What Would You Do? Why?

Question

Hello BP family!

I’m brand new to the world of the real estate investment and am trying to educate myself. But I gotta say, there’s so much to learn and so little time.

I’m debating on next steps and what better source of opinion than yours?

My primary home is a coop. We are priced out of SF homes in our area because there’s a short supply and incredibly high demand (driven by school district and easy commute). The current mortgage is low and equity doubled in the past 4 years.
It seems I can't secure a HELOC because of coop restrictions. Surprise, surprise.
But, I am told there is the option to refi and take the cash out.

I’m willing to give up the sought after school district for a comparable nabe with 9 rated schools for a SF foreclosure that needs a least $50k clean up. The equity in that is expected to increase quickly, in which case I’d have the option to get a HELOC to tackle that mortgage. The sale of the coop would free up money to start my passive income goal.

Keep the coop and refinance to cash out OR sell, free up cash and buy the SF where I could eventually play with some of the equity?

Thanks a million to all the contributors like you! You make this little 9-5er day dream.

Jay Hinrichs · Answer

being in a Co OP I would bet dollars to donuts its SF proper or maybe Oakland..

if its owner occ she made a ton of equity she could cash out tax free. or at least 500k if she is married 250k single.. that's the best tax treatment we have in America.. then decide what she wants to do.. Clayton agree on fix and flip in certain markets must be very careful right now on not competing really hard for deals from wholeslaers or auction .com or the like..

Clayton Mobley · Answer

@Diana Medina I'd have to say sell. You'd be benefiting from all that extra equity accumulation and getting out of an appreciated asset just before the top of this cycle (well, from where I sit, I think we're getting near the top and there should be a correction in majorly inflated markets). I'm not sure where you are located, but based on the appreciation rate you described I want to guess CA? Unless you mean you doubled your equity in the last four years by accelerated pay-down?

Regardless, really, I agree with @Matthew McNeil that I'd get out of anything that limits you. HOA fees, financing restrictions, you don't need them. If you're willing to sacrifice some up-front comfort for a fixer-upper and you have contacts for good contractors/agents, or are great at DIY work, then i think that route would be a better use of your capital.

Basit Siddiqi · Answer

@Diana MedinaI would sell the personal residence as it appears that you have held the property for more than the 2 out of 5 year holding requirement. $225,000 tax free gain is about $60,000 in savings if you factor in Fed/NY/NYC tax rates.

Co-op's are annoying as personal residences as you have to pay a monthly maintenance fee on-top of your mortgage.There are so many restrictions as you pointed out with not being able to get a HELOC.You open yourself up to so many options with all that equity as your disposal.

Clayton Mobley · Answer

@Jay Hinrichs I also had that issue! I think that's why I assumed it was CA originally...that and that insane appreciation rate lol

Jay Hinrichs · Answer

Oh I saw SF and just thought San Fran  not single family LOL

Clayton Mobley · Answer

@Jay Hinrichs looks like she's in NY, another highly inflated market. With $225k in gain, she's got plenty of options (but selling with the Sec 121 is definitely the best move by my estimation), so if a fix and flip comes along and the timing is right (depending on what the market's doing in a year or so) so much the better. Sounds like she's looking for a long-term live-in home, so even if the flip doesn't pan out she'll likely ride out any market correction in the long run - you know the market always keeps on trucking even after a dip. As long as we're not in for another 2009 (fingers firmly crossed) her long-term values on a fix-and-hold should still be good.

Clayton Mobley · Answer

@Diana Medina well then, definitely sell! That's a perfect amount of gain (assuming your cost basis hasn't been reduced by depreciation if you previously held it as a rental, doesn't sound like that's the case). I'd wait until you meet the 24-month requirement for the Sec 121 exemption and then sell. If you're looking for a long-term home, you'll likely ride out any upcoming correction anyway, or if you find something great and end up pushing the value up quite a bit before the market turns, you could still end up flipping if that's what makes the most sense - you have plenty of options.

Paying HOA fees and dealing with red tape is definitely holding you back, and all that equity could be doing a lot more for you elsewhere. Depending on how much you end up paying for the new place, you could parlay some of that equity into cash flowing properties in cheaper markets, to diversify your holdings a bit and get some more stable income in a market not as prone to volatility as NY. Again, lot's of options.

Best of luck!

Andrew C. · Answer

I have a co-op as well and always assumed that a cash out refi was restricted.  I will definitely have to look into that now.  I have two properties out-of-state because of the high cost of housing here.

If you can find a comparable neighborhood with 9 rated schools that you can flip, that sounds pretty good.  I think 9 rated schools ARE the sought after school districts already though.  I see foreclosure/short sales in my neighborhood in the $700k range and I don't live in Manhattan or a hip part of BK.  I've tried to look into duplex/triplex so the rental income helps out but those are well over a million dollars.  As my kids grow, we'll probably grow out of our co-op so I've been contemplating as to what to do next.  I'm hoping that there is a slight pull back in prices but with Amazon HQ2 coming to Queens...I think prices might be going even higher.

Diana Medina · Answer

I'm in NY. Coop was purchased 4 years ago. Now $225K above purchase price.

I'm looking to live-in long term (15 years), unless there is a job relocation, unforeseen circumstances, etc.

For the sale of the coop, I'd qualify for the tax exclusion if I sell next year.

As far as investments, the idea is to buy and hold out of state with a hired property management team and a flip a year.

Thank you for your feedback!

Diana

Clayton Mobley · Answer

One other thought: I suppose my answer above would vary slightly depending on your market and your goals. If you are in CA, then the upcoming correction might render a fixer-upper less valuable in a few years than it would be now, unless you're looking at more of a live-in flip situation where you'd be in and out in a year or less.

If you're in a secondary or tertiary market, then my answer above still stands, as any correction that does occur in the next few years won't hit those areas as hard. But if you're in a big primary market I'd say still sell the coop, but maybe look at putting some of the capital to work in another market with more stable values.

I know that ends up sounding wishywashy lol, if you'd provide any more specifics about your situation I'd be happy to fine tune my answer, and likely others will be able to offer more specific advice as well. What amount of equity are looking at? Do you have other savings you're looking/willing to invest? Will you qualify for a Sec 121 capital gains exclusion when you sell the coop (how long have you lived there)? What are your goals for REI? Are you looking to DIY rentals, BRRRR, or just whatever gets you the best return? Do you want/need your investments to be local so you can self-manage or just for peace of mind, or are you ok investing out of state?

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