a significant saving. Looks like your interest rate is at least 4.5%? Is that the best around, now?...

Chris Mason · Answer

That CapEx may be high. And property management is up to you. I often get the impression that this website, as great as it is, has C class neighborhoods, and C class tenants, hard coded into it. Which may be a reflection of 100% perfectly accurate numbers drawn from where and how the founders got started (speculation on my part). The Bible has figs and an incorrect value for pi and the Roman Empire hard coded into it -- it may be a great place to draw wisdom from, but pi is still 3.14159(...) and not the number they have it as (also what the heck is a fig?).To wit: this isn't exactly a neglected home in flyover country you are just now buying today at a low full retail price because the local economy is so depressed that no one can afford to own (or maintain) a house...

Dave Woolley · Answer

@Chris Mason, @Brent Coombs, @Dylan Vargus... Thanks for the feedback and encouragement... very much appreciated!In regards to my calculations... rent for comparables in my area looks to be ~$3850. My mortgage is $2300/mo, property tax is $808/mo, and insurance is $67/mo... total comes to $3175 which would give me a positive cash flow of $675/mo. When I add in all of the other expenses via the BP Rental Calculator (vacancy rate 5%, capex 18%, repairs 5%, property management 10%) the total comes to $4427 and results in a negative cash flow of $596. Does this look like an accurate analysis or am I using inflated numbers?Thanks again!

Dylan Vargas · Answer

@Dave Woolley Congrats on the 2003 buy! Wow! The mortgage on your home should be WWWAAYYYY lower than the rental income you would have. I would work the calculator again. Your payment should be $1600 per month plus taxes and insurance (maybe a little more than $1600on the principal). I would ask @Chris Mason for a rate and quote. YOU WILL NEVER LIVE IN SILICON VALLEY AT YOUR CURRENT LOCATION FOR $1600 PER MONTH AGAIN (plus taxes and insurance) in my opinion, so I would keep the house if you really like the area. If you find another area that you like (90% sure) sell and move on! This will give you a ton of capital to really have the chance to quit your job and have income from properties. There will be many learning experiences along the way and it will be tough for a while I would think. Now, the grass is always greener on the other side! Having a regular job provides a ton of benefits unless you just totally hate it. You would need a certain number of units to create passive income. More the better I would think. Depends on what amount of money you need to live your lifestyle. Also, you can start buying properties now, keep your house and use the equity to build your portfolio. I am not a pro by any means! I do think there will be a dip in the market sooner or later. So I am a fan of get your money while you can! @DianeG may disagree with me here. How bent are you personally about living in your area? Can you live somewhere else near for half the price? This can solve all the problems! Good luck but either way what a great position you are in. So, relax and do whats in your heart/gut! Enjoy!

Brent Coombs · Answer

@Dave Woolley, fact is, you're ALREADY a real estate investor - since 2003! Welcome to BP.And your initial deposit has been earning you ~$35k per year on average ever since - despite the diversion of a global financial crisis in the middle of that! And your current mortgage SHOULD be less than $3k/m including Taxes and Insurance ie. Much cheaper than the rent you could obtain!Congrats on your progress so far. Keep asking all the right questions, and you'll get there!...