Do I sell in order to buy more??? Looking for advice...

[Andrew Hinkley]

Hi all...So here's my situation.  I currently own a home in Los Angeles CA (Highland Park 90042).  I have gained substantial equity in the house over the past 2 1/2 years since I purchased it.  I am going to be buying a home near by which was my Grandfather's which has been offered to me a bit below market value.  I will rent the house that I am currently in which will provide monthly cash flow.  My question is if I should sell my current house instead.  I believe that I will be able to pocket around $250K profit without being hit by capital gains taxes, as the law now allows up to $250K tax free with certain requirements which I qualify for.  If I were to sell, I would use that $250K for other rental property purchases in other regions of the country.  Any advice?  Many thanks in advance!  ~Andrew

[Charlie Fitzgerald]

My short answer would be don't sell what you intend to buy.  My long answer would be, since you are going to move to the home previously owned by your grandfather, get a loan to buy that from the trust as your primary residence.  Keep the property in HP and rent out the house AND cash flow the improvements to convert the smaller unit in back to an additional rental.  That's my $0.02 worth.

[Jon Huber]

@Andrew Hinkley I purchased my first home in Los Angeles, and I am very happy I didn't sell it. You could refinance the properly to leverage the equity you have. However, if your property appraises high, as a conforming refi, you are maxed at $417k. I was in that same situation, so in my instance instance, I got a HELOC. I used the line of credit because I had substantial equity, appraised well over the 417, and didn't want to sell. Send me a message if you'd like a contact of someone to speak with. I was very happy with the guy I used, and have referred him out

[Roy Kwak]

Hey Andrew,

I'm next door in South Pasadena and very interested in buying in Highland Park and Eagle Rock areas.  I'm curious why you want to get out of L.A.  I think that Highland Park has a lot more upside potential over the next few years.  That being said, as far as your question...I guess I would ask a few questions:

1) When you say you are going to be positive cash flow on your current residence, do you mean that it is actual cash flow net of expenses (and not just mortgage)?

2) What is your time horizon and how aggressive do you want to be about building income now versus just having something later in retirement?

3) Do you really want to manage property remotely?  I own/manage properties in Riverside and I consider that a pain sometimes...even though it is only an hour away.

4) I'm with Jon in that you could consider doing a cash out refi if that is an option. I think that the name of the game in L.A. is buy and hold since appreciation is the big play here. One major issue with the HELOC is that you are subject to interest rate risks because they are always variable rates. If you don't have buffer, this could put you in a bad situation.

http://www.mtgprofessor.com/A%20-%20Second%20Mortg...

[Andrew Hinkley]

Thanks for the lengthy replies.  I'll try to address both of your questions....So I have already done a refi on my house and am max'd at $417.  I am currently using those funds to do work on the new house which is just up the road in Pasadena off Ave 64 (San Rafael hills).  A little on the new house...it was my Grandfather's, went into a family trust after his death and now my Dad owns it.  I will purchase it in about 5-6 months at a bit below market and will be able to retain my Grandfather's original tax rate.  I love Highland Park but my house is very small (less than 1000 SQFT).  I feel moving into the Pasadena house is a no brainer.  I also feel HP will continue to increase in value over the next few years, but who the hell really knows.  I do however think owning in Los Angeles overall is very positive. One thing also...my current HP house has a small back house (no plumbing currently) that I could do a small addition to and probably rent it out for close to $1000 to a student or someone looking for a day use office.

So yes, after all expenses I will still have positive for cash flow.  The rents in my area are astronomically high and my location is ideal.  Right near all that's popin' on York Blvd.

I am very eager to start creating passive income ASAP.  My goal is to be able to quit my day job in the future and continue to broaden my rental portfolio.

My current plan is to mostly purchase "turn key" properties that will all be under property management.  It would be very hard for me to hunt down properties, rehab them, find tenants etc.  I am also interested in wholesaling and buy and flip as well.

So as it stands I plan to hold my HP house indefinitely as a rental and continue to look for more properties elsewhere.  I will also have instant equity in the new house once I move in.

really appreciate your replies!

~Andrew

[Charlie Fitzgerald]

My short answer would be don't sell what you intend to buy.  My long answer would be, since you are going to move to the home previously owned by your grandfather, get a loan to buy that from the trust as your primary residence.  Keep the property in HP and rent out the house AND cash flow the improvements to convert the smaller unit in back to an additional rental.  That's my $0.02 worth.