Calculating rate of return on primary property w/ appreciation

[Laura M.]

Hi all -

I hope I've posted this in the right area. I've just purchased a second home in Oakland, Ca as my primary residence. I now am trying to decide whether to sell or to rent my current primary residence (also in Oakland). I want to get started being an investor (currently I have only done passive investments) but I want to do this right. 

On the one hand, it would make sense to sell at the peak - my current residence is in a desirable neighborhood. But because I've owned my home for 15+ years the mortgage is low enough that there is a healthy spread between rents and my total expenses on the home (including maintenance, insurance, property taxes, etc.), giving me a good monthly income.

How do I value the buy vs. rent when the property has appreciated healthfully? How does rate of return get calculated? Or at least, how do YOU factor this in - you have a nicely appreciating property that is producing income and you are at the peak of the market? How do you decide to sell vs. keep renting?

Do you just ignore the appreciation and factor that in as covering your exit (i.e. owning in the Bay Area is a safe bet as it's an economic engine and inventory is usually low in more desirable areas)?

Thanks!

[J. Martin]

@Laura M.

It all depends on your circumstances, needs, prospects, and alternative investments, but here's what I like to look at:

Annual Cash Flow / Net Realizable Equity
Net Realizable Equity is the amount of cash you could receive if you sold the property (after commissions, sales costs, capital gains taxes, etc.). If you look at that cash flow yield relative to the amount you could invest in an alternative asset, and still like that yield, given everything else you think about the prospects for your property, you may have a better idea..

Good luck!