I want to move - should I keep my house and rent it or sell it?

Question

Hi all.  This is my first post on Bigger Pockets.  I've enjoyed reading through these forums and learning the past few months and I feel grateful that such an awesome community exists for people like me to learn about RE investing.

Here's my question - I currently own my home in Montebello, CA.  I owe $372k on the home and it recently appraised for $465k.  My wife and I would like to move to a nicer area so that we can have access to better schools for our son and also to just live in a nicer area.

So we're looking at Duplexes in Eagle Rock, Pasadena,  Glendale and Torrance because we're interested in becoming landlords and moving toward investing more and more.  I currently have a HELOC that I obtained for $45k and that's from the equity in my currently home.  I'm wondering if it's a good idea for me to rent out my current home and use the HELOC money to buy a Duplex.

Based on a little craigslist and rentometer research I think I could get $2k-$2,300 in rent for my home and that would cover my mortgage, taxes and insurance.  It would not cover the other expenses: vacancies, capex and maintenance, etc.  I would want to manage this property myself and use a service only to find a quality tenet.

One concern/fear I have is that if I used all 45k of the HELOC money (which has a variable interest rate) and rates continue to rise, that the payment could get out of control.

What do you think?

Travis Sperr · Answer

Sell the house - you would never buy that house as an investment property - it doesn't cash flow. Take your equity while it is still tax free and buy your duplex and another SFR or multi-unit that produces cash flow. Otherwise you are going to be out of pocket every month keeping the house as a rental and will have to fix it up when it is time to sell.

Michael Boyer · Answer

Looking to be buy and hold landlords, the current home does not look like it pencils out well. But on the plus side, you know it well (the history and maintenance, etc) and it could be a "trainer" rental for awhile to teach you some landlord skills.

But you could do that (learn landlording) by selling it and getting into a duplex, too. The tax free sale of your home is a bonus. So the equity might be better used in the multifamily for economy of scale. And it looks like single homes may be tough to cash flow in your area anyhow, so small multifamily may be your niche and an ideal starting point.

But all markets are local and CA does see some impressive appreciation in areas (often in a very short time) so your keen market analysis may be key. That is sort of the premise of Schumacher's classic book: Buy and Hold (just hang on...especially in SoCal and Coastal CA, or at least it worked for him)... Personally, I like positive cash flow in the mean time...

Best of luck!

Travis Sperr · Answer

Great point - I had that exact thought about sky rocketing values - but assumed it wasn't there becuase it wasn't mentioned.

JD Martin · Answer

The only way you could justify the current home as a viable rental is if you had strong evidence that appreciation was just beginning and that you could expect housing values there to skyrocket. Otherwise, as @Travis Sperr mentions, it's a financial loser. Speculation in RE is very risky stuff, not something to toy with unless you have a lot of resources (i.e. you can afford to lose big). I'd break and move on.

Trever Jones · Answer

Thank you everyone for the advice!  I think selling my current home and using that equity toward the Duplex makes the most sense for my wife and I.  Maybe if I had more reserves I'd think about keeping the home but I like the idea of starting slow with one rental property and building from there.  Thank you again!

Ciprian L. · Answer

@Trever Jones

You should talk to a lender first, see if you qualify to purchase a duplex if you decide to keep the house.

You also need reserves when you have rental properties, if the 45k HELOC is all your money, I think it's too risky to purchase the duplex and keep the single family, if something goes wrong and you have to spend money that you don't have and also have 2 assets that don't cash flow you risk on loosing the properties.

Nabil Suleiman · Answer

@Trever Jones

As one more tip; If you are looking at duplexes in those areas 45,000 is maybe 3-6% down (maybe) depending on the quality of the property. In our current market, I generally don't see those investments going toward the buyers with less on the table. So if that is a move you are serious about making, I would consider utilizing your equity to "move up" as many investors do.

Many people with 45+ doors started with 1.

Jennifer McElliott · Answer

That's a great question - and one I've struggled w/ a couple of times now - we've moved from our primary home in the SF area - rented out a condo that was underwater and didn't cash flow, but covered (like in your case) the mortgage (P&I), HOA, and taxes but didn't cover vacancies, or capEx etc.  That was 6 years ago and w/ the help of a PM that screened our tenant - we've had the same great tenant since that first placement so we never had to worry about vacancies.  Also given the age of our condo, we haven't had any capEx expense, so basically we've had a tenant pay down our mortgage, and since then the market has rebounded and we are now sitting on a nice chunk of equity.

We're about to come into this situation again due to a military move and I'm contemplating the whole situation all over again.  So here's what I'd list out as the pros and cons to weigh (in addition to what folks have already brought up)...

Pros to keeping it as a rental:

1.)  Montebello - and most of the SGV is a very hot market - you're seeing some amazing appreciation in that whole area where even the neighboring cities that used to be undesirable have starting list prices of 500K!  So I think you do have appreciation on your side.

2.)  since this was a primary residence you probably have a better interest rate on it than you would if you were to purchase an investment property w/ the proceeds... and if not, have you considered refinancing it (before you move?)  What we've stumbled on is that if we buy a primary, live in it... then have to move, you get to keep that primary residence perk of lower down and lower interest rate and you get to re-use those perks when you move into your next primary home.

Cons:

1.) it's not cash flowing - so that's an obvious con - but can you change that w/ a refi?  Can you value add - what kind of zoning is the house in?  is there any way to add a garage unit or something like that to get an additional renter in there?

2.) This might cost you money if you get bad tenants - but again this could be mitigated to some degree.

3.) Not really a con, but - a pro to selling is that you can reap the benefits of up to 500K in profit w/o being taxed on it and you won't have to worry about doing 1031 exchange or anything like that... but i think - and others will have to chime in on this one... that you can still rent it out for a couple of years and decide later to sell as long as you had lived in the property 2 of the 5 prior years!

As far as your HELOC goes - you'll also need to factor in how much you're renting out the other sides of your planned duplex and how much of a 'cushion' you will have with that.  I'm assuming you and your wife have w-2 jobs... in our case that's helped up to hang on to that original condo that didn't cash flow since we weren't relying on the cash flow to make ends meet.  So depending on the condition of your home - and what you can forsee for cap ex expenses that may arise and what your debt to income ratio is right now - it may be advantageous to hang on to that property.  While it's true you probably wouldn't have purchased it as a rental from the outset, due to the numbers, you have other positives that you gain from it being a primary converted to a rental.

Best of luck to you!  Like I said earlier - we're back in that same position now w/ a house in WA and an upcoming move this summer... so we have a couple more months to kick around the pros and cons and watch the market a bit too!  Keep us posted!

Trever Jones · Answer

Thanks guys!  I was originally looking at my primary residence as a bad investment property but then I got convinced that maybe it was worth it because of the tax benefits, principal paydown and possible appreciation but I like your guys reasoning and I think I'll just sell it and put the equity toward a Duplex.

Also that will mean I'll be able to put more down on the Duplex and I won't have to use the HELOC money for the down payment so it's less risk for me so I think it's the overall best decision.

Thank you again!

I want to move - should I keep my house and rent it or sell it?

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