Landlord/Rent or Buy 2nd Home

[James Channing]

Just want to see what others would do in my situation. I own a Bay Area condo which is worth ~$700k now with a mortgage of $230k. Rent on it is about $2900. Mortgage + property tax + HOA is ~$1900 per month so cash flow is definitely positive if I rent it out. Mortgage is at 3.375% 30-year-fixed so cash-out re-fi before renting it out might not be sensible.

My family now needs more space and am considering buying a SFH in the ~$1.5m range. I also have ~$700k cash in hand. Obviously I prefer not to use all $700k on a 2nd house, if I don't have to, as it will be a good base for other investments or kids' 529 savings.

For a $1.5m home, property tax is already $1500 per month, and ~$2k in mortgage interest after 2018 tax laws' deduction - I will be taking the $24k MFJ standard deduction if I don't buy a 2nd home.  $1.5k + $2k = $3.5k running cost.  I follow the zillow rental listings for those houses, and they can be rented for $3.5-$4.0k

Endless numbers crunching and countless spread sheets tell me land-lording my condo, and renting a SFH is not such a bad idea. However, this is not a normal action within my circle of friends and it is hard for me to find someone to discuss on my plan.

What do you guys think? Is it a feasible strategy to land-lord my condo and rent a SFH? Or should I bite the bullet and look to purchase the SFH?

[Ken Nguyen]

Bay Area real estate investment requires a different expectation than other part of the country.  If you don't speculate on the growing tech industry who pays really well, you simply can't buy anything in it.  A median tech salary is about $150k and fresh grads from top schools are making that much to start with.  Stock options for large companies like Google and FB are 100K+ per year.  This is why you see young tech couples making 2M all cash offer.  

If i were you, i would look into refi/heloc on the loan.  You definitely don't want to keep too much cash in your condo.  You should look at how much money can you pull out such that you will break even after all the tax deductions and depreciation.  Unless you need the cash-flow to supplement your living standards, try to keep it slightly negative to maximize your portfolio.   Investment debts are good debts if you can manage the risk well.  Being able to borrow money at 3-4% for a business is very powerful and unique.  Most people don't think they need a CPA.  Of the few that think they need it, hires one after the fact.  I would suggest consulting a CPA to see how an investment property will change your tax situation prior to doing it.  The changes are more than you think unless you are quite savy in Tax laws.  

As for your primary home.  There are ways to optimize but i would not put too much calculations on it.  Your home and your family is the foundation where everything is built on including your future businesses and investment opportunities.  A safe neighborhood that is close to jobs and has good school system will easily take 1.5M so i don't think you are wasting money.