Should We Sell These Properties?

Question

We need help in analyzing what we should do with a couple of SoCal properties we bought around 8 years ago.  Our goal is to free up some money (a substantial amount for non-REI purposes), as well as to increase our cash flow, and buy or retain a crash pad in that area of SoCal.

Property #1 is a SFR in a very good neighborhood in North San Diego County.  Its valuations are: $641,800 USAA/$647k Realtor.com/$721,018 Redfin.  It originally was bought for $432k as a future home at 3.75%, and I'd love to be able to keep it unless it's smarter not to.  We financed $209k, so our down payment was $226k.  We owe $156,800.  It clears $600/mo.  The HOA has stayed relatively low at $100/mo.

Property #2 is a condo in a family area of Orange County. Its valuations are: $484,700 USAA/$487,800 Realtor.com/$490,720 Redfin. We purchased it for $350k at 3.75%. We put $220k down and financed $130k. We owe $85k. It clears $525/mo. The HOA has ballooned over the past few years, from $225 to $400. We tried selling it a couple of years ago when it was a buyer's market, but we failed, and after three months, took it off the market and rented it, again. The biggest complaint was that it faced a parking lot and not the golf course. However, there are many condos in this area, and most of them face parking lots. It's over a thousand square feet, and the amenities are substantial: golf course; lake/beach; pool; rec room.

We're in our 70s, so there's no room for financial mistakes.  We live in Phoenix, but SoCal is like a second home, and whatever we do, we still need something there for us.

Thanks.

Joe Homs · Answer

@Wendy Black keep them all, at least until you implement this plan.  Move into the home in San Diego and live there for at least two years.  That will turn it into your principal residence and then you can sell it under IRS code 121 and not have to pay capital gains.  If you sell now there will be at 20% capital gains hit, or if you wait maybe more.

If you are cash flowing on properties, here in California, then you purchased at the right time.  If you need some cash out of the homes you can do a refi or Heloc.  You have two great assets here in California that are producing cash flow for you.

Do you own the home in Phoenix?  Sell that one and move back to California with that cash.  My dad was a big buy and hold investor and started selling his primary and moving into his investments every two years.  That took him ten years to complete.

Good Investing...

Mark Frattini · Answer

@Wendy Black

Brian G. · Answer

@Joe Homs I thought if a property is your *primary first* and then becomes a rental you can sell and enjoy the 121 cap gains tax exclusion and pay no cap gains tax (ie if having lived there at least 2 years out of the last 5 when selling) but if the property is a *rental first* and then your primary the allowable cap gains tax exclusion is prorated, ie proportionate to the number of years in the last 5 that it was a primary vs rental. Is this incorrect? I thought there was a different treatment under section 121 depending on whether a property was a primary first or a rental first...?

Justin Phillips · Answer

@Wendy Black My wife and I were faced with the Sell/Keep dilemma, and we decided that keeping our rental, with access to equity was the both of both worlds. We ReFi'd into a specialized 1st position Heloc on our property, known as an offset mortgage in other countries. It's a line of credit tied to a zero balance sweep checking account, every deposit lowers the balance and thus saves interest cost. So we can park idle funds/deposits on our line, where they work much harder than savings, tax-free. We have access to our equity for 30 years, so it maximizes flexibility. You all would have access to equity when you need it, but wouldn't be committing to 30 years of cash-out payments on day 1. We're able to enjoy our monthly cashflow, see appreciation, and are ready for the next opportunity when the market turns.

Wendy Black · Answer

Dear Mike in the Scorching Heat (we're in Phoenix; we share your pain):

You've got a good attitude about family.  Property can be replaced; family cannot.  The problem with rebuilding our portfolio later is we're already in our 70s.  As much as these Boomers think we will live forever, we won't.  There isn't time to make a bad mistake and then rebuild.  You cannot believe how little Social Security pays.  It's said every retiree needs $1.5 million each PLUS Social Security to live through retirement, which is longer than it used to be.  I'd believe it.  There's no way to know how much will solve the family's problem, but everyone's got expenses.  We actually won't make a profit on the house until next year because we had a number of repairs last year that were not covered by insurance.

I'm not sold on a cash-out refi.  Should we sell the condo, we need to take money out, but then we'd have to reinvest somewhere for at least the same, if not higher, cash flow.

Joe Homs · Answer

@Wendy Black thanks for the updated information.  I checked on your home, in California, and its probably worth about $530K in todays market (depending on condition.)  So, if you sold that home (assumptions) for $530K minus fees ($35K) you should net around $495K.  Minus your purchase price of $350K then your capital gains would be $145K.  Your long capital gains taxes on this would be around 20% of gains or $29K.  (Check with your CPA as California is a tax hungry state and you may need to pay taxes here as well.)  (and for all you CPA's, yes I know there is a recapture of depreciation, but these are just some quick numbers to consider.)

I think this is your best bet to free up the money that you need for your family.

Good Investing...

Tim Winter · Answer

@Wendy Black There's nothing worse than kicking yourself for selling a property that later you wanted to keep, but sounds like you've got a plan that isn't as much of a concern?

If you are looking to sell one of the two properties, my advice would be to get rid of the most problematic one. The condo sounds like its on its way towards being the most problematic, and also having a SFR over a condo gives you more options.

You mention wanting a "crash pad", is it your intention to rent it when you're not there? Snowbird perhaps? The best advice I'd ever gotten when I started thinking long term and what properties to keep, was why not keep properties in places you want to visit, so you can write off the whole trip? Just book the property for the times you'll be there.

Or if you're going the snowbird route, as mentioned previously if you make that your primary home with the eventual thought that you'll sell it, after two years you can then sell it when or if the need arises tax free.

If you like the cashflow and still see future potential for them (thus your dilemma?) cash out refi or HELOC might be the way to go. Failing that I'm sure there are private investors in your network that would do a short term loan for cash against one or both of the properties in a portfolio loan.

I don't suppose you or someone in your family has a whole term life insurance policy? Taking a loan against that would be another way to free up capital without liquidating your long term assets. I also know a lender that can lend off of individual investment accounts same as 401k if that makes sense to do for your short term need?

Wendy Black · Answer

Thank you for your advice.

To be rather obtuse about it, there's been two major health emergencies in our immediate family with four young children involved.  We need something that would have an impact to free up a substantial amount of cash in the short-term, while not putting us at-risk in the long term.  Additionally, to stabilize the situation, it would be optimum to buy the $325k home from the major company that's been renting it.  I don't know if they would sell.  However, for the foreseeable future, we would have to pay the mortgage.  That's a problem.

Joe: Our needs have changed.  We'd like to have a crash pad in SoCal but not live there full-time right now.

Kenneth: If we knew how to solve this problem, we wouldn't have posted it.  I've looked at it every which way for months.

Theresa Harris · Answer

If the market is hot and property 2 had problems selling before, I'd sell it now.  Also as HOA almost doubled, it suggests that there are management issues.

Peter Mckernan · Answer

@Wendy Black I would say keep them and do a cash out on them, for some cash as you mentioned you needed. Keep them for as long as you can keep them cash flowing and you'll look back happy that you did!

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