Should I sell or keep my Carlsbad rental?

Question

Hey BP community,

Looking for some feedback on a decision I’ve been going back and forth on — hoping some of you with experience in high-appreciation markets or equity redeployment strategies can weigh in.

Here’s the situation:

• I own a rental property in Carlsbad, CA (ZIP 92010).

• Purchased for $820K, now worth ~$1.5M.

• I owe ~$630K on a 3% fixed mortgage.

• It cash flows about $20K annually after all expenses.

• I now live in Texas and am considering either upgrading my primary residence here or reallocating the equity into something more scalable.

My current thought process:

Pros of Keeping:

• Locked-in 3% rate is hard to beat.

• Strong appreciation and demand in Carlsbad.

• Consistent, low-maintenance cash flow.

Cons of Keeping:

• Significant equity trapped in a single asset.

• $20K/year on $870K of equity is a pretty low return (~2.3%).

Options I’m considering:

1. Sell and use part of the equity for a larger home in Houston (where I’m raising a growing family), and invest the rest into the stock market or other real estate deals.

2. Do a cash-out refinance, though the rate jump makes me hesitant.

3. Just hold long-term and let it ride — enjoy the appreciation and tax benefits.

Would love to hear from anyone who has faced similar decisions, especially those who’ve moved out of state from a high-growth area. What would you do in my position?

Appreciate any insights!

Brandon

Brandon Seidel · Answer

One thing I would add is that since I only moved out about 18 months ago, I have a short window to sell to avoid capital gains taxes

Eric Fernwood · Answer

Hello @Brandon Seidel,

The decision to sell or keep your Carlsbad rental should be based on the property's likely future performance. If your goal is financial independence, you'll need rental income that can sustain your lifestyle for the long term. In our inflationary world, your rental income must increase faster than inflation.  For example, if a basket of goods costs $100 today and inflation averages 5% per year, that basket will cost $163 in 10 years ($100 × (1 + 5%)^10). If your rent increases faster than inflation, you'll have the needed $163. If not, you'll need a job to make the difference. The key question is: Will your (Carlsbad) rent likely increase faster than inflation? The same question should be asked for any replacement rental properties.

Some other considerations:

• While cash flow pays the bills, appreciation is how you grow your portfolio. Based on what has happened over the last 10 years, what do you expect the average appreciation for an existing home in your price range to be for the next 10 years? If selling and replacing with rental properties elsewhere, what do you expect the average appreciation of the replacement properties to be? If the Carlsbad property has higher appreciation potential, it might make sense to keep it until you can find replacement properties that are likely to out appreciate it (AND generate growing rental income faster than inflation.)
• California is a pro-tenant, anti-owner state, which means a problem tenant could lead to an expensive, year-long eviction process. While such nightmare scenarios are unlikely, I think of nightmare evictions like cancer—when it happens to someone else, it's just a statistic. When it happens to you, it is a tragedy. So, this is a risk factor to balance.

Ashish Acharya · Answer

@Brandon Seidel You’re sitting on significant equity with a low 3% mortgage, which is a major asset in today’s high-rate environment. However, earning only ~$20K annually on $870K in equity is a low return (~2.3%). If you sell, you could redeploy the equity into a primary home upgrade and higher-yield investments, but you'd face capital gains and depreciation recapture taxes unless you do a 1031 exchange.

A cash-out refi could free up capital while retaining the appreciating asset, though higher rates will reduce cash flow. If long-term wealth and tax benefits are priorities, holding may still make sense. If scaling or lifestyle upgrades are the goal, consider selling with a smart tax strategy. A side-by-side tax impact and reinvestment analysis would help guide the decision.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Alex Olson · Answer

In short it is all about you and what you want. Do you want to 1031 exchange into a cashflowing market like Kansas City or keep there? Right now you have a lot of untapped equity. That equity can buy a lot in the midwest. If you are thinking about exchanging here, I am happy to have a conversation on replacement properties and returns you can get in KC.

Keith Mintz · Answer

Hey Brandon, I understand this situation well. I also live in Carlsbad and my family has been debating the exact same decision. They bought a house in Encinitas in 1997 for $275k and it is now worth nearly $2m. It is in a very family oriented neighborhood with an HOA. The house has been rented out for years since we moved to Carlsbad and we get about $6k/m as of today. Running the number in comparison to other investment opportunity, the cap is S****. I see better opportunity left and right everywhere, which always brings back up the debate. But the pros of keeping it is net cash flow, steady appreciation, and always have a house in an excellent location while always having cheap property tax, for our future family. Doing a 1031 exchange from an investor point of view, makes a lot more sense even with having to pay a higher property tax. But for us, our family will always be in San Diego, so it is easier to just keep it and not worry about it. We have contemplating just pulling equity out and using that for other investments.

So to answer your question, it really comes down to your future plans and preference. North county San Diego, is really more of a residential area for families and those actually wanting to live in San Diego. Real estate is way more expensive in this area compared to southern San Diego.

Your house will sure appreciate but if your wanting a higher cash flow now, investing elsewhere would be better. Also If you don't plan on living in San Diego again and have no family here, may be another reason to sell it to a family. And buy a better cash flowing investment where you live or in another market that is growing and has cheaper real estate.

