Moving - do we rent or sell and invest outside CA
Developer · Chandler, AZ · Member since 2015 · 12 posts · 3 votes
We are moving from Long Beach, CA to Chandler, AZ. We are trying to decide what to do with our current house.
I asked a friend and he posed an interesting question. Imagine you had $350k (which is the cash our equity in our home) would you use that money to invest in a single family home in Long Beach? Our plan was to rent it out, but we have the house on a 3% 15-year note and it would only break even or be a slightly negative cash flow (not counting debt reduction or appreciation). I don’t see our house appreciating much more given it’s one of the nicer houses in a very blue collar neighborhood.
Should we hold onto it? I’ve always believed in never selling. If we do sell it, how would you recommend investing the $350k. We don’t need the money for our AZ house. However if we did put it into our AZ house we would have an extra $4k per month to invest.
@Keith Gilbert, there are a NUMBER of things to consider that make your friends' comments invalid. I'll name a few:
For ALL these reasons, and a few more, I keep my property in San Diego.
What I would do is get it back on a 30 year term (you don't want to pay it off anyway, you will owe tons to STATE of California), and strip it for $100k when I want to invest elsewhere. Or pay off your primary residence since you probably can't itemize anyway. Paying off a rental completely in Cali is a bad idea, but that's another story. ;-)
I visited AZ a LOT before living here. I've been here 10 years now. It has LOTS of both 'good and bad', like any place does. But the heat becomes unbearable year after year after year.
And that is why I STILL have a 'foothold' in San Diego.
In your case I would Re-Fi as is on a 30 yr term. Your PITI would be around 2600, based on 4% interest rate.
If your rents are 3400 a month, the numbers work as follows:
Income: 40,000
PITI: 31,200
Cashflow: 8,800
Tax liability
Income: 40,000
Interest: 17,472
Prop Tax: 6,800
Insurance: 1000
Depreciation: 14,500
Tax Deductions: 39,772
Net Tax Liability: $228.00
So, you can basically put $8,800 in
your pocket every year and pay no tax on it. All except $228. Where/how else can do that?
Now add 3-5% annually to the income line. What does that look like after 5 years, 10 years?
In your case you have already made the investment/hard part. If you want to have a chance to go back someday AND make money in the meantime, this is it.
If you need/want $100k, go strip it for $100k and invest it elsewhere.
If your rents are more that 3400 a month, you will pay some tax. But MAYBE you can find some expenses or upgrades that can write off the difference? ;-)
In any event, I hope I have given you a few things to think about.
@Keith Gilbert Good question!
Could you sell it now and take the "Owner Occupant Tax Exemption"? The IRS offers a tax exemption for the sale of primary residents if you qualify.
Do you expect or want to move back into the Long Beach house?
If you have the tax exemption and don't plan to move back into it I suspect you could find better uses for the money. For $350,000 we could purchase an AZ multi-plex that will cash flow positive.
Love Chandler, lots of great choices and I would be happy to assist in that regard as well!
Doug, thanks for mentioning the tax exemption for primary residences. I just looked it up and we would qualify for that exemption.
There is always a possibility we may move back. I will still be working in CA 4 days a month. However all our family is in AZ and we will likely stay. If we did move back we would probably move to Seal Beach.
@Keith Gilbert, I am assuming that you bought quite some time ago.
Think of the prop 13 property tax difference if you were to sell today and go back 10+ years from now. That could be THOUSANDS.
Your friend is WRONG. You don't have 350k in your hand to buy the property in Long Beach. You have ALREADY spent that money. Now the decision is if you will 'crack the piggy bank' and take the money.
I have been in a similar situation as you. I am from San Diego. My parents passed and I was left the house (and a very low property tax base). I 'equity stripped' the property so (Rent - mortgage/piti/expenses) minus depreciation = ZERO. This way I can put my cashflow in my pocket.
My recommendation to you is to figure out what will be your rent, and work it backwards so you can put positive cash flow in your pocket.
