Should I sell my home or keep it as a rental?

Question

Background: Bought 3 bed 2 bath 1900 sq ft primary residence home outside of Sacramento in 2019 for $540K.  I used the VA mortgage loan with 0% down (no PMI) and currently have a 30 year mortgage rate at 2.25%.  I will be leaving active duty military, and will be moving back to Upstate New York in June 2023.  Home currently worth $750K.  The Rocklin/Roseville area is a very desirable place to live with top public schools.

Situation: If we choose to keep as a rental property, we would use a property manager (10% fee of rent) and California charges out of state investors an additional 7% fee of rent.  If I rented this property at $3200 a month, my monthly expenses would be approximately $3700 a month (mortgage, maintenance, taxes, insurance, property management).  I have not calculated potential annual repair costs (bought as new build in 2019).

Question: Should I sell my home or should I turn it into a rental property given the monthly negative cash flow of -$500?  I would be able to afford to pay the excess expenses of the negative cash flow as well as any unexpected annual repair cost.  However, I do not know if it is worth it.  I do not have much experience when it comes analyzing these type of decisions, and appreciate everyone's advice.

Thank you for listening,

Greg

Bjorn Ahlblad · Answer

@Greg Hammond welcome to BP! Hard to say where Ca property values will be for the next 10, 20, 30 years. I'm guessing the growth will continue-but who knows. One key is never be forced to sell or might get crushed.

I held Ca properties from early 1980's to 2015. They never cash flowed in the early years but did later as equity increased. The crowd here will tell you that that is 'bought' cash flow and does not count-well maybe.

When we finally sold the properties my wife and I made serious cash!

In you case 500 dollars a month is only 6k a year and if your property value is increasing 100k a year who is the fool for 'feeding' that property. Cash flow is irrelevant IF you are making serious appreciation. Yes, it is risky and so is driving to work or the ski hill.

Now that I am old and retired we get cash flow from Wa state properties which we bought prior to moving from Ca. We get appreciation too just not like Ca.

You also have to consider how investing in Ca will affect your NY lifestyle. Nice to have choices. All the best!

Dave Peterson · Answer

CA is withholding the amount they believe you will owe them at the end of the year as tax on the rental income.  So it will be a credit to you when you do your taxes.  Unfortunately, they are usually wrong as they have no idea what your expenses are.  You can check with the Franchise Tax Board to see if there is a form you can fill out that will allow you to lower the withholding amount if needed.

James Hamling · Answer

To be direct: NO.

Sell, utilize the gains to acquire 2 new PERFROMING properties. Pyramid UP.

Eliott Elias · Answer

I would figure out other ways to cash flow, rent by the room, airbnb, furnish finder. If you still can't cash flow I would sell, you can sell tax free for up to 250k in profit

Greg Hammond · Answer

Thank you for clarifying that.  What does the 7% tax withholding mean?  Does that money essentially come back to me?  Apologies for my ignorance, and thanks for your help.

Greg

Jay Thomas · Answer

This plan would involve selling your existing property, using the cash to purchase a new property in New York and then investing in a rental property out of state. It is important to weigh the pros and cons of this approach as you consider the current mortgage balance, realtor fees, taxes, and other costs. Additionally, it would be beneficial to research different locations for both properties so that you can find an investment that will yield the best return on investment. By carefully researching potential investments and weighing all options, you can ensure that you make a sound decision when deciding how to use your money.

Henry Clark · Answer

@Greg Hammond

Run the numbers.

1.  Was this house your primary residence for 2 consecutive years out of the last 5?  If so, then you don't have to pay any gains on the income from the sale.  Talk with your Tax accountant.  You don't have to sell now.  You can wait say 3 years, as long as you sale before you break the 5-year window.  Add this to your calculation, but also as a time window.

2.  How much BAH, Base Allowance Housing were you receiving?  Let's say $25,000 per year.  How do you plan to make the payments on your next house if you don't sell this one?  Thats after taxes.  You would need around $40,000 gross to get the $25,000 after taxes.  Or need to sell the SAC property to reduce your monthly payment.  Determine what your new living situation will be with your new income streams and costs and work backwards to what monthly housing payment you can afford.

3.  BAH.  Did you use that to pay into the original mortgage?

4.  How much is left on the original mortgage?

5.  You probably won't get the 2.25%.  See what your next mortgage will look like and run the payments.  Again, see how you will fund.

6.  Market to Market.  What is your upstate New York market compared to SAC, as far as appreciation potential or income potential?  As far as taking the money and investing it into a rental in NY for comparisons.  Look at property tax and insurance differences also.

7.   Crystal ball time.  Both appreciation and income potential, what do you see SAC versus upstate NY in the next 3 years (5 year limit)?

8.  Talk with your Tax accountant about the above.  Don't know if there are some unusual California rules.

Erik Estrada · Answer

It would be smarter to sell and use the cash to buy a property in New York and a rental out of state. This would depend on your current mortgage balance and how much you would net after realtor fees and taxes.

Dave Peterson · Answer

@Greg Hammond

The 7% is withholding on your taxes.  It's not an additional fee.

Should I sell my home or keep it as a rental?

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