Author Topic: Selling bay area house vs holding on  (Read 16136 times)

nmalik

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Selling bay area house vs holding on
« on: August 17, 2019, 06:31:14 PM »
I have a house in the Bay area coastside and for personal reasons need to move  (locally). For this move I plan to  rent after which I will upgrade to a different property in ~1.5-2 years.

I am trying to decide what to do with my property. I've had a paper gain on it and think selling could be a good idea. At the same time, I dont want to lose out on potential property appreciation while staying locally and could rent the property out.

Would be interested in thoughts of selling and keeping money in the stock market or holding on to the property and renting it out

Sam

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Re: Selling bay area house vs holding on
« Reply #1 on: August 19, 2019, 08:47:34 AM »
I think it’s a good idea to try to hold on for as long as possible. Try to rent it out first and see if it covers all expenses and then some. Only after you cannot get a good renter and rent price should you consider selling.
Regards,

Sam

nmalik

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Re: Selling bay area house vs holding on
« Reply #2 on: August 19, 2019, 04:24:18 PM »
Interesting. But what are your thoughts on taking out the home equity and putting it in the stock market instead. Shouldn't the return on the market beat or equate the rise in appreciation/increase in home equity from renter over a 2 year period? (Mortgage rate is 3.625%)?

nmalik

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Re: Selling bay area house vs holding on
« Reply #3 on: August 19, 2019, 04:25:21 PM »
As added info, based on the current rents in the area, Ill likely break even on PITI, Insurance and property mgmt but wont make much monthly profit

couchfi

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Re: Selling bay area house vs holding on
« Reply #4 on: September 19, 2019, 01:13:30 AM »
@nmalik what did you decide to do?

@Sam why do you think it's better to hold? I'm currently in the middle of this decision (except I have an SF condo rather than an house, and moving into a house), and to me selling and diversifying that cash in realestate crowdfunding and maybe a rental property or two in a low cost of living area with good cap rates seems like a better deal. Sure I lose 5-6% from selling costs, but I'll still lock in a gain now to reinvest and diversify.

Property prices are very high already in SF and I would barely break even on rents, having two large mortgages in this market during a down turn would wipe out any existing gains and probably force me to pay into the rental property when rents also drop during a recession. To keep a rental at this stage of the real estate cycle, I'd want to have a good amount of buffer for cash flow.

Money Ronin

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Re: Selling bay area house vs holding on
« Reply #5 on: September 19, 2019, 10:36:51 PM »
I am also for holding and renting.  Am I'm going to offer you another CRAZY suggestion:

I'm assuming you're young (you define what that means) and have a long investment horizon.  Therefore, I think you should be willing to take some risks.

Before you move, refinance your house at the current incredibly low rates and cash out as much equity as the bank will allow.  The maximum mortgage interest you can deduct is on a $750K loan, but I would exceed that loan amount despite a portion of the interest not being deductible.  Consult your accountant regarding deductibilty.  I don't know of any other situation where someone will lend you 30 year money with 3.5% or less tax-deductible interest.  You could of course go the ARM route instead for an event lower interest rate.  While you're at it, take out a HELOC.  The application is usually free and costs nothing if you don't use it.

Once your house transitions from a personal residence to a rental, it will be a lot harder to get the highest LTV, lowest rates or any sort of HELOC.  Banks place a higher risk premium on rentals. 

Don't just focus on cash flow.  You need to consider overall Return on Equity.

Say you don't increase your mortgage amount.  You rent out the house and I'll assume you are slightly cash flow positive.  Then you decide you'd like to invest in something like a rental property.  If it's a single family home, you'll likely pay an interest rate of 0.75% to 1.0% more than your primary residence.  If it's an apartment building, you will pay 3.75% to 4.25% interest rate but for a 5 Year ARM (there are no 30 year mortgages on apartments).  Either way, the lending terms will never be as good as your primary residence.


couchfi

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Re: Selling bay area house vs holding on
« Reply #6 on: September 19, 2019, 11:36:43 PM »
Thanks for the idea, it's a little too late actually as I'm about to close on a new primary residence 2.5% 10/1 ARM and half way there working with an agent to list my current home.

