What to do with your primary California house that has $1M equity

Question

I was fortunately enough to be gifted a house back by my parents and now there is over $1M in equity in the house that's in the SF Bay Area. On Redfin it's about $1.35M and there's $245k of loan on it.

Because of COVID, I am unemployed at the moment but still have substantial savings where I can make the mortgage payment by doing short term rentals.

I don't plan to be in California in the long term and wanted to sell this house and use the proceeds to invest out.

If you had a house with $1M in equity, what would you do with that house?

Thanks,

Justin Thorpe · Answer

@Jing Chai

The only thing I’d advice is to deep soul search on your intent to sell your property when you leave California. There are a lot of people who leave and eventually want to return only to find that the prices in the SF area have moved up beyond their comfort. At least that’s how history worked. I always think of SF RE as “premium currency” meaning once you start owning RE in this area you can afford RE pretty much everywhere you want on this planet with few exceptions. Hence if you have been lucky enough to be gifted that currency, you are among the lucky ones.

Darius Ogloza · Answer

A lot would turn on what my basis in the house was.  Did the house appreciate substantially after you inherited it or was your parents' basis at or near $1.35 when it passed on to you?  This should inform whether selling makes sense in light of your other plans.

Personally, given the low balance on the outstanding note and the presumably low Prop 13 property taxes you will pay on it, I would hold it as a rental and take out a HELOC to use for investment capital.

Damon L. Davis · Answer

@Justin Thorpe is onto something. SF Bay Area is such a hot market being gifted a property there is fortuitous. Consider keeping it, renting it out with a prop mgr, and cashing out equity for your reinvestment. The cash you take out is a good balance to acquire financing on the next investment.

Just b/c you’re leaving the area doesn’t mean you should abandon the asset that’s anchoring your next move. It will continue to appreciate while someone else is paying the mortgage. I’d keep the property

Jing Chai · Answer

Thank you everyone for answering my question! I'm 31 years old and after thinking things through, I think I will keep this house in the short term and see if I can get take out some of the equity against it.

I learned that right now there's a lot of uncertainty in the market and it's best to wait for a while before making any major decisions.

Chris John · Answer

@Jing Chai  I think you're getting a lot of great advice here from @Darius Ogloza, @Justin Thorpe, and @Damon L. Davis.  I think this is an instance where you truly can have your cake and eat it too.  I'd strongly consider keeping it, borrowing against it, and buying more with what you've borrowed (wherever that might be).

I discovered biggerpockets a couple of weeks ago and it's already changed some of my opinions on real estate.  I used to be all about cash flow (which I still think is very important), but it's been pointed out to me several times that often the real money is in appreciation.  I found that was true in my own investments.  Realizing that now, I would be EXTREMELY hesitant to sell a property in SF that had such strong numbers.  These guys know of what they speak.

Good luck with whatever you decide!

Darius Ogloza · Answer

Got it.  If it's your primary, capital gains tax should not be much of an issue given the exemption.  Do you need the cash for other ventures?  Do the math, but I suspect this should cash flow very nicely.  I have a $250K note on a place I purchased in Mill Valley for $450K back in the day and the cash flow is very strong even with the mortgage payment. No vacancy in 12 years now.

Amit M. · Answer

I agree. $1mil in equity now may mean $2mil in equity 10-15 years from now in prime Bay Area.

Apartment bldg in some rando area 10-15 years from now? Not so much.

Anthony Angotti · Answer

@Jing Chai personally I would refinance out some, but not all, equity and then rent it out.

Move to a lower cost of living state.

I assume from your post that you are a reasonably young age, so as this appreciates long term it is going to generate an enormous amount of wealth for you.

Brian G. · Answer

@Jing Chai if that is your only RE holding, personally I would not risk it all on one 1031 transaction to buy an apartment complex. What if your apartment deal does not work out? Perhaps you can consider a 1031 exchange and multiple purchases using the equity to diversify your risk instead of one large deal? Regardless, I would think long and hard before selling that property. As mentioned, you could access the equity (refi or Heloc) to grow your holdings and keep the property. Your idea to use it for a short term rental is a very lucrative idea and you can manage remotely if you really wanted to. It does take some extra work but is doable with the right systems in place. There are quite a few on BP who own Vacation Rentals and remote self manage, myself included. What a great position to be in. Make the right decision for you after weighing *all your options*. All the best!

Jesse Daconta · Answer

Hey Jing,

We'd be happy to answer any questions you may have on apartment investing. Add me if you're interested.

Best,

What to do with your primary California house that has $1M equity

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