You MAY even be able to put enough in your pocket to buy a SFR in AZ when you get here. ;-)
Hope that helped!
In any event, my vote is to keep it. ;-)
Alan - are you saying my friend's analogy is wrong because if I were to buy my current CA house "today" using the hypothetical $350k the property tax on my property would be almost double the current amount of $6,800 per year?
Here is our exact situation. The house would likely sell for $850k, we owe $440k. We refinanced a couple years ago changing it to a 15 year note at 3% interest. Our PITI is $4,041 per month. We could rent the house for $3,400-$3,700 per month. So it seems the only way to make this thing cash flow would be to refinance the house again to a longer note. If we had to pay our CA mortgage and an AZ mortgage at the same time we could do that. However, I'm not sure about having so much riding on one single family residence. Maybe diversify that $350k a little more (multi family, notes, etc.)
Our income is high enough that we could completely pay for another house in AZ quickly without using any money from our CA house (as long as we keep the purchase price reasonable)
@Keith Gilbert I think most conventional investors would tell you if it's not going to cash flow or appreciate what's the point in keeping it? Some investors love cash flow, others love appreciation, almost everyone loves both whenever possible, without either what's the point?
Find one with positive cash flow that is in a growing market like Phoenix is that has a good shot at appreciation and go for it! Let's put half the money into a 4-Plex in the east valley that will cash flow positive. let the tenants pay off the remaining loan balance. I will manage the property in AZ so it's almost hands off for you!
Maybe buy two 4-Plex in AZ!! Become an investor.... Someday the passive income might be welcomed.
Given you'd only break even of be slightly negative, I'd sell it and buy a rental closer to your new home that will cash flow. With your break even or slightly negative cash flow scenario, have you factored in vacancies, repairs and management fees?
@Keith Gilbert, there are a NUMBER of things to consider that make your friends' comments invalid. I'll name a few:
For ALL these reasons, and a few more, I keep my property in San Diego.
What I would do is get it back on a 30 year term (you don't want to pay it off anyway, you will owe tons to STATE of California), and strip it for $100k when I want to invest elsewhere. Or pay off your primary residence since you probably can't itemize anyway. Paying off a rental completely in Cali is a bad idea, but that's another story. ;-)
I visited AZ a LOT before living here. I've been here 10 years now. It has LOTS of both 'good and bad', like any place does. But the heat becomes unbearable year after year after year.
And that is why I STILL have a 'foothold' in San Diego.
In your case I would Re-Fi as is on a 30 yr term. Your PITI would be around 2600, based on 4% interest rate.
If your rents are 3400 a month, the numbers work as follows:
Income: 40,000
PITI: 31,200
Cashflow: 8,800
Tax liability
Income: 40,000
Interest: 17,472
Prop Tax: 6,800
Insurance: 1000
Depreciation: 14,500
Tax Deductions: 39,772
Net Tax Liability: $228.00
So, you can basically put $8,800 in
your pocket every year and pay no tax on it. All except $228. Where/how else can do that?
Now add 3-5% annually to the income line. What does that look like after 5 years, 10 years?
In your case you have already made the investment/hard part. If you want to have a chance to go back someday AND make money in the meantime, this is it.
If you need/want $100k, go strip it for $100k and invest it elsewhere.
If your rents are more that 3400 a month, you will pay some tax. But MAYBE you can find some expenses or upgrades that can write off the difference? ;-)
In any event, I hope I have given you a few things to think about.
@Keith Gilbert Welcome! Thinking out loud here @Alan Grobmeier has some great info. I much smaller thinking terms I look at it like this. Say you owe 13 years on this mortgage. After 13 years if the rent is 3400 you are paying 93,600 to supplement payment (3400 rent but payment 4000 so 600x12monthsx13years) 440000 is mortgage owed -93600 you helped pay=$346,400 being paid by someone else after 13 years. So someone is paying you approx 27000 per year for the house. This would be one hell of a 401k match in the working world. My point is based on your high income I vote for 13 year payoff. Then add what @Alan Grobmeier said and it gets waaayyyy better than my laymen way of looking at it. Good luck and keep us posted.