Maybe I'm too risk averse, but I just can't make the numbers work without unrealistic expectations about SF real estate growth over the next few decades. Surely it will revert back to the mean at some point?

The new place costs nearly 2x the one I'm selling, so I'm already heavily levered in bay area real estate.

If I count principle payment as cashflow, then I'm cashflow positive, but straight line depreciation eats most of it back to break even, and it's before considering any rental vacancies or repairs, property managers (8-10%) making it negative.

I can't assume the bay area will increase in value more than other parts of the country over the next decade or two, it's already the most expensive city. Long term, equity appreciation will track inflation, let's say 2 - 3%. I'm probably looking at 10 - 15% IRR while slowly deleveraging from an initial 70-80% LTV which is pretty high imo. Real estate syndicates and crowdfunding can hit that with lower risk through diversification.

Money Ronin

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Re: Selling bay area house vs holding on
« Reply #7 on: September 20, 2019, 10:44:27 AM »
If you're buying a new house for 2x, then I really can't fault you for not wanting more risk.  I do recommend maxing out the money borrowed. 2.5% is an absolute fabulous rate.  Who is the lender?

Let me also tell you my own real estate story.  In 2002, I sold my condo for $315K because I was convinced real estate had it's run and things were overpriced.  I bought a house for $750K in 2003 because I realized I was wrong--prices kept going up.  In hindsight, I should have rented the condo and bought the house, but back then I was more risk adverse, had less cash and knew far less about real estate.

Prices continued to increase until 2006--then real estate fell apart.  But had I kept my condo, it would be worth $700K today.  In 2002, I could have rented the condo for $1800.  Today the rental rate would probably be $3000.  When I sold in 2002, my mortgage was around $130K.  From 2002 to now, a renter could have been helping me pay my mortgage while the property appreciated.

Also from experience, SFH in nice neighborhoods with high quality tenants usually have low maintenance needs.  I would not recommend a management company assuming you live within an hour of the property.

Thanks for the idea, it's a little too late actually as I'm about to close on a new primary residence 2.5% 10/1 ARM and half way there working with an agent to list my current home.

Maybe I'm too risk averse, but I just can't make the numbers work without unrealistic expectations about SF real estate growth over the next few decades. Surely it will revert back to the mean at some point?

The new place costs nearly 2x the one I'm selling, so I'm already heavily levered in bay area real estate.

If I count principle payment as cashflow, then I'm cashflow positive, but straight line depreciation eats most of it back to break even, and it's before considering any rental vacancies or repairs, property managers (8-10%) making it negative.

I can't assume the bay area will increase in value more than other parts of the country over the next decade or two, it's already the most expensive city. Long term, equity appreciation will track inflation, let's say 2 - 3%. I'm probably looking at 10 - 15% IRR while slowly deleveraging from an initial 70-80% LTV which is pretty high imo. Real estate syndicates and crowdfunding can hit that with lower risk through diversification.

couchfi

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Re: Selling bay area house vs holding on
« Reply #8 on: September 20, 2019, 09:37:00 PM »
>  2.5% is an absolute fabulous rate.  Who is the lender?

Wells Fargo, got tipped off by Sam's post on refinancing! This is also a great discussion on the topic https://www.bogleheads.org/forum/viewtopic.php?f=2&t=280692#p4535458

> Prices continued to increase until 2006--then real estate fell apart.  But had I kept my condo, it would be worth $700K today.  In 2002, I could have rented the condo for $1800.  Today the rental rate would probably be $3000.  When I sold in 2002, my mortgage was around $130K.  From 2002 to now, a renter could have been helping me pay my mortgage while the property appreciated.

