Should I sell my SFR?

Question

So I purchased my first SFR 2015 and has been rented out for a year now. It is located in good area of Orange County, CA. My mortgage is $2k and some change and rented out for $2700. The tenants are great and always on time. The home was completely remodeled down to studs even new framing in alot of places. I purchased it for $406k and did a 5% down conventional loan on it. The balance now is $372k and the current market value is anywhere between $525-$550k. I purchased this home with the intention of someday living there should I have a family. I have a place to live however either way. Im leaving my emotions aside and strictly looking at this from a numbers point of view. Now I did spend total of about $105K on the entire rehab including a years mortgage, reason it took almost a year is because i paid for rehab as i got paid from work, live and learn, non the less it all panned out and im here now. So, also I am not investing in Non-Performing notes and would like to grow more in this market.

My thought process is if i were to sell the property I would get about $140K in profit. Also this is as owner occupied not a rental. So the two year mark is approaching this may, so i would avoid capital gains tax. Since the market is high right now and ill get top dollar. I assume market is going down next year and I can buy back in then. I want to use the profit i make to invest in notes, and double my money. Just dont want to hold on to this if the time is now for me to sell and make a good profit. I need some input as to what would be the best investment strategy for me to go with. Thank you in advance and taking the time to read all this.

Daniel Hanson · Answer

@Varinder Kumar

Here is the math as I see it, just wanted to make sure I could summarize what your post says:

Purchase Price $406kDown Payment @5% =$21kOriginal Mortgage $385kRehab $105kAll-in purchase price + rehab =406k + 105k =$511kAll-in Cash= 21k + 105k = $126kCurrent value = $525k to $550kCurrent mortgage = $372k

Not clear if you have lived in the property prior to renting it out.  If not, you will still have capital gains tax on the sale, just depends if it is short term or long term capital gains.  Very simpistically, ignoring capital gains taxes and accumulated (negative?) cashflow and selling costs, it looks like your profit from sale would be mortgage paydown (385k-372k) + appreciated price minus all-in purchase (525k-511k) = 13k + 14k = $27k, or $52k if you are able to sell at the higher price.  Once you subtract the other expenses I'm ignoring, you may find no profit in selling.  I'd recommend doing the math in a spreadsheet and accounting for all your costs so you can decide the true profit before making your decision.

Varinder Kumar · Answer

@David Faulkner

Thanks for the advise! I'd like to use the cash to get into a multifamily property as well, it will take me a while to save up that kind of money for a down payment, so this is my best option.

David Faulkner · Answer

Selling a single family home that is well located in a nice neighborhood in OC in order to buy non-performing notes is trading down in quality and up in risk ... I would not do it, and I know which one is most likely to hold up best in a downturn, so I doubt that your plan to make a boatload of money and buy back in when the market goes down would pan out.

Your theory on never claiming it as a rental therefore selling tax free is an interesting one, though an IRS auditor reading a publicly posted admission that it was a rental may disagree. I wish you luck, but my opinion is that this is not going in the right direction.

Varinder Kumar · Answer

well it's considered owner occupied, I never claimed it as a rental. So I won't have the tax on the gains. I think I'm going to sell it. I know I can double my money by investing right.and buy back in when market goes down.

Justin B. · Answer

The big piece here is that you have not lived in it for 2 of the last 5 years.  That means there is no difference in this property than any other property you have.  If you sell, you'll owe taxes on the gain.  That being said, there is a lot of potential cash there and you could probably put it to good use.

In my personal opinion, if I had no other money, I would sell because $100k (let's be honest, that's what you're most likely looking at) could go a long way to buying more properties.

But again, when you make your decision, since you've rented it out and don't qualify for a tax-free sale, I'd make my decision solely a business one and not think of it as your residence.

Varinder Kumar · Answer

@karthick

Non performing notes are notes that owners defaulted on which banks did not want to spend the time and money to foreclose on so they sell them off to hedge funds at steep discounts and what ever hedge funds don't want they sell off to private investors. You are basically investing in debt. What ever they unpaid balance on that note is you are purchasing at a fraction of that amount. You can read more about the non performing notes in the fourms. But know that to get connected with note sellers and trade desks that sell notes it's not easy. You can always go online to Fci exchange and view notes for sale there. Learn it first though as there are a lot of laws you need to to know about..good luck

Karthick Bhaskaran · Answer

Hey Varinder Congrats on your house. If you don't mind, what are non-performing notes ? and did you mean you were investing in them ?

" So, also I am not investing in Non-Performing notes and would like to grow more in this market. "

Kai Kopsch · Answer

Holding on it you can't know what will be the market price in other year will be it may high the market price or low because markets is unpredictable. If you sell it now and get a good profit then it will be great for you.

Varinder Kumar · Answer

@Bob B.

Thanks Bob the other thing that on my mind is, since the tenants have only been there for a year and they have made it their home, would there be any retaliation towards me? Breaking stuff out of anger etc? How best to break the news to them? Maybe I'm over thinking it. They have been good tenants. But I got to do what I got to do, I understand that also.

Bob B. · Answer

Sell it and focus on your note business.

Should I sell my SFR?

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