@Alan Grobmeier and @Dylan Vargas thank you so much for your thoughts and wisdom!!
I look forward to sharing this info with my wife to see what she thinks.
I’d be interested in understanding why paying off a rental in CA is a bad idea.
Alan I hear you about AZ. All of our family is there and growing up the heat was all I knew. Now we know what june gloom is and almost perfect weather year round. Going back to the heat will be tough, but saving a couple grand a month in income tax will be nice. We are moving back to help care for my father in-law and my son who will be going to ASU like his mom and I. Thankfully my employer will let me work remotely.
@Keith Gilbert I think that weighing the pros and cons of the tax exemption now against a possible 1031 exchange later may be helpful. @Doug McVinua idea to buy a cash flowing rental in Az and keep some cash on hand sounds like a winner to me. Also, it may not be easy to rent a nice home in a blue collar area for upwards of $3400.
I'm also interested about why paying a Ca rental off is not advisable.
Hi Keith,
I'm a cash flow go so you can base my post off of that. I say sell it since you qualify for the tax exemption. You get to pocket 350kish and most important eliminate $440k in debt. That's the part that will give you more time and freedom. Extra 4k a month in AZ oh man that's big. Just think about what your lifestyle will be. If you do this, how will your life improve?
As for AZ. Don't rush into anything. Just rent evaluate the market and then decide. Cash is king and a position.
@Keith Gilbert, @Clarence Johnson, you asked (why not pay off a CA property) and I shall answer. Very long, so keep that in mind. LOL
First, I will be clear on ONE aspect: If I was to live in the property, I would pay it off.
As we all know there are a number of states that do not have state income tax. So, if I was to profit of $30k in Texas, my Texas state income tax liability is $0.
From speaking with my CPA, MOST states will tax you on your earnings IN the state which you are doing business. If I profit 10k from a property in Oregon, I pay tax on 10k worth of income. My tax liability is LOW, even if I make 100k a year on a W2 and investments elsewhere.
Cali does not do that. What they do is 'tack' on your rental income on top of ALL other income, in state or not. For example: I have a W2 job at $100k from NV, 30k in rental profits from TX, and 20k from rental profits in Cali. My Cali state income tax is taxed at $130k-$150k 'bracket', not the 0-$20k like most other states. In other words, I am taxed a $hitload and I don't even live there. :-(
As a result, I look for LEGAL 'tax dodges'. My dad owned the property I have now, free and clear. He paid MONSTER state income tax on his rental earnings. On numerous occasions I begged him to mortgage it. He said NO and probably should have had his picture on the CA flag instead of the Cali Bear. He paid TONS in tax that he did not have to.
When he passed, I mortgaged the property and brought the money to AZ and invested it here. I created a scenario where my Cali property cash flowed, but created no tax liability.
The way you do that is Income minus expenses minus depreciation, as I did in my example earlier in this thread. Fixed expenses are your property tax bill as you know how much it will increase annually, insurance (to a degree), and interest (as you can calculate it with an amortization table).
Since the "GOAL" (or at least my goal) is to avoid Calis punishing income tax, I will probably need to Refi the property AND/OR make sweeping upgrades to change my cost/expense basis.
By my own calculations this will probably need to be done every 10 years or so as I pay down the principal and increase the rents.
Today, according to my CPA, there are additional rules I have to follow that weren't even in place a few years ago. For example, I can only leverage a RENTAL property up to my cost basis.
If you paid 500k, you can only max out at a 500k loan as a rental. However, the property is your RESIDENCE now, so that limit does not apply. ;-) And that is why you would equity strip before you leave town.
You set yourself up w ca$h in your pocket and monster write off for years to come. Obviously you will be a little negative cash flow every month, but you could probably put $200k in your pocket by equity stripping now.
It becomes a forever piggybank, basically due to the rules of the state of California.