Having money coming in with no mortgage left must feel pretty good! If it was 700k today, seems you can do better by selling it and reinvesting that money elsewhere. 700k in a decent real estate syndicate deal will yield 6-8% preferred return in cash which is $3.5k - $4.6k a month before considering equity up side right? I'm still early in my investing career (side hustle?), maybe syndicates are higher risk? I dunno.

> Also from experience, SFH in nice neighborhoods with high quality tenants usually have low maintenance needs.  I would not recommend a management company assuming you live within an hour of the property.

That's a good point, we can probably manage it ourselves. Our neighborhood isn't great, but it's a very easy commute to tech companies, and we can get good tenants at our price point.

Sam

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Re: Selling bay area house vs holding on
« Reply #9 on: September 21, 2019, 09:08:19 PM »
Interesting. But what are your thoughts on taking out the home equity and putting it in the stock market instead. Shouldn't the return on the market beat or equate the rise in appreciation/increase in home equity from renter over a 2 year period? (Mortgage rate is 3.625%)?

Not worth the risk at all.

 It’s like jumping out of the frying pan into the fire.
Regards,

Sam

Eric

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Re: Selling bay area house vs holding on
« Reply #10 on: September 29, 2019, 06:18:26 PM »
I would suggest selling. SF has had a great run, but what's the probability weighted return up or down. Cap rates are horrible so you need appreciation to break even vs another investment. Foreign investment is down and unlikely to return in the near term (low oil prices for middle eastern investors, slowdown in China).

The tech bubble is showing signs of popping. No suckers willing to buy we work. Recent ipo performance is pretty bad across tech.

There is already a real estate reprising. Seattle is down. New York has a huge surplus of luxury real estate. The heartland where cap rates are reasonable and people can afford to buy is doing well.

How tied to you to the bay area? If some magical inflation happens and you are priced out is that a life ending scenario? There is more likely a downturn than upside, but it's worth keeping is an upside is problem. If all your friends and family are in the bay area, that's different than if you are a transplant to the area.

I would be a seller unless you have strong ties to the area.




Sam

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Re: Selling bay area house vs holding on
« Reply #11 on: September 30, 2019, 09:12:18 PM »
I would suggest selling. SF has had a great run, but what's the probability weighted return up or down. Cap rates are horrible so you need appreciation to break even vs another investment. Foreign investment is down and unlikely to return in the near term (low oil prices for middle eastern investors, slowdown in China).

The tech bubble is showing signs of popping. No suckers willing to buy we work. Recent ipo performance is pretty bad across tech.

There is already a real estate reprising. Seattle is down. New York has a huge surplus of luxury real estate. The heartland where cap rates are reasonable and people can afford to buy is doing well.

How tied to you to the bay area? If some magical inflation happens and you are priced out is that a life ending scenario? There is more likely a downturn than upside, but it's worth keeping is an upside is problem. If all your friends and family are in the bay area, that's different than if you are a transplant to the area.

I would be a seller unless you have strong ties to the area.

Sadly, I agree with you about the slowdown. Inventory is also up in SF. The peak looks to be 1H2018.. then a slowdown, then a rebound in 1H2019 then now another slowdown.

BUT, I will say that despite the enthusiasm fading away from all the recent tech IPOs like Uber and Lyft, I think this will cause MORE new tech IPO employees to sell stock end of 2019 and early 2020 (tax diversification) and diversity into real estate.

Therefore, I suspect a better time to sell is in 1H2020, not now.
Regards,

Sam

nmalik

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Re: Selling bay area house vs holding on
« Reply #12 on: October 05, 2019, 02:40:03 PM »
Thanks for all the suggestions.
I've decided to sell in 1H'20 (That timing works out with other factors). Aiming for March or so to avoid the "(?)winter slowdown."

My plan is to sell and then buy another property later in 2020/early 21, so wont be out of housing for too long but would just make things easier logistically than renting it out. Aim is to put some of it into stocks and perhaps look into syndicated deals...


