All Forum Posts by: Jeffrey Waldron

Hi I'm Jeff in LA. This is an update to a previous post 11 months ago. 

We're ready to move up from our starter home in LA's Eagle Rock neighborhood, and would like to retain our small home as a rental. The house is paid off and has been well-maintained (by us!) and seen big upgrades in the last seven years: new AC unit, sewer line, hazard removal, garage conversion (to office), etc. -- most of the major maintenance surprises have already happened. It's a nice little house in a nice neighborhood, we can likely ask $3,000/mo, and I believe we'll have our pick of clean, trustworthy renters (too optimistic!?).

I've never been a landlord. Many people I talk to for advice (outside of the real estate investment world) warn that it's going to be hell, that renters have all the rights, they'll trash the place, you'll end up in court -- somehow I'll be screwed and it's best to cash out, take the capital gains tax exemption and move along. I don't have a community of folks here who have done this, or a community of real estate investment-minded people to encourage this move. 

It's a gut move for me -- I've always wanted to be a real estate investor -- I like owning property and this cashflows immediately. I'd like to build towards a portfolio of a couple of income-producing properties. 

Why does everybody want to talk me out of this (financial advisor, in-laws, etc.)? Do we take this plunge? For a year or two and see how we do? 

-Jeff 
 

Thanks again everybody for the insight! 

One more question comes to light as I continue calculating: I believe the property is cashflow positive at comparable rental rates in the area -- but not significantly so. If it ends up renting at a little better than breakeven, is this still a good move? There are 11 years left on the mortgage -- so in that time frame renters will basically buy us the house. 

Are taxes only applied to profit after expenses (mortgage, maintenance, etc.) -- does the IRS come after any of the equity the renter is feeding the loan all year? 

Thanks as always -- this is an incredible resource for knowledge! 

Another question for the LA folks -- is there a workaround for the short term / vacation rental restrictions that are going into place now? We did short term rentals on this property for four months earlier this year while in New York on business and did very well. Would love that to remain an option. 

Thanks @Eric Carr -- for the words of wisdom and the vote of confidence. Could you explain how cash flow in the short term is tax free? (Because offset by expenses / mortgage interest / etc.?) Thanks! 

@Ted Stewart My understanding was that I'd basically have three years to sell as the first day of the five year period technically started two years ago. 

Thanks for the responses! My instinct has always been to hold LA real estate -- we let our first condo go to trade up to our current house and I regret it, looking at how well its done and the lost rental potential over the last five years! 

"What reason would you have to sell?" is the great key question as the tax penalty only kicks in on a sale. If the sale is to invest in another piece of property, the 1031 exchange saves us. The great equity we have (our would-be tenants would basically pay off the house completely in about 11 years), seems like a good starting point for getting into BRRRR via cash-out refinance. Another potential long term plan has us moving back in for a couple of years when our daughter goes to college, and cashing it out after that tax-free.

And either way, we have two years and change to decide after moving out before the primary residence exemption disappears. 

Does anybody happen to know if the 1031 would apply toward a new primary residence down the road? Or only investment properties? 

Thanks again for the insight -- any additional is so welcome, we're close to taking the plunge! Any scenarios / recommended numbers we need to run before diving in also appreciated! 

-Jeff 

Weighing the pros and cons of a scenario where we keep our current home as a rental, as we buy and move into a larger place. Our small house is in a great area of Eagle Rock where rent will cash flow positive. In the last five years, the house’s value has gone up more than $200k. We have a 3% loan and low payments. We’re approved to purchase another home without the need to sell. My biggest hold up is accounting for the loss of capital gains tax exemption, and being on the hook for taxes on the gains if we decide to eventually sell the rental. How do we get around this? Move back in for two years before selling? Any thoughts from people who have been in similar dilemma’s welcome, as well a those who know the LA market! Thanks! -Jeff