I specialize in 1031 and investment comparisons, if you have any further questions or need analysis done. Feel free to connect!

Dan H. · Answer

($2m - $275k)/28/12= $5,135/month of appreciation ($61,607/year)

the only way your cap is not outstanding is that you extracted value.  Likely far over $1m of value.

What if you purchased at 80% LTV?  $55k plus closing costs.  Let’s use $6k closing costs so $61k all in purchase cost and the property has produced an average return of 100% on initial investment annually from the appreciation alone.

interest rate in 1997 was ~7.5%.  On the 80% LTV, 30 year. P&i $1538/month.  $6k rent would vied almost $4500/month to cover all expenses and provide you cash flow.  The property tax in near fixed, you are likely paying less than $4k/year.

But let’s assume you refinanced at some point into a 3% loan without cash out and extending the term.  $928/month.  $5k to cover expenses and provide cash flow.

The loan would be fully paid off in a couple of years.

If you had not pulled out equity and increased the term, you could be paying a few hundred a month (refinance in late 2021) and having almost $6k/month for expenses and provide cash flow.

Or late 2021 you cash out refi at 80% LTV with 3% loan and pocket ~$1.5m tax deferred.

My point is this has been a home run investment but your post makes it seem like something that you would expect other markets to match or beat.   very unlikely.  You purchased in a great area and a good time (mid 1999s locally had a fall in RE values, purchase in 1997 was a near optimal purchase similar to a purchase in 2012).

Good luck

Eric Gerakos · Answer

Keep.

Rick Pozos · Answer

I take the more frugal approach. If you are making 20k per year plus tax benefits, keep it. THAT is your retirement account. Leave it there, take care of it and it will be $2mil when you retire and sell.

STAY where you are at your home. Do you really NEED a bigger house and a bigger mortgage?? Probably NOT. Save that money and get ready to buy another property where you are locally.

Most people never prepare for the hard times. One or both spouses can lose a job, get in a car accident and can't work, hospital bills, cancer, slip and break a leg at home and cant work for a month. Lots can happen. Stay lean and put that 20k into another rental property locally. Does each kid really need their own bigger bedroom?? (the answer is NO)

Rodrigo Serzedello · Answer

Hey @Brandon Seidel, great question—and you’re definitely not alone in wrestling with this type of decision.

First off, congrats on an awesome investment. That kind of equity gain doesn’t happen by accident. Sounds like you made a smart buy at the right time in Carlsbad (and locked in that golden 3% rate—huge!).

I’m a real estate agent and investor based in San Diego, and I also own out-of-state rentals. So I totally get the emotional and financial tug-of-war you’re describing.

Here’s how I’d look at it:

1. What’s your bigger picture?

Are you in “growth mode” or “stability mode”?

•	If you’re aiming to scale, that $870K in equity can be rocket fuel—especially in more cashflow-friendly markets like Texas.

•	If you’re leaning toward stability and enjoying predictable passive income, then holding onto that 3% loan and appreciating asset makes total sense.

2. The opportunity cost is real

$20K/year on $870K = 2.3% return like you said.

Could you 1031 that into multiple doors in TX or the Midwest, boost cash flow 3–4x, and still ride long-term appreciation? Likely yes.

3. Your primary home upgrade

Raising a family in a home you love is worth a lot. If selling helps you do that and frees up equity for investments—you might get both lifestyle and portfolio wins.

What I might do if I were in your shoes:

Run a side-by-side 5- and 10-year forecast comparing:

1.	Hold (rent, appreciation, tax benefits)

2.	Sell & redeploy (new primary + 2–3 solid cashflowing assets)

Then ask: which version gets me closer to my personal AND financial goals?

Happy to help you model it out if you want to run the numbers. Either way, you’re in a great spot with options. 🙌

Cheers,

Rodrigo SerzedelloSan Diego | Investor & Agent Keller Williams Delmar

Dave Foster · Answer

@Brandon Seidel, You've hit the high spots

1. If you pursue this option you'll pay tax on an $800K profit plus depreciation recapture.  That's not a small tax even in TX let alone what CA might want from you.  A 1031 exchange would let you defer all of that tax.  But you must purchase new investment real estate.  You can't defer the tax if you buy your primary residence or stocks/etc.If you decide to sell the property, being that it's an investment property you will be able to do a 1031 exchange.

2. You're right to be concerned about the impact of a cash out refi.  This almost never helps a weaker performing property.  And in your case would almost surely make it a negative producing NOI property.  If you can find a killer property to buy.  And if appreciation stay's strong in Carlsbad then your Internal rate of return will be fine.  But you'll have little cash each month to bank for expenses.

3. This is always an option.  And it can be a good one -  especially in CA, if you don't need a lot of cash flow.  And if you're not trying to scale your portfolio.

If you want to scale and grow your investment real estate then this property is not a good candidate to hold.  Your best bet would be to sell and 1031 exchange.  A 1031 exchange would allow you to defer all of the tax and depreciation recapture, and reinvest it into a larger, or more and smaller property/properties with better cash flow. This is a great tool to scale up your portfolio using all of the tax to your advantage.