Keep or sell investment for primary residence?

Question

I own a condo in Silicon Valley worth about $300-325k. I owe $130k on the mortgage. I currently rent it out for $1650/mo and profit $250/mo. I now live in Austin, TX, and need to purchase a primary residence for my wife and I.

I want to keep my condo and leverage it into other investments to grow my portfolio. But I am also tempted to sell it to purchase a primary residence. However, I don't want to "mortgage the house" to pursue my dream of being a full-time RE investor later on.

Am I killing my chances to become a full time RE investor later on by putting my investment into a primary residence? Should I hang on to it and save for down payment on my personal home?

Assaf Furman · Answer

@Jason Rowlett

Indeed an interesting situation. Would you mind sharing the location, size and bd/ba? both rent and worth seem too low to me, even for a 1bd/1ba 800sqft condo.

On one hand The completion of the Apple campus is scheduled to the end of this year, and that will affect the rents and prices of RE. On the other hand the market is experiencing a plateau, and large developments of apartment complexes in Mountain View, Sunnycale and Cupertino will contribute to the inventory of rental units. It's a tough decision on its own whether to keep holding this rental here, let alone when throwing the purchase of your primary residence into the mix.

Here's what you can do to help deciding:

- You can order an appraisal to get a better idea of the condo's worth, reach out to a lender to get an estimate for a refi (if you can do it at all) as well as looking up current market rents

- Then, look for both primary residence AND an investment property in your local market that you could purchase with the proceeds of the sale/refi of the condo

- You may end up realizing you can buy a primary residence in addition to a rental with those proceeds, earning the same rents or close to it which will allow you to keep investing, to my understanding that's your goal

- Consider the option of a 1031 exchange to a rental which you'll occupy later on. You can do it if you play it right, but that will take some time until you could get in there yourself so it really depends on how soon you want/need your own residence

Account Closed · Answer

@Jason Rowlett

Interesting situation. Where in the bay is it? What type of unit is it? 1650 seems low.A couple of factors stand out to me here.

1. Silicon Valley seems like it is at or close to peaking economically, and with real estate. A couple of my friends working for tech out there are telling me all of the ridiculous stories about corporate overvaluation and extreme leveraging. These guys are working for start ups and banking near $200k/year, and many of them tell me their companies are operating at a loss but still growing in value. I've also heard quite a bit about VC funds drying up. You would probably know much more about this than me.

2. Are your growth prospects better in the future austin property or the bay area property? If you move your money into a a new property with more appreciation (or less likely to depreciate) then it's probably not a bad bet.

This is probably what I would do to have your cake and (to some degree) eat it.

- Sell the bay property. @320k (which still seems so low to me!) you'll spend 130k on your mortgage and 20k in transaction fees fees, netting 170k which will be capital gains free if you lived in the property for 2 of the past 5 years.

-Purchase a value add home in an area you like using an FHA loan. If it's a major fixer and a 203B loan won't approve it you can go for a 203k loan with very low money down and construction costs rolled into the mortage. Get that sucker prettied up and refinance it... you should be in a 20% equity position and be able to knock the PMI off.

-enjoy the 100-150k or so you have left for your investing endeavors! You're pretty close to some great secondary and tertiary markets I imagine.

Tell me what you think about this!

Jeff Pollack · Answer

@Jason Rowlett, I think your rent is too low.  I get $1650-$1700 out of 500sft 1br apartments on a busy street in Santa Clara all day long.

You have and interesting problem that many would love to have.  Nobody here has given you bad advice, but I'd be very reluctant to let go of real estate in Silicon Valley, let alone in that particular location.  Apple is not going anywhere any time soon and if your time horizon is 10+ years I like the chances of values and rents going up.

Do you have a 401k?  If so, have you considered taking out a loan from it?  You can borrow up to 1/2 the total value or $50k, whichever to less.  The interest rate is like 4% and the loan has a 5 year term with a 30 year amortization schedule.  You make monthly payments right back into your own retirement account.  That is the best part.  You are paying yourself back instead of making payments to a bank.  I thank you can also pull a decent amount of money out of your condo with a refi if you're talking to somebody who knows what they are doing.  PM me if you like and I'll introduce you to a guy who knows his stuff.

Happy hinting!

Lauren Heart · Answer

Hi Jason,

IMO if I were in your situation...I would keep it...and leverage it.  (Many options there!)  This is Silicon Valley...this is CA.  If you look at the history of what property does in CA, (especially over 10-20 years) that should satisfy any anxiety.  Also, your estimates on your current property are too low given the location..I don't care if it's a shack!  :)

I'm very curious...so let us know what you end up doing!

