Should i sell my house?

Question

Hi! Everyone on Biggerpockets,

Im currently thinking of selling my home right now that demand & prices are high. Our family goals have shifted from working, saving, buying a home to investing to get out of debt and become financially independent. We realize the La Market appreciates well and it would be good profit if we hold on and sell 20 yrs from now but as robert kiyosaki says your home is not an asset.

We are shifting towards selling this home and moving into an apt which is a couple hundred less than our current mortgage. Using the profit after closing costs, re agent fees etc to payoff current debt and use the rest to invest in an area with lower cost propertys( in southern california) to do short term rentals that cash flows well.

What do you guys think is this a good route to go or is their other ways i could go with my investing plans?

Here is some info:

-Home in los angeles 90247 zip code.

- mortgage balance is $385,000

- 2 bed / 1 bath / 815 sq ft / 5100 sq ft lot

- current homes sold in area comps are $550,000

- so after closing costs, re agent fees, moving costs we will have around $110,000 to $120,000 profit

- we will payoff debt of $25,000 and be left with around 85k to 95k to invest with

- i will also get back my Va entitlement so i wont have to put down any money on a new investment and wont pay mortgage insurance.

- both of our credit scores are 800+

-mortgage payment of $2300 + maintenance & repairs

Thanks

Dan H. · Answer

I am in the San Diego market which as you likely know has similarities to the LA market.  Here are some thoughts:

• RK indicates a home is not an asset, but he is using his definition which is not Webster's definition.  I never agreed with his assessment that a home is not an asset.   I strongly disagree with his view on home ownership.  His definition of asset is based solely on cash flow.  It does not look at return from other sources.  It also does not take into account that it is often cheaper to buy than to rent (if it was not there would not be RE investor renting units out).  His anti home ownership perspective is surprising because a penny saved is worth more than a penny earned.  A penny earned has taxes taken out of it.  Maybe you end up with 70% of a penny earned making it into you pocket (I wish that much of the penny made it into my pocket).  So money saved is very valuable.
• We own quite a few properties in San Diego.  The Midwest rents (not the cash flow but the actual full rent amount) are below my monthly return from just appreciation.   We have holdings for up to 27 years.  Everyone of our properties has appreciated at least $1K/month over the holding period.  We have one that has appreciated over $4k/month over the holding period (21 years).  What has been you monthly appreciation over your hold time for your house?
• Initial cash flow is not actual cash flow.  Cash flow is the actual cash flow over the hold period.  I suspect that my cash flow, in the absence of extracting value, would exceed virtually all Midwest markets.  Currently all my rents are in excess of 1% of acquisition costs with one being in excess of 4% of acquisition costs.  What happens on my properties is most of them started with modest cash flow, then the cash flow gets good, then I extract out the equity, then the cash flow is bad (negative but do I care if I am $500/month negative if I just extracted out $200K?), to start the process all over again.
• LA is an outstanding market for buy and hold RE.  Case schiller had it as the number 2 market for buy and hold in the US since 2000.  I would need to have a good reason to choose a different market.

Good luck with whatever you decide.

David Lee Hall, III · Answer

@Marcos Urvina

Honestly with your credit and 85k in fund money, you could look at 2 homes in Midwest markets that cash flow around the 1% rule and have a nice emergency fund in place. So if you want to get started in cash flow investments it sounds like a great plan.

Example: I am selling to a CA buyer one of my rentals currently. $960/mo gross income, sale is $61k cash on the sale. B- area. With 20% down, you could buy 6 of these types of properties. That isn’t a bad start to a career investing.

Forrest Faulconer · Answer

Have you thought about doing a cash-out refinance? Interest rates are so low, we refinanced ours at 2.99%, our monthly payment decreased and we pulled out a good chunk of change. With your credit score and the fact it's your primary means you are lined up to get the best options.

Forrest

Shanell Law · Answer

@Marcos Urvina

Just wondering what the nature of the debt is. Cars? Credit Cards? I wouldn’t recommend cash out refinance for such debt or to sell your property.

I would search for other means to resolve the debt. Perhaps a second gig or ride-sharing if you have the time , but uprooting yourself just doesn’t seem worth it. I know working a second gig is a sacrifice but likely worth it and you won’t have to do it for long.

Preparing to sell, selling, searching for a property and closing will take time and because the timeline is unknown the debt will remain unpaid. The same goes for building an ADU.

I would recommend minimizing spending on other items and extracurriculars with part time employment that would together total $1k a month which would could dedicated to debt pay down. Going this route would start your debt payoff almost immediately.

ADUs are terrific but minimize debt first then look into building on your property so that you can enjoy the income that the rental would generate.

All the best.

Rick Albert · Answer

I've had the same debate with one of my rentals.  The biggest question I ask myself is where would I reinvest that money that would produce better returns?

For example, one of my LA rentals has about $80K in equity.  Assuming my tenants move out (because of the current climate), all the money would be tax free if I sell before July.  I could then use that money towards building an ADU on my next house hack.  Effectively losing one rental but gaining two more (would move out of my current house with ADU and have it 100% rented).

A driving factor is how will selling this asset accelerate you to your next goal?  That will give you your answer.

David Gwilt · Answer

How long have you lived in the property?  You should also consider the tax impact of selling the property for a profit if you haven't lived in it for 2 or more years and don't meet one of the other exceptions to exclude the capital gains from taxes.

Nick Hedberg · Answer

Hi @Marcos Urvina. Have you considered adding an ADU? This would generate cashflow for your current property and would increase it's value due to the additional square footage.

I would not recommend selling and renting unless there is a significant difference and the numbers are rock solid. I have seen too many people that have become wealthy owning real estate to advise selling and moving to renting. Most people on this site buy properties to rent them and don't sell their properties to become renters.

Another option would be to sell/cash out your current place and buy a multi-family. The tenants can help pay down the mortgage and you can potentially AirBNB a unit for up to 120 days since you would be an owner occupant.

Jesse Mancuso · Answer

As a property manager I am (naturally) somewhat biased towards keeping a property and renting but agree wholeheartedly above. Renting can make sense for a lot of people but not all. Purchasing lower-cost properties that provide regular cash flow might be a good option for you. I'd continue to weigh out all options just as you are doing. Best of luck!

Marcus Auerbach · Answer

@Marcos Urvina here are some reasons not to sell:

- you give up your monthly principal pay down, how much is that?

- you give up your tax savings, how much is that?

- you give up appreciation on $550,000 - even if it's only a couple %

RK is right, your home is not an asset, but that does not mean renting is better (it is not). figure out how to keep you home and buy an asset!

Dane Glaze · Answer

@Marcos Urvina Hey Marcos i’m interested in your property. How much are you thinking about selling for?

Should i sell my house?

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