Keep or sell current residence?

Question

I bought a 3bed/2ba 1k sq ft house in SoCal for 580k two years ago and through appreciation and some rehab (kitchen, landscaping) it's worth 700k.

I've decided to move a few minutes across town to a 1500sq ft for my family and got approved for a 20/80 loan buy it without selling my current house.

Should I sell or keep and rent it?

My mortgage is 2800/mo and I could rent it for 3100. That's only $300/mo NOT factoring expenses. Recent reports say Orange County is the 4th riskiest market with an 8% chance of homes going down in value over the next 2 years.

Am I crazy for considering renting it and not taking the appreciation now? Is there anything else I should be considering? I might be able to remodel the bathrooms or add a deck or something to flip for more appreciation (same floor plan flipped for 720k around the corner from me)

Mike Dymski · Answer

Hey Taylor.  The IRS allows you to exclude the capital gain on the sale of your primary residence up to a $250k gain if single and $500k if married, as long as you lived in the home as your primary residence for 2 of the prior 5 years.  Whether you rent or sell, this exclusion should play a big part in your decision (now, or within the next 3 years, if you choose to rent it).

Steve Vaughan · Answer

I'd fix it up nice and sell.  A $600,000 rental for $3100/mo? A really low ROE you could beat easily.

Other considerations? Taxes!  You should qualify for the 121 exclusion on gains.  Best gift you will ever receive from Uncle Sam @Taylor Hawkins.

Kristina Heimstaedt · Answer

@Taylor Hawkins As someone local to the market, I'm going to go against the grain and say hold. I'd ask what your mortgage structure is on the current property because $2800/month seems quite high if your purchase was closer to $500k. If my guess is correct about neighborhood, (probably westside), you should be able to collect as much as $3500/month depending on particular location and remodel. I manage a portfolio of properties, many of which are condos in Newport Crest which were all purchased for around $500k and all have mortgage payments plus HOA, plus property taxes and insurance around $2800/month.

My ultimate push for keeping the property is keeping the eye on the prize of being able to utilize the sale of this property down the road into a 1031 exchange for a property that has more units and cash flows significantly better. If you use the funds for your next purchase, you do get some tax benefits as mentioned by @Mike Dymski. However, as Vanguard University, OCC and the Chargers coming to the area continue to grow and positively impact the neighborhood and people aren't thrilled with the Taylor Morrison projects, you have a commodity that not everyone else has: land.

Either way, you've made a great investment and congratulations on this wonderful position to be in: profit or profit?

Megan Greathouse · Answer

@Taylor Hawkins, I'm in a similar situation. I moved to a new home a couple of years ago, and rented out my previous single family home. It rented for $1795/month, and my mortgage payment was about $1300 per month. Sounds great, but after learning through doing I found I was really only getting about $50/month on average after property management, repairs & maintenance, and a few capex items that popped up. I now have a decent amount of equity in it, and have decided to sell in order to use that equity to buy 2 new units. If I buy right, I should be getting cash flows closer to $400/month from those two units.

Of course there's time and effort required, and some additional expense involved with selling and buying, but I think it's the right move in the long run, given my personal goals. But it all boils down to what you want out of your real estate. I want to build up cash flows so I can eventually leave my job and focus on real estate, so selling now and buying units with higher cash flow makes sense. Best of luck to you in the decision!

Taylor Hawkins · Answer

Good idea Carlos! AirBnB tells me I could make ~4k/month which might change things. My girlfriend is a great/experienced property manager so I might look into that.

I've also heard people in my city make a lot of money as sober living homes, but I'm unsure of this business and there seems to be a lot of turmoil with the local government with that right now.

I appreciate all the ideas and help. Such a great  community!

Carlos Altamirano · Answer

@Taylor Hawkins

Interesting situation. You definitely won't be able to cashflow to a local resident on a long term lease, but have you thought about a short term rental? I don't know what city your house is located but a nice 3/2 here in SoCal can cater to a family who wants to see and visit beautiful Orange County. You can convert the house into an assisted living facility that will most likely cashflow too. I know people in that niche who are doing great. The thing is understanding your tenant and serving them well. Ultimately is a business, of course. On the other hand, you can also take your equity and place it out of state into multi-family. I am looking at an 8 unit building in Saint Louis with a net of $2700 for 210k. You'll have to know and understand multi-family too, specially the market. Good luck!

Phillip Dwyer · Answer

@Taylor Hawkins  Sounds like you're going the selling route.  You mentioned doing some more updating/remodeling prior to selling.  Make sure you do a cost benefit analysis to make sure your dollars in equate to actual profit.  Given the time of year, it may be better to do less so you can get the house on the market before the fall.

Taylor Hawkins · Answer

Thanks everyone! I think the consensus is to sell and I tend to agree.

I said Vanguard because I haven't gotten my butt in gear and got my first rental deal yet. I have a lot of friends and family in the Vegas and Houston areas so I'll take this as encouragement and start looking in those markets. @Thomas Rutkowski I had never even considered private lending as an option. Thanks for getting my wheels turning!

Vincent Pace · Answer

I think you should sell and take your profit there! Your expenses from renting it out are most likely going to be greater than 300 dollars, so you would be taking a loss, which is obviously not ideal. Best of luck to you!

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