Sell or hold in Bay Area?

Question

Hi all,

Here's our situation. Our tenant is moving out at the end of June and we have to decide whether we should continue renting out the house or sell it. It's in the Bay Area and if we sell, it'll put a good sum in our pocket. And since we've lived in that house for 2 of the last 5 years, the capital gain will be tax free as well. But we'll have to do it by the end of the year to qualify for the exemption. If we sell, our plan is to take our time to look into getting a multi family property maybe just outside the Bay Area (it's too expensive here) so we can continue to let the money grow. We may hold onto the money until the market slows down in the next couple years to get a suitable property as well.

The other idea is to keep renting it to have a small but steady stream of passive income.

My feeling is that the market will continue to stay this way for maybe another couple years and if we wait that long, we won't qualify for the $500k exemption since we will have passed the 2 yrs out of 5 timeline. That's way there's more incentive to sell now and take our time to look for the right multi family.

How does my logic sound?

Paul Choi · Answer

@Kin Leung

Man...this questions comes up all the time on BP - I want to get into MF but maybe I'll wait till the market corrects or crashes.  Nothing against you Kin...just a newbie way of thinking, which is totally fine since it sounds like you're starting out.

everyone has different goals and opinions but for me, the right time to buy MF is the time you have funds to buy.  You cannot time the market...no one can.  So yes prices are hot, it can go up 15% in the next year then correct 10% the following year.  So you waited 2 years and still have to pay 5% more. At the same time you missed out on the cash flow income for those 2 years.  There are a million different possibilities.  What I do believe is that a crash like 2008 will not be happening anytime soon.  That was a once in decades type event.  So I doubt you will find properties at 30%-40% discount within the next 2-3 years.

MF investing is all about cash flow. yes cap rates are compressed but there are deals out there.  I just closed on a 16 unit and looking for my next one.

In a great market, there are a lack of deals but tons of money

In a bad market, there are tons of deals but lack of money.

That said, when you want to buy a 10, 30, 50 unit MF property, banks will ask - do you have experience buying and managing properties.  Not a single family home with 1 tenant but at a larger scale.  So in a bad market, you cannot show to the party and just start buying apartment properties.  Remember, credit is tight so banks will fund properties backed by investors who have track record...and there will be alot of deals they can pick and choose from.

finally, MF investing is all about cash flow. Forced appreciation is great through rehab or tackling mis-management but just regular appreciation is just icing on the cake.  1-4 units is a world with residential agents, lenders, property managers, etc.  5+ units is a different world with different brokers/agents, lenders, etc.  You have to be networked in that world to get the best deals and loan products.

Arlen Chou · Answer

@Kin Leung the decision that you should be considering is not sell or hold, it should be deciding on a business plan.  From your brief outline it does not really seem like you have decided on what you want to do in the future...  Without first deciding on that, making a decision on selling or holding is unwise.  Buying out of the area multi-family properties is completely different then enjoying a small passive income.  I suggest that you take a look more at a 5 and 10 year personal income and time goal, before making any decisions.  Keep in mind, doing nothing is also a decision...

I would consider my personal short term goals and time requirements before embarking on potential changes in my financial situation.

If you are worried about getting money out of the property, you could always refi out a chunk of money and invest that out of the area.  That money is essentially "tax free" too as it is a loan not a capital gain.  You could do that now or wait until you think the market is more tilted towards buyers, the only effect on you will be rising interest rates.  But if you sell your property now and just park your money, you will not see very good returns in any investment vehicle that is liquid and safe.

You have a hold of a "golden goose" that will keep laying cash flow eggs and appreciation eggs for a long time.  Don't let fear of paying taxes drive your decision process.  If you miss the window, you still have the 1031 exchange process to shield you on the tax side.  Granted this is a deferred tax strategy vs an optimization strategy, but the end effect is pretty similar if you plan to expand your rental portfolio in the future and pass on to later generations.

Sit down and draw up a financial plan and then decide how your current property fits or does not fit into that plan.  Don't let your immediate actions dictate your future... plan your future and make the decision to get you to where you want to go.

Amit M. · Answer

I’d keep it and get a heloc 2nd which you can use anytime you find a good deal on a new property. Just about all successful Bay Area investors did well by holding and adding more properties as they could from refinancing. I’d also try to stay in the local area, and look at 2-4 units. The more prime your location is, the more appreciation you will get in the future. Of course look for a good deal, off market maybe, with value added potential.

Thomas S. · Answer

Makes perfect scenes.

CA investors either are faith investors relying on appreciation and planning to passing the property along to family at the time of their death or they are investors looking to actually grow. To grow you must at some point in time take your profits and roll them into something bigger and better. The timing seems about right for you now to actually benefit from your investment.

It is one thing to be able to brag about owning a million dollar property it is something much different to actually have a million dollars.

Paul Choi · Answer

@Kin Leung   I agree with your thinking.  If your ultimate goal is to grow your portfolio with a bunch of MF properties, then best to sell and pick up an apartment.  If you 1031, isn't the cap gains issue out of the picture?

Chris Paez · Answer

Ill be stepping into a similar situation soon and I am torn. That exemption makes it feel like its the right thing to do. The thought pushing me to do it is that with a good chunk of money you can have more opportunity to get into deals even in expensive areas. I don't think waiting is the right course of action tho, but be cautious and make sure you keep a chunk so that if there is a break in the market you can still capitalize..... And then there is also the fact that no matter what happens in the next 10-15 years you will just keep making money on that property no matter what happens. :/ safe and secure versus bold and uncomfortable..

Kin Leung · Answer

While it's true that I can 1031 exchange and avoid the tax, I'm not sure if it is actually the right time to buy now as everything is still so expensive including multi family properties. That's why my thinking is sell now and be patient until the time is right. Thoughts?

Sell or hold in Bay Area?

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