Rent home with high equity or sell

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vickyuec
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Rent home with high equity or sell

Post by vickyuec » Wed Aug 08, 2018 1:15 am

Hi,

I purchased a home 5 years ago with 20% down-payment in SF Bay Area. It has appreciated since then in value, so that my equity is over 60% now at current market price. I recently purchased another home which I'll be using as primary residence. I was planning to rent out the previous home, but found that rents haven't appreciated as much as prices themselves. My question is whether I should rent the first home, or sell it to - 1. reduce principal in new home AND 2. buy one or more investment properties so that rent I'm getting is same but my equity is lower (around 25%)?

Thanks!

JoeRetire
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Re: Rent home with high equity or sell

Post by JoeRetire » Wed Aug 08, 2018 6:23 am

It you want to be a landlord, then rent this house.

Otherwise, sell it.

vickyuec
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Joined: Wed Aug 08, 2018 1:04 am

Re: Rent home with high equity or sell

Post by vickyuec » Wed Aug 08, 2018 11:18 am

Thanks Joe. I do want to be a landlord. However, I'm considering between two options -
1. Rent the current home where I have equity around 60%, and rent to price ratio is not so great.
2. Sell this home and buy a cheaper home in a different location as an investment property where rent to price ratio is better. In this case, I also have the option to increase my leverage by keeping my equity at 25%. And I'll use the remaining proceeds to reduce outstanding loan amount on my primary home.

Any suggestions?

z91
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Re: Rent home with high equity or sell

Post by z91 » Wed Aug 08, 2018 12:00 pm

Compare the two properties (the one you own and the one you are planning to buy). Would it make landlording any more difficult/riskier? For example harder tenants with lower credit, or so far away you don't even want to drive by just to check on the place (from the outside of course).

I'd much rather be a landlord for an area where it's easy to rent out to high earners and longer-term tenants than some place further away. If you don't mind the extra work (if any) for the same pay, then go for it.

Since you lived in the house you know all the issues with it. Buying a new property will have issues you may not know about, and may need to fix down the road. It may be much more difficult with a renter living there.

There is also the note about property taxes..your taxes are likely much lower now. Would they be the same or more with the new property? Basically put all the numbers together, then see if it's worth it.

Keep in mind if this was your primary residence the past few years you could take out all the capital gains tax-free if you sold..the Bay Area market is flattening a bit now though.

megabad
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Re: Rent home with high equity or sell

Post by megabad » Wed Aug 08, 2018 12:23 pm

z91 wrote:
Wed Aug 08, 2018 12:00 pm
Keep in mind if this was your primary residence the past few years you could take out all the capital gains tax-free if you sold..
Well maybe not "all" but at least $250,000 or $500,000 if married. For this reason I would almost certainly sell if this home is your primary residence. In SF, I would expect that this might save you $100,000 in taxes. If not primary residence, than I would run the numbers as you would normally.

I generally agree with you in that I don't like having much equity in rental property in a low interest rate environment but the taxes are the reason I would sell. Otherwise you could just cash out refinance before you move and address that issue. You will generally need around 30%+ equity for best rates on new non-primary residence loans, but there are exceptions.

Nate79
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Location: Delaware

Re: Rent home with high equity or sell

Post by Nate79 » Wed Aug 08, 2018 1:25 pm

For basic analysis does this potential rental property fit the "1%" rule?

chevca
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Re: Rent home with high equity or sell

Post by chevca » Wed Aug 08, 2018 1:51 pm

I was going to mention the capital gains exclusion rule also. That is tough to pass up.

Also, I'm sure it's done... but, owning a SFH rental in a high cost of living area doesn't seem like the best way to landlording. Especially if rates aren't competitive with the housing market. My thinking is that being HCOL, it would mean just about everything is also more expensive. Need a new roof, siding, paint the house, HVAC, or whatever... it's just going to me more expensive. It would just seem to me there's a better way. Maybe a 4-plex or apartment building in a HCOL? But, a single family home doesn't seem like the way to go. But, I'm also no expert.

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knpstr
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Re: Rent home with high equity or sell

Post by knpstr » Wed Aug 08, 2018 2:05 pm

Not enough information really -- but probably sell and take advantage of primary residence tax treatment on gains, then invest that.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

JoeRetire
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Re: Rent home with high equity or sell

Post by JoeRetire » Wed Aug 08, 2018 3:34 pm

vickyuec wrote:
Wed Aug 08, 2018 11:18 am
Thanks Joe. I do want to be a landlord. However, I'm considering between two options -
1. Rent the current home where I have equity around 60%, and rent to price ratio is not so great.
2. Sell this home and buy a cheaper home in a different location as an investment property where rent to price ratio is better. In this case, I also have the option to increase my leverage by keeping my equity at 25%. And I'll use the remaining proceeds to reduce outstanding loan amount on my primary home.

Any suggestions?
Certainly.

If you didn't already own your current home, would it be at the top of the list for your investment property purchases?
If not, sell this home and purchase a better investment property.

vickyuec
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Re: Rent home with high equity or sell

Post by vickyuec » Fri Aug 10, 2018 12:57 am

Thanks for all the great advice here guys. Given the low rent, the older home would not have been a great choice for investment property. The tax free gains and peace of mind from reducing mortgage payments on the new home are further (substantial) nudges towards selling it instead of renting. So I finally decided to sell the place.

Millennial
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Re: Rent home with high equity or sell

Post by Millennial » Fri Aug 10, 2018 5:07 am

We just went through this in Boston. Here's my advice: decide if you want to be a landlord.

If no - sell and go something else with the money.

If yes, build a spreadsheet to calculate net present value for both keeping/renting and for selling/buying/renting. This needs to take depreciation, taxes, expenses, rent, and transaction costs into account. If the latter is more $$, decide if it is enough more to go thru the sell/buy process.

I would be willing to bet ROI will be much better on the sell/buy/rent scenario, due to a few factors like realizing cap gains tax free, better leverage, and higher depreciation.

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tainted-meat
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Re: Rent home with high equity or sell

Post by tainted-meat » Fri Aug 10, 2018 5:59 am

You will have a lower property tax base than a recent buyer if you keep the property. You may check to see if that is worth passing up the capital gains exclusion.

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