Renting out Primary residence or Turnkeys in CA

[Corey M.]

I live in CA where rents typically don't cover the price of a house/mortgage. I've lived in my place for 8 years and after a recent cash out refi, I pay about $2250/mo for my mortgage + taxes. If I rented it out, I could get about $3k per month. However, my expenses are another $750 or so (management, Capex, maintenence, insurance, eq insurance, hoa). Essentially I'd breakeven if I rented it. I'd also have to buy a new place at a cost of about $800k (160k down) @ 3% interest, and that new place would have all the typical tax breaks associated with a primary residence. Los Angeles property has been appreciating at about 8%/yr, and because of that, I'm trying to choose between renting out my residence and moving into a new one, or doing a passive investment in a turnkey. I have a f/t job and can't be active.

The turnkeys I've been looking at average about 18% IRR, and that includes appreciation, equity via house paydown, and net cash flow. Most of the places I'm looking at have about 2-3% annual appreciation. This IRR doesn't include depreciation.

So, with that $160k that I could use as a down payment on a new residence while renting out my current one, would it be better to do that or buy 800k worth of turnkeys with that $160k (~5 sfhs)?

My concern with renting my current house and buying a new one is that the cash flow could easily be negative on any given month AND I'd be taking on a new mortgage that is 50% higher than my current one. On the other hand, I'd be making LA level appreciation on both of them, which could be lucrative. 

Thoughts? 

[Lee Ripma]

@Corey M.

I like to decouple living in real estate from investing in real estate. Then you can think of RE purely as an investment. 

The issue I have with turnkeys is that they are often sold at or above market value in C to D areas. These areas may provide cashflow but they won't provide market appreciation and the turnkey company has already taken all the forced appreciation. 

There is a company that master leases SFH and uses that as a platform for a coliving company. The reason I like the model is that you are in A and B areas which actually have market appreciation. You also don't have the hassle and risk that you have with the traditional turnkey route with the master lease.

If you're looking at overall ROI it can be hard to beat CA. If you are wanting cash flow then you won't get it when you buy in CA (but will after time). I was very sold on cash flow by BP starting out. I now look at IRRs not cash flow and invest in CA. I also still hold a rental portfolio out of state.

Cash flow makes you free and appreciation makes you rich. What do you care about?