Sell California House or pull out equity to invest in another state?

Question

Hello,

I have been reading this site for quite some time and find it very interesting and informative, this is my first post.  I have done a lot of research on real estate investing but would like to get others opinions on our situation.

We own a house in California worth about 450k there is no mortgage and very low taxes because our family has had it for about 50 years.  We pay about 1k a year whereas people buying now pay close to 6k a year.  Low HOA $50 a month.  We are currently renting it out for $2,300 a month.  Obviously this is a very low ROI and not really acceptable when so much money is tied up in one property.  I want to sell the place and buy rentals aiming for properties that are in line with the 2% rule.  We also have some savings bringing our total assets to about 600k. (including the house)
My question is should we just sell this CA house outright and then reinvest in rental properties in a different state?  Or should we try to borrow against our house and try to use that equity to purchase rental properties?  I doubt the bank would let us pull out the full value of the house (450k). My family kind of wants to keep the house and borrow against it because the property taxes are so low.  Our credit is in the high 700s. I can sort of see their point but I think the house is getting pretty old and could need repairs soon also CA is apparently long over due for an earthquake.

Any ideas?

Thank you in advance.

Richard Martin · Answer

Tyler;

Sell it.

Be sure to follow Anthony's advise about the 1031 Exchange otherwise you will have a huge tax hit.

Arthur Garcia · Answer

My Two cents - Sell the house and buy cash-flowing rentals in CA.  There many markets right out side of LA that are yielding very high cash on cash returns.

With a next egg of 350K+ - 400K, you should be able to easily hit 20-25% (maybe more) ROI (with leverage).

One more note, if re-invest the capital with leverage, you should be able to shelter most of your "passive income" via depreciation.

Rob Gillespie · Answer

Well Tyler,

If the home has a big emotional  attachment to you and you family, I would not sell it. If you look at it as an investment, then I would liquidate it and take the money to an area that you can get more bang for your buck.

I would not  leverage the property, that is when you start getting into headaches that you probably don't want. You have a huge advantage over most, take your coin and invest it in better places only if you actually need more income. If you are living a good life and have all of your bills paid with the 2300 per month, and your life is headache free, you may not wanna rock the boat. With any investment, you will loose some of your freedom and create some issues that need to be attended to, it is not retirement unless you enjoy the business.
Just my 2 cents.

Steve L. · Answer

I still don't get why you are viewing the taxes as such a big benefit?  Even with the "benefit" of low taxes the return is average at best.  Say you are returning about 5% on equity right now, if you could find an investment that returns 10% with an updated tax basis, does it really hurt you? Did you really give up a really such a great benefit?

The chances of Prop 13 disappearing is looking pretty high these days, I don't know if old transfers would be grandfathered or not.

Anthony Clayton · Answer

I would sell the house and use a 1031 exchange to purchase a multi-family house in California.

The reason I say California is because you live in California and you know more about the area.

Tyler M · Answer

Hi Steve,
 thanks for the response,  I have been leaning in that direction myself.  As I mentioned the only thing making the decision somewhat difficult is the fact that the taxes are so low.  In some ways it kind of seems like a waste when a lot of people in the area would probably love to have that tax rate.  I would consider a home equity loan if we could take out the complete value of the house (450k) but I'm not sure if lenders are doing that anymore.  I heard that they were only giving home equity loans up to 70% of the appraised value.
Has anyone else heard anything different?  I guess if you could take out 100% if the equity and the rent covered the loan payments comfortably that would be an option.

Steve L. · Answer

I would sell this house. You are earning 3-4% on your money with the "benefit" of super low taxes.

I am not sure I would invest in another state, you can buy rentals here that make 12%+ if you buy right.

Let me know if you need help with comps.  I could also give you a discount listing commission if you want.  But if it was me, I'd give the renter 60 day notice in April/May and aim to list it in June.