$350k equity: sell and purchase investment property, or stay?

[Account Closed]

Hi - I am fairly new to bigger pockets. I have had rentals in the past but lost 2 to foreclosure after the bubble burst in 08/09. I still had my primary home, and was able to sell that & moved to San Diego CA. We found a great deal on a home a few years ago, purchased (using an FHA loan) and now have built about $350k in equity. I am ready to get back into the rental game, but want to get some opinions on next steps.

Option 1 - refinance our house and pull out some equity to purchase a rental. I still don't qualify for a conventional loan (not until January 2020), and I would still have to pay PMI - I am also pretty sure that you can't get an FHA loan on an investment property. So this may not be an option.

Option 2 - Sell, rent a home for the time being, and purchase a duplex in an 'up and coming' area. 

Option 3 - just sit tight and sell or refi in Jan 2020... when the last foreclosure drops off.

A couple things - we live in San Diego - property is expensive. Duplexes we have looked at are in the $400k - $500k range in an up and coming area - I would not want to buy and live there with my kids and rent the other unit out (just because it's just that .. an up and coming neighborhood -a little sketchy). However, we could rent in a familiar area close to their schools for about what we are paying on our mortgage ($2800/month). And, then we could buy a duplex (for example) that was $450k with about $200k down I figure (with an FHA loan & saying it WAS going to be our primary residence) my payment would be about $2300/month and they would rent for (combined) $3000. My husband does all the work to our houses and has his own handyman business.

My inclination is to sell and buy the investment property - and rent for a year until the foreclosure drops off, then we would refi the investment property, possibly use that to purchase another, and use the remaining $150k - $200k that we have to purchase another home/primary residences. 

Thoughts? Comments? Opinions?

[Dan H.]

I am an RE investor in San Diego.  Besides being an RE investor in San Diego, following the RE market/trends is a hobby. 

SFR in San Diego purchased at retail with low down payment are cash flow negative. Duplex to quad purchased in San Diego at retail are challenging to find that are cash flow positive. You do have the correct type of location that could have a duplex to quad that is cash flow positive (the working class areas).

It is easy to underestimate expenses: 5% vacancy, for a standard duplex $400 to $500/month maintenance/cap ex, misc costs $100/month, PITI.

So is San Diego a terrible place for RE investing. No. That is because of appreciation. The issue I see with your plan is that your SFR is likely to appreciate better than the duplex. You sell your SFR for a duplex that may have a little positive cash flow (if you find the right duplex) but you lose in the appreciation compared to your current situation. You also now have taken on the effort of having a duplex.

I suspect your plan is more effort for very similar return to having done nothing other than let your current home appreciate.

Different plan: look for the duplex that has a value add (basic BRRRR). Use the value add and refinance when your credit report is clean extracting out some of the value. More work than the options you presented but more upside also).

Good luck