Should we rent or sell a SFH in Fremont CA

Question

We bought the house in 2014 at $830K and moved out in June, 2018. After that we changed that to rental, rented out for one year at $3200 per month, and after that we did remodeling and changed to airbnb. Before remodeling, we can rent out for $3500 per month. With COVID-19, we did not have any reservations for April/May/June. Now we are thinking whether we should sell or rent out as long term. Any suggestion/discussion are welcome.

Current principal balance is around $550K, we have 7-year ARM at 2.875% interest rate. We did the refinance as primary residence at 06/2016, and the interest rate will increase at 07/2023.

1. Sell:

we can still get tax free $500K captain gain if we sell before June 2021 because we live as primary for 2 years (2016-2018) in last 5 years (2016-2021). If we can sell at $1.2M, we need to pay 6% agent/closing cost, we should get $1.2M*94%=$1.128M, and get $578K cash. The gain is $298K which should be tax free.

2. Rent for long term. Need to somehow get rid of all furniture currently used for Airbnb.

Assume we can rent out for $3500 per month, with one month per year for vacancy.Currently the monthly mortage is $2510 ($30120 per year) and annual property tax is $12K.

Income: $3500*11=$38500, Mortage is $2510*12=$30120, Interest is $16K, Property Tax: $12K, Insurance: $1K, Maintenance: $3K per year (Not sure if this is reasonable?). The total profit per year is about 38.5K-16K-1K-12K-3K=6.5K per year, cash flow is -635 per month. Not sure if this is the right way to calculate profile and cash flow. Not sure how should I calculate ROI to compare with other investment options. Maybe change to interest only mortage or refinance will improve the cash flow and ROI but reduce profit (interest will increase).

3. Only do short term rental. Need to wait and see how the situation will change. Any suggestion?

Jonathan Pflueger · Answer

@Wei Jiang

If you can afford to hold onto it keep it. Like @Brian Garlington referred to - location, location, location. Generational wealth is made from appreciation and equity, rental income is insurance against downturns in the market.

@Dave Spooner also makes a great point, most investors do not understand markets like the Bay Area and leave out of their investing equation very important details - prop 10, tax write-off's, appreciation, rising rents, built in equity you can borrow against (this is a very important plus that should not be overlooked) are all aspects that can very easily tip the scale against any number of negative factors.

With that said, this really depends on your life trajectory and specific situation. Selling and taking tax free money is not a bad choice, just make sure whatever you do aligns with your investing and life goals. All in all, not a bad situation to be in!

Account Closed · Answer

Are you sure your mortgage payments don't include taxes, interest and insurance?  This doesn't make sense to me.

A house in Fremont is gold.  Don't forget about your Prop 13 benefit, too.

Also, why not just rent it furnished?  Lots of Indian techies who like to live in Fremont because of the Indian community there.  If you didn't mind the resident faces changing occasionally, you could probably keep it rented year-round furnished.

I managed a property in Santa Clara, and learned that Indian techies would lease a place as roommates, then they would rent more floor space to more of their Indian techie co-workers and friends (normally, all single males).  Then, sometimes the original guys on the lease would just go back to India and different guys would move in.  They never caused me any problems and the rent was always paid on time.

If it was my place, that's what I'd do.  Rent it month to month furnished and advertise on an Indian community website - find out where to advertise to this population.  I've seen Indian community websites, so I'd start there by Googling it and if it's not obvious how to advertise to this niche, then just ask on the website how to do it.  You'd have that place rented in a heartbeat, in my opinion.

Amit M. · Answer

This is prime blue chip real estate. You should keep it! Long term it will = gold for you. (It may be counterintuitive for some folks...but this is why there are so many multimillionaires in the Bay Area :)

For now, rent it out as furnished rental mid term to one year. Then decide if you want to go back to short term, or just continue as long term rental, depends on market demand.

Oh, and get rid of that 7 year arm nonsense. Lock in a 30 year fixed rate so you are not subject to future interest rate fluctuations.

Ask yourself this: how many people do you know who sold prime Bay Area real estate 10-15 years ago (who could have worked to keep it) and think that was a good idea today?  Crickets 🦗 🦗🦗.

Brian Garlington · Answer

As another poster suggested.....why in the world would you sell? Fremont is where Tesla is and a LOT of tech jobs. Offer it as a furnished LTR Rental. You may be surprised at how many people don't have furniture. Worse case scenario you sell the furniture on EBAY or Craigs list but don't sell your place in Fremont.

Account Closed · Answer

So, you're losing $6500 per year, although your vacancy rate is too high.  Data from 2017 says SF Bay Area rental vacancy rate was 3.18%.  You're figuring it at 8%, but even accounting for that, you're still losing almost as much.  But, you're gaining a ton in appreciation.  How does this work out on your taxes?  I think that's what you need to find out before you sell it.  Maybe you need the tax write-offs?

ARMs are awful.  I'd refinance if you were going to keep it.

Steve Morris · Answer

My gut would be to sell especially if you can take the $500K exemption, I used to be in the Bay Area high tech business, but I think outside of coding (which can be done anywhere) that the population will be stagnant at best.  Plus AirBnB is getting saturated.

As far as 6% commission, that seems high - I'd shop it.  Most realtors put a sign, put it in RMLS and schedule showings for which $50K+ seems a bit extravagant.

Mike Chern · Answer

@Wei Jiang

I think your calculation is very conservative, renter like to stay for years, and maintenance will be lower than 3k a year, no hurricane, no extreme weather.

You should hire a professional agent do proper tenant screening, and manage it yourself if you can. Screening tenant is very important in CA. Screening screening.

Twana Rasoul · Answer

@Wei Jiang definitely sell and lock in all that tax free growth.  doesn't seem like a great rental to keep.  there's no gray area here.  Pretty black and white to me. sell it and use that money to invest in other deals.

Best of luck!

Wei Jiang · Answer

Account Closed

Thanks you for your suggestion. My mortgage includes interest but not tax or insurance. So when calculating profile, I only use interest as expense.

Income: $3500*11=$38500, Mortgage is $2510*12=$30120 (Interest is $16K in mortgage), Property Tax: $12K, Insurance: $1K, Maintenance: $3K per year (Not sure if this is reasonable?). The total profit per year is about 38.5K-16K-1K-12K-3K=6.5K.

Mike Eichler · Answer

If you want to pull the cash into something else, you could refi and rent.  With interest rates right now I know that isnt the most attractive option, but just a thought.

Should we rent or sell a SFH in Fremont CA

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