Sam

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Re: Selling bay area house vs holding on
« Reply #13 on: October 09, 2019, 09:15:22 PM »
Thanks for all the suggestions.
I've decided to sell in 1H'20 (That timing works out with other factors). Aiming for March or so to avoid the "(?)winter slowdown."

My plan is to sell and then buy another property later in 2020/early 21, so wont be out of housing for too long but would just make things easier logistically than renting it out. Aim is to put some of it into stocks and perhaps look into syndicated deals...

So a 1031 exchange or no?
Regards,

Sam

nmalik

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Re: Selling bay area house vs holding on
« Reply #14 on: October 12, 2019, 04:34:10 PM »
Sam,
I believe the property should be eligible for the tax exclusion on the sale of a primary home so not bothering with a 1031 exchange. Would you advise otherwise?

nmalik

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Re: Selling bay area house vs holding on
« Reply #15 on: October 12, 2019, 04:59:58 PM »
Sam,
Also saw your other post on Bay area real estate possibly going down over the next 2-3 years. Its clear that the market is cooling already...
However, do you think prices in the peninsula are likely to go down significantly or plateau, given the high level of demand in the next 6 months or so..
also all the ipos...

Sam

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Re: Selling bay area house vs holding on
« Reply #16 on: October 16, 2019, 07:01:19 AM »
Sam,
Also saw your other post on Bay area real estate possibly going down over the next 2-3 years. Its clear that the market is cooling already...
However, do you think prices in the peninsula are likely to go down significantly or plateau, given the high level of demand in the next 6 months or so..
also all the ipos...

I think the peninsula goes down 15% at most. But I have a feeling demand will pick up in Spring 2020 as I wrote in my newsletter this past week (https://forms.aweber.com/form/70/414890070.htm). And you're right about $250K/$500K tax free profits post sale.

Regards,

Sam

Kendall

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Re: Selling bay area house vs holding on
« Reply #17 on: October 28, 2019, 10:26:28 AM »
The cap rates for SF Bay Area property are soooo low. I tried to rent my previous condo in San Jose to earn income. After the mortgage, management fees, wear and tear and the headaches of HOA boards, I could not keep being a landlord. I barely broke even on cashflow. But I was able to hold on to the property until there was an upswing in the market and sell out. That seems to me to be the only reason to own  a rental with a mortgage payment on it.  I will surely come to regret the choice.  I sold a condo in Mountain View for $200k and it now priced at $900k.  At the same time, not owning that condo freed me to do other things with my money and diversify my risks. If my properties had all been completely paid for, then, in a sense, switching it to a rental property is like playing with the house money.

dogloza1

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Re: Selling bay area house vs holding on
« Reply #18 on: December 08, 2019, 09:28:07 AM »
Why would anyone in their right mind pay 8-10% in management fees for a single family home or condo???  What is there to manage?  A home shield insurance policy runs about $50-$75/month and all needed repair visits run about $75.   

Sam

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Re: Selling bay area house vs holding on
« Reply #19 on: December 08, 2019, 10:49:20 AM »
The cap rates for SF Bay Area property are soooo low. I tried to rent my previous condo in San Jose to earn income. After the mortgage, management fees, wear and tear and the headaches of HOA boards, I could not keep being a landlord. I barely broke even on cashflow. But I was able to hold on to the property until there was an upswing in the market and sell out. That seems to me to be the only reason to own  a rental with a mortgage payment on it.  I will surely come to regret the choice.  I sold a condo in Mountain View for $200k and it now priced at $900k.  At the same time, not owning that condo freed me to do other things with my money and diversify my risks. If my properties had all been completely paid for, then, in a sense, switching it to a rental property is like playing with the house money.

We’re you abele to reinvest the proceeds and turn it into more than $900,000 during this time? Or somewhere close? If so, not bad, especially with the extra freedom.
Regards,

Sam