To sell or rent?

Question

I am a newb to any kind of investing. However, I have newly become motivated in eventually achieving financial independence and having a stream of passive income.

Long story short, My family and I are planning on moving to my parents for personal and financial reasons (help with kids, and more disposable monthly income). Im debating on what to do with my primary residence. Here is some facts on my home:

$275,000 purchase price. I owe approx. $249,800 for 3.75% on a 30 year loan. I have had it for almost 2 years. My monthly PITI is $1610. Estimated monthly rent from a property manager is $1900-2100. It is located in Rialto, CA (San Bernardino county). Estimated value today from Zillow.com is $325,000.

I am fixed on putting it out for rent (unless someone can convince me to sell it and find a better income property). But I am not too sure if I should make it a goal to keep this home as rental property given that I have such a low interest rate on the loan and pay more into it, or eventually sell it to upgrade to a better income property and pay the minimum mortgage.

p.s. Forgive me if there are some stupid questions or amateur assumptions here. I understand there is A LOT for me to learn, and I already have started on reading some books, listening to podcast, etc to start learning as much as I can.

DL Martin · Answer

Many people on Bigger Pockets say that it is nearly impossible to buy a "positive cash flow" rental in SoCal in 2015. Many Californians have in fact given up on buying rentals in CA. Search the forums for "Turn Key" rental properties. It is pretty sobering.

Without a big pile of cash to start out, you many never be able to fund a positive cash flowing SoCal rental property. Unless of course you move in with your folks, save up your down payment, buy that house in Ontario/Chino Hills, live in it for two years, and then turn that house into your second rental. (I did this three times in the City of Riverside. The only "downside" is that when you have a vacancy, you are eating that $1,700 per month payment each month that the place is vacant. My yearly tax refunds are always in excess of $20k every year, so I have always been careful to stick that money in a reserve fund in case I had two or more empty houses vacant at any one time. Adequate reserves = good nights sleep when you have multiple mortgages in excess of $1,500 each)

If you are able to move out of your house and get positive cash flow right now, then it would seem to make sense to start with the Rialto house as your first rental. (I'm going to guess that you came in with 5% or less down payment. If that is true, then there may not be much room to pay realtor commissions, closing and other costs associated with selling.)

@Mark Ferguson is right about paying careful attention to exceeding the time limit to take advantage of the two year occupancy tax free cash out exemption that currently exists.

I disagree with most others here in that I really like the idea of you holding on to that house and it's 3.75% 30 year fixed mortgage. Some day (next year or the year after???) , that mortgage might be a significant brick in your financial independence foundation. Or maybe 3.75% 30 year mortgages are the new normal, forever... who knows. ( I sure don't)

My only advice is this: If you buy another house, buy with an eye toward making it a rental. Be clear with your wife and family that it is a "two years and we are out" purchase. (or however long it takes you to save up the downpayment for the next purchase) Otherwise, you will be stuck in that house (and that house payment) and this strategy will be dead in the water.

Good Luck

DL

DL Martin · Answer

SoCal is a desert. All yards have to have underground sprinkler systems or grass will not grow. Water is expensive. Tenants don't care if there is grass in the front yard or dirt in the front yard. Left to them, the grass will die. If the grass dies, code enforcement will start issuing citations. (Citations of any kind in CA are no joke. Running a stop sign is a $300 ticket. Speeding is a $500-$700 ticket..)

The tenant will keep turning the water sprinkler duration down (from 30 minutes per day to 10 minutes per day, for example) to save money on the water bill. You need a lawn guy to check the lawn every week and turn the water duration back up if the tenant has turned it down that week. Also, sprinkler heads get broken frequently, causing massive water geysers everytime the sprinkler runs. This is a perfect excuse for the tenant to turn the lawn sprinkler completely off. (usually by simply unplugging the timer in the garage). You need a lawn guy to check and replace broken sprinkler's weekly.

California is awesome!

DL

Paul DoCampo · Answer

Thank you everyone.

@DL  Martin , Would you NOT recommend the land lord be that lawn guy? I have an 8X10 shed with all my gardening tools that I was thinking of keeping there with a pad lock.

Derek B. · Answer

Maybe it's a Cali thing, but your tenant should handle the landscaping imo. My inlaws always included the gardner in their rentals out there and I never understood it.

Paul DoCampo · Answer

I don't have an HOA. I cant think of another expense except for maybe a gardener If I choose not to do it myself. But the current plan is to visit twice a week to take care of the lawn/landscape.

Is there a set amount that people put aside every month for maintenance? And does that vary depending on the condition of the house? Because I cant imagine budgeting a higher maintenance cost for my house compared to an older home that needs more work. Thanks to my carpenter dad and current job, I'm skilled with basic construction and plumbing, so I have been keeping this house up to par. The only thing I forecast that will go out on me soon, is the a/c unit.

Jason OBrien · Answer

Hi Paul,

Much to consider and the best place to start is with an actual Market Analysis.   San Bernadino has extreme variables depending on location and Zillow should be looked at as an entertainment site and not a real resource for true value.

In San Bernadino, Riverside and San Diego counties Zillow has an 85% inaccurate value rate based on actual solds and then compared to Zillow estimates.   Once you have a better picture of value, running the numbers again "rent vs sell" would give you a better picture of what each choice may look like.

Send me a PM if you want and I'll send you a detailed RPR.   Give you something to look at.

Best

Mark Ferguson · Answer

I would say sell it.

1. You don't have much cash flow at all once you consider vacancies and maintenance. Id there an HOA or any other costs you would have to pay?

2. Since you lived there two years you might be able to sell with no tax liability on the profit. If you rent it out and then sell that could change.

3. You also have to consider what is available as far as income properties in your area.

Paul DoCampo · Answer

Carolina E , thank you for such a quick reply and for the advice. I will definitely ask a retailer for a fair market value.

To answer some of your questions, We don't plan on moving back to the house unless we truly have to. Our goal is to eventually buy a primary residence in Chino/Ontario which is about $50,000+ more than my home. We are willing to stay for two years at my parents, or even more depending on the future market and funds.

I plan on managing it myself.

Carolina E. · Answer

@Paul DoCampo Hi and welcome to BP.  Not sure how much I can help, but are you planning on wanting to eventually move back to that house? And how long do you plan to stay with the parents?  Are you going to manage it, maybe to save on the property manager cost. This are a few things you may want to consider. I think you have a good amount of cash flow coming in if you do rent it out.  Also, try to get a Fair market value from a realtor or look at recent sales near your home that match it.  That will be a better way to tell what it is worth.  Zillow can sometimes be off.

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