Idk if you should sell or keep. One thing to consider if you think you might move back then keeping might make sense or be prepared to trade CA house value today for one bedroom Socal condo later for that same value is very possible.
@Alan Grobmeier brilliant, is your CPA based in Cali? I'm looking for one who thinks like this. Cali seems to hate businesses, especially landlords lol.
@Clarence Johnson, he is a Cali CPA. Bowling friend of mine for years. CPA for 15+ years now. Closing in on retirement, but worth every penny. ;-)
@Clarence Johnson, there is ALWAYS a 2nd option. In my case I have considered buying a condo in Cali that throws off a paper loss without being a cash flow loss. Easier said than done. LOL.
Hey @Keith Gilbert!
If this decision is primarily driven by logic and strategy, I would say sell and reinvest out of state.
$350k in the midwestern market I operate in, when used as 20% down with the bank I work with, will get you about 35 C+/B- class units total, at right around a 11 cap, which with financing comes out to be a 25% return if you use a 15% long term vacancy and maintenance budget. 25% return on $350k is $87,500/year, which is pretty hefty if you're open to investing out of state. If you're not, I would still sell and hold onto/park the cash somewhere safe to invest in the next potential downturn should it occur and create good opportunities. Whatever you do, don't invest the money in debt paydown... that's too much cash to accept such a low rate of return on. That 4k savings is going to be a good chunk principal, not pure interest, which I wouldn't calculate as part of your ROI.
If you do try the out of state thing I would recommend going in gradually. Of course your comfort level will dictate your pace.
Another big one- do notttttt go pick some major city to invest in. They're so saturated with investors already. Secondary and tertiary markets will help you ensure you're not competing with so many people that are willing to take a worse deal than you are. I recommend you only invest at a 10 cap or above.
Hope this helps!
I just finished talking to a real estate friend in my neighborhood. She believes our house would rent for $3,500-3,700.
We could refinance to a 30-year at 3.99% and pull out $160k. Our new mortgage would be $3,501 PITI.
I’m thinking it makes more sense to sell and invest in another market like @Account Closed is suggesting. We make enough annually to be able to move back to CA if we ever choose to. If we did move back it seems unlikely we’d move back to the same house.
@Keith Gilbert. Have you thought about the transactions fee of getting out of the property? 850k sale price may equate to 50-80k just to get out.
In addition, I would like to note, you are a 'rarity'. Most ppl that leave can't afford to go back. Ever. I have known a LOT of co-workers that have left Cali only to realize they are locked out of ever returning. :-(
My wife and I make a good income. Moving back, for us, has turned to a need vs a want.
We could probably barely afford to go back if we didn't have the property in San Diego. The property tax difference, in my situation, is way larger than yours. It's probably the difference between being locked out and not locked out.
And that's before you get into the higher costs of just about everything else.
Best of luck to you and welcome (back) to AZ. Hopefully we can meet up sometime when you get out here.
@Alan Grobmeier I am curious what would be the need to move back? If it is private no probs.
@Matt R. move to AZ and you will find out. It's not a personal thing.
It's just REALLY hot here. I'm spoiled, I'm originally from San Diego. I left 10 years ago due to many of the economic factors others have left.
I was able to build a nice real estate portfolio here in AZ that I would have NEVER been able to do in CA. So, it's obvious that moving was good financially.
I envision being able to spend my summers and CA and the rest of the time in AZ. The 'best' of both worlds. ;-)
@Alan Grobmeier, right on and understandable. Some of AZ has a special kind of hot as in I am melting.
@Matt R. I was told about the 'dry heat'. Yeah, sticking your head in the oven is dry heat too. I don't normally do that unless I am cooking something.
Almost everywhere has 'good and bad'. The weather in SoCal can't be beat anywhere on the planet for 12 months. I have traveled to every state in the US and 20-something countries. I haven't found anything like it.
The minus is that the food costs, taxes, gas prices, immigration, and other stuff appear to be out of control. And that's why I wouldn't stay 100% of the time. ;-)