Keep or sell Bay Area rental? Converted from primary 2 yrs ago

[Karen Y.]

Hi All,

I have a condo in Silicon Valley (Sunnyvale) that we converted from a primary residence 2 years ago. The 2-out-of-5 years window for tax purposes is coming up, and we are trying to figure out what to do next.

I bought it ~10 years ago for $625K and it's ~$900-925K right now.  We rent it out for $3400/month and profit $500/month.  The property is walking distance from the new Apple campus and very easy to manage.  

Whether or not we hold onto this property, we would like to invest in real estate.

It seems like our options are

1. Sell the property to avoid taxes, then look for new investment property
   
2. Hold onto the property. Hope prices continue to go up, do a 1031 exchange later. However, it seems it would have to appreciate a lot to make up for taxes. That said, prices are skyrocketing. If we did keep the property, we have also considered taking out a HELOC to invest in other property (not Bay Area).

How would you think about this?

[Account Closed]

Karen,

You bought at almost the absolute worst time, and you still got about $300k in appreciation in 10 years.      Amazing isn't it?  Bay Area real estate is quite forgiving over the long run if you can ride out the storm.

Assuming you put 20% down, that's about $2,500/mo in appreciation or 24% ROI annually. Do you see how $500/mo in cash-flow is not significant compared to the appreciation?

If you hold onto this place for another 10 years, there's a decent chance it'll worth $1.4M and rent is about $4,900/mo by then.  That's about $4k/mo worth of appreciation and an additional $1,500/mo of cash-flow.  If history is any indication of course.  I have no crystal ball.

It's definitely not an easy decision.  My stance is neutral in this case.  If it weren't for the $250k (single)/$500k (married) tax-free exemption, I'd vote to keep it.  Regardless of what decision you make, I hope it's the right one.

Best of luck.