All the best,

Lauren

Account Closed · Answer

@Jason Rowlett

of course! Hmm... 2 miles from the spaceship is definitely a confounding factor.

If you'd prefer not to sell you can definitely do the equity thing like you said, just be wary of the fact that you'll be holding onto a property that cash flows less (best case) or negatively (worst case) because your margins are already a bit narrow. Does your 250$ cash flow monthly already account for misc expenses such as vacancy, capital expenditure, special HOA situations, etc..? Or is $250 the optimistic estimate?

If it were me pulling equity out of the property, I would open up an equity line of credit on it with the intention of paying it back. Then you just have to make sure that the home you purchase in Austin fits the following model:

All in costs < .80 ARV

All in being purchase, closing, rehab, holding, refinance, etc. I would probably shoot for 70-75% to create a contingency buffer... you will probably overshoot your rehab budget b/c of the emotional component of it being YOUR home. You should be able to easily get a loan for 80% of the ARV on it after and pay back your line of credit.

I'm pretty conservative financially, but I would say don't take out a loan to wholesale. If you're new to it all there is something to be respected about the organic growth process. Fund the marketing yourself and send out 1000 mailers this month. You shouldn't dump 10,000 mailers your first month if you're still learning how to do it well. And if you are good at it... the money you make from smaller campaigns will fund your campaigns growth.

I actually recently posted a bunch of my own personal content regarding printing your own yellow letters easily and at a low cost... Heres the links to the forum posts. There are a couple of goodies in there.

https://www.biggerpockets.com/forums/87/topics/284742-low-cost-yellow-letter-recipe

https://www.biggerpockets.com/forums/87/topics/286791-a-diy-yellow-letter-template-for-you-all-to-use-printing-tips

David Faulkner · Answer

We are late in the RE cycle, and I'd bet that both SV AND Austin are closer to the top than the bottom for this cycle, but believe that both have excellent long term prospects. So, if you are sitting on a nice equity position and positive cash flow (which is what it sounds like), then I would consider holding onto the condo, saving up, studying up on Austin and REI, and waiting until the market tanks until you cash out refinance and invest in Austin. The contrarian in me always wants to be conservative when others are aggressive and leverage up when others are running away ... this has served me well over the years.

Ryan Landis · Answer

@Jason Rowlett as many others have mentioned, there are a few great options you have on the table. Not sure when you left the Bay Area, but if you did in the past couple of years (and lived in the condo for 2 while you were here) that might influence some of the guidance you get.

Speak to your accountant as well if you can because the things you are considering will impact your tax burden (one way or another).

Sunny D. · Answer

The market for studio buyers for that size is a small segment. Most silicon valley folks would save up more to buy a larger 1BR. I would say sell it if you can get what you are looking for.

Dave Foster · Answer

@Jason Rowlett, if you want to go a route that preserves as much of your profit as possible but still accomplishes your goals given some patience I would concur with @Assaf Furman.  Sell your condo now at the top of the market and use the proceeds to purchase 2 Austin properties using a 1031 exchange.  This way all tax is deferred and can go into your re investing.  One of these properties would be something you may want to live in one day.  One of them should be a good investor class rental.

It sounds like you're already in Austin so stay wherever you are right now.  Renting is usually a bargain for the kind of property you can get so stay put have some fun and keep an eye on your rentals.  Use the rent on the nicer one to pay your rent or use the income from both to sock away another down payment.  After you've used the nicer one for investment for a year or two you change it's use from investment to your primary residence - not a taxable event.  Now you have a primary residence and a rental.  Your investing career is going well and you haven't paid a penny in tax on any of the gain.

Now tap equity or explore other options to get your next property.

Patience and the move to less expensive market could reward you handsomely.

Jason Rowlett · Answer

@Lauren Heart @Assaf Furman Account Closed

Thank you all for your comments! I truly appreciate your insight. My condo is located on Kiely Blvd. across the street from Central Park (Woodsborough complex). It's a "junior one bedroom" which is basically a studio and is 440sf. I've added new floors and painted it myself and it looks great given its age (45 yo).

There have been 2 recent sales of comparable condos in the complex. One with upgrades for 350 and one with no upgrades for 315. I'm at a loss because just this past November my agent in CA told me mine would be worth 265-300. I will definitely need an appraisal!

I like the idea of pulling equity out of it, I just don't have enough equity to take out a second mortgage on a new primary residence after pulling cash for a down pymt. (My mortgage company tells me I can only get about 50k out as of October 2015). Not really sure what's going on here with some of the numbers I've been getting. I think that has led to a lot of my confusion on what's best to do.

Thanks again for all of your responses.

Jason

Keep or sell investment for primary residence?

Most Popular Reply