To Keep or Sell Rental Town home in San Jose

Buying & Selling Real Estate
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To Keep or Sell Rental Town home in San Jose

Kiran R.
San Jose, CA · Member since 2014 · 43 posts · 15 votes

Hello everyone

I like to get the inputs from some experience investors, and what you would do if you were in my shoes.

  1. I bought a 2/2 town home in San Jose in Feb 2013 as primary residence for 520K with 20% down, which now can be sold for ~700K
  2. And in late 2015 we purchased a SFH and moved into this, making the townhome as a rental property for 3k/month
  3. Now as the time to renew the  lease with my tenants has come, I am in two minds about keeping the townhome or selling it and take some profit.

Here is my thought process so far

1. The town home barely cashflow, which is ok. The only reason the thought of selling has come, is I want to take out the profits  when the market is good, and have cash ready when the market goes down may be this year or 2 years from now. 

2. I have no better investment ideas with the profits from the sale of town home, so I might pay some to reduce the mortgage of my current Primary residence(SFR), and reduce my total debt.

Any suggestions/ideas, or what you would in similar situation are highly appreciated.

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Ryan Landis
Residential Real Estate Broker · San Mateo, CA · Member since 2013 · 585 posts · 264 votes
10y

@Kiran R. depending on the dates, make sure to speak with your accountant as you might be able to get a good chunk of the proceeds tax free because it was your primary for sometime.

Not sure what your interest rate is on your primary, but in terms of debt pay down vs. liquid cash, and given your goals, just make sure you have access to it (i.e. through a HELOC or some other structure).

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  • Brad Saari
    Investor · Denver, CO · Member since 2016 · 55 posts · 28 votes
    10y

    Keep in mind that you will pay capital gains tax if you don't reinvest the money from the sale into another property, believe its called a 1031 exchange. There's a relatively short window between closing and reinvesting....something like 180 days. 

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  • Ryan Landis
    Residential Real Estate Broker · San Mateo, CA · Member since 2013 · 585 posts · 264 votes
    10y

    @Kiran R. depending on the dates, make sure to speak with your accountant as you might be able to get a good chunk of the proceeds tax free because it was your primary for sometime.

    Not sure what your interest rate is on your primary, but in terms of debt pay down vs. liquid cash, and given your goals, just make sure you have access to it (i.e. through a HELOC or some other structure).

    2Reply
  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    10y

    @Kiran R. You are gaining equity/wealth at a rate of 5k a month currently. Maybe exchange only if you can find something better. The market rent could be just catching up and perhaps check that too. You could be around the corner from much more cash flow as well. Good luck!

    2Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    10y

    @Kiran R., You will not need to do a 1031 exchange to shelter tax on this property.  You moved into it in 2/2013 and moved out late 2015.  So you lived in the property for two out of the previous five years. You can use the primary residence exclusion of sec. 121 and sell it at any time and take the first $250K ($500K if you're married) in profit tax free. You will need to sell the property prior to 2/2018 so that you can say you lived in the property for two out of the previous 5 year period prior to sale.

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  • Robert Musallam
    Investor · San Jose, CA · Member since 2014 · 294 posts · 113 votes
    10y

    Hi @Kiran R. 

    Nice job on the market timing! The conversations I'm having right now with sellers in your situation is to consider taking advantage of the tax exclusion (as @Dave Foster astutely described) and funneling the money into a true investment property, such as a 2-4 unit. I think using your capital gains to expand your real estate portfolio would be the best use of your gains. 

    What you'll have to decide is whether or not you're looking to expand into that 2-4 unit realm or if you'd prefer to keep the easier to manage, single family unit. 

    Best of luck and feel free to reach out if you have any questions!

    2Reply
  • Kiran R.
    OP
    San Jose, CA · Member since 2014 · 43 posts · 15 votes
    10y

    Thank you all

    @Dave Foster, @Robert Musallam @Ryan Landis - you are right. The profits from sale are tax free as it was my primary till late 2015.

    Robert, I would like to expand my portfolio to 2-4 units but, I feel right now it may not be the best time considering the market has been trending up for a while now.

    0Reply
  • Jim Walters
    Rental Property Investor · Conover, OH · Member since 2016 · 55 posts · 48 votes
    10y
    I would think about selling this property if your goal is to own rental properties. One of the most crucial points when investing in real estate that you are going to use as a rental property is for it to be a good cash flow positive property. It does not sound like this property is. I read your additional post about it not being the right time to buy. However, there still may be opportunities to buy properties that are cash flow positive.
    0Reply
  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @Kiran R.:

    Hello everyone

    I like to get the inputs from some experience investors, and what you would do if you were in my shoes.

    1. I bought a 2/2 town home in San Jose in Feb 2013 as primary residence for 520K with 20% down, which now can be sold for ~700K
    2. And in late 2015 we purchased a SFH and moved into this, making the townhome as a rental property for 3k/month
    3. Now as the time to renew the  lease with my tenants has come, I am in two minds about keeping the townhome or selling it and take some profit.

    Here is my thought process so far

    1. The town home barely cashflow, which is ok. The only reason the thought of selling has come, is I want to take out the profits  when the market is good, and have cash ready when the market goes down may be this year or 2 years from now. 

    2. I have no better investment ideas with the profits from the sale of town home, so I might pay some to reduce the mortgage of my current Primary residence(SFR), and reduce my total debt.

    Any suggestions/ideas, or what you would in similar situation are highly appreciated.

    Ryan is right on the money.  You can sell and exclude from taxable income up to $250,000 if you are single and up to $500,000 if you are married if you can say that you live in the property as your primary residence for at least 24 months out of the last 60 months ("121 Exclusion").  The 121 Exclusion is tax-free income, so be sure not to pass this up if you can. 

    If you don't qualify for the 121 Exclusion, then it is rental property and you can do a 1031 Exchange into something else. 

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