Am I Smart Or Just Antsy?

Question

First off, hello! I am new to BP and looking to start building my network in Southern California (Orange County) for RE education/planning and future RE investing. Hello BP! Secondly, a question... If I sold my primary (and only) residence tomorrow, I'd be able to capitalize on a fair amount of appreciation. Also, due to high HOA's, Mello-Roos taxes, and the fact it's an attached house, I don't see it being an excellent rental property in the future. By my rough calculations, breaking even would be the best case scenario if I rented it out. My thoughts are to cash out on my current appreciation and: 1. Rent until the market corrects itself 2. House hack a multi-unit property in So Cal or 3. Buy a home with better long term rental potential. Since the market is near the peak here, I don't want to trade apples for apples, but maybe there are some slightly better apples out there than my current apple?! I'd love to hear opinions from those more seasoned than myself! Thanks in advance for any feedback! -Hunter

Dave Foster · Answer

@Carlos Altamirano, Since the property is @Hunter Petersons primary residence he cannot do a 1031 exchange on it without first moving out and converting to a rental for a period of time.However, if he's lived in it for 2 out of the previous 5 years he can sell and take the first $250K in gain ($500K if married) tax free. If you truly believe things are at a high and destined to stagnate or fall then sell and rent for a while.@Brian Ploszay, make a good point however. And House hacking is really just couch surfing v.2 which is slumming with friends v.3 which was how we all got to live near the beach as destitute young bohemians. That's been around a long long time before it got a new name.

Ali Boone · Answer

Haha. I like the apples part.I agree about the rentability with HOAs and Mello-Roos likely not being overly helpful. As far as the options:1. Do you mean you rent somewhere to live or rent that property?2. Just be sure to run the numbers. Househacking may put you in that apples to apples category. You'd want to make sure the numbers on that surpassed just staying in your own place. They may not.2. Longer-term rental potential is definitely an option, but you'd likely be looking at out-of-state properties if cash flow is your focus.What kind of numbers are we talking here? Like how much appreciation are you sitting on in your current house and what are the totals of those HOAs and Mello-Roos and such?

Thomas Rutkowski · Answer

I'd sell and capture your equity. The markets in Southern California and the Bay area have seen above average rates of growth. Take some chips off the table.All of my own cash is sitting on the sidelines in safe, financial alternatives. I'm waiting for the market to become sane again before I take on "equity" risk again. Private lending may sound risky on the surface, but it's actually a very safe, secure position. The investor borrowing the money is taking on the risk. I'm either going to make a very nice, risk-adjusted return or I'm going to inherit the collateral securing the note.

Hunter Peterson · Answer

@Filipe Pereira I can't be sure but that seems to be the word on the street. So Cal seems to be a little more immune to market corrections, but since townhouses are usually the first to depreciate before SFRs in a down cycle (from what I hear) I don't want to get caught without a chair when the music stops so to speak, especially if I don't see that this place would be a cash flowing property if I had to hold onto it.

Brian Ploszay · Answer

Seems like California investors are house hacking these days. I am not sure there will be a correction in pricing in Southern California. What would help is if they built more higher density housing to sap the demand. The great cities of the world are not horizontal. They build up. One thing to watch for in Southern California is the transaction volume. If it slows, that a sign of a mini-correction.

Carlos Altamirano · Answer

Hey @Hunter PetersonNice situation you have there. You can refinance and rent that property on a short term basis through AirBnB or other channels similar. Not sure on your capital gains tax if you just sold it. Maybe 1031 into a mulit-family out of state? We hold rentals in midwest. Good luck!

Filipe Pereira · Answer

Are you sure? How do you know?

Aaron K. · Answer

In my experience Mello Roos is the devil and high HOAs are a close second I think you might be on the right track with house hacking, you can find some multifamily properties with 2-3 detached houses on a lot, which gives you the privacy of an SFR with the house hacking ability of multi family. I don't know if there will be a correction in California's future, but if there isn't you might get caught in a cycle of ever rising rents and not come out ahead. Even an SFR with rental potential without Mello Roos and huge HOAs might be a good option. PM if you would like to discuss further.

Matt R. · Answer

Option 2 or 3 sound good. It is understandable the hoa and mellos are not always great for rentals.Option 1 idk...the market has corrected itself but not the way you are thinking. Even if it is a peak today, that is a price from 10 years ago and with adjusted inflation that is still 20% less than 10 years ago. Not only that, the 2007 price vs 1997 price was much higher so why would we think 2017 would not be higher that 2007? And it is barely higher only in some areas adjusted for inflation or even below the 2007 value today. Good luck!

Nick G. · Answer

@Hunter Peterson It's just my personal opinion, but you'd be absolutely nuts to sell your place and go rent. 100% the way to go is to do a cash-out refi, there are some pretty nice products for owner-occupied properties, up to 90% LTV, I'm looking at one myself. I wouldn't do a HELOC today because in the event the market corrects sooner rather than later, the creditor may cut your HELOC off at the knees whether or not you used it. So a cash-out refi is the way to go, in my opinion.The only major scenario I could support you selling in would be if you rented out your place and bought another to live in with a low-interest and preferably low-down loan (major bonus points if you house-hack by renting out rooms.) It wouldn't be a cash flow play, it would be almost entirely based on appreciation over the next 10-20 years (since the next 10 years will likely have both a correction and some recovery, meaning your major appreciation gains probably won't come around until after then, though you may have a healthy little bit of appreciation in the next 1-3 years, which is my belief for how much we have left in SoCal of this seller's market.)