Author Topic: Sell primary to buy more rentals or rent out primary?  (Read 1803 times)

Mrs. Healthywealth

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Sell primary to buy more rentals or rent out primary?
« on: November 28, 2020, 09:36:42 AM »
Due to unforeseen circumstances, we will be moving From what was suppose to be our forever home. As a result of the move, we no longer have to pay for housing, except utilities. This brings our expenses down to $2900 for a family of 4 living in a very HCOL area in SoCal. We currently have 7 out of state rentals and like the PMs for the locations. Our plan is to have a total of 15-20 SFH. From the sale of this home we can purchase 5-6 more rentals. The net income for the current 7 rentals is $3000/mos. if we purchase 5-6 more, it will add $2800-$3300/mos more. If we keep our primary home and rent it, cash flow is negative $320, but adding in equity pay down turns it to positive $300. The appreciation potential is significant can be 3-11% and can yield way more in 10yrs, but more of a gamble. Which one is better?

Hereís the breakdown:

Market Value: $750,000 (probably more in this market)
Original Purchase price: $655,000
Original Mortgage Amount: $524,000
Interest Rate: 2.875%
Mortgage Term: 30yrs
Term remaining: 29yrs and 7mos
Amount remaining on mortgage: $504000
Gross Rents: $2900
Principal and Interest (the P&I of your PITI - should match with the above info): $2107
Taxes and Insurance (the T&I of your PITI): $770/mos or $9240/yr
HOA costs: None
Deferred maintenance notes: Roof will need replacing in 7 years. Capex was updated within past 5yrs.

Anything else special or unique in regards to the numbers of the property (not the property itself; things such as city assessments, back taxes, special costs due to unique features of the property, etc. etc.): This is a highly appreciating suburb of Los Angeles and great schools. Can add an ADU for $120k and rent for $1800.

If youíre wondering why we are still building our income stream despite being FI, itís because we donít want to base our expenses on the $2900, but on what our average is: $6500.

FINate

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #1 on: November 28, 2020, 10:09:53 AM »
How long have you lived in the house? Basically, do you qualify for the homeowner capital gains exemption if you sell?

Due to unforeseen circumstances, we will be moving From what was suppose to be our forever home.

This is why I've stopped thinking in terms of a forever home. A home is wherever you make it... until you decide to make it somewhere else. But maybe that's just me :)

As a result of the move, we no longer have to pay for housing, except utilities. This brings our expenses down to $2900 for a family of 4 living in a very HCOL area in SoCal. We currently have 7 out of state rentals and like the PMs for the locations. Our plan is to have a total of 15-20 SFH. From the sale of this home we can purchase 5-6 more rentals. The net income for the current 7 rentals is $3000/mos. if we purchase 5-6 more, it will add $2800-$3300/mos more. If we keep our primary home and rent it, cash flow is negative $320, but adding in equity pay down turns it to positive $300. The appreciation potential is significant can be 3-11% and can yield way more in 10yrs, but more of a gamble. Which one is better?

Afraid I don't fully understand your situation or your plan. You average less than $500/mo cash flow per rental. If these are SFH I hope they are in very LCOL areas (you did mention out of state). So I'm not comfortable commenting on most of the above. Except this: Don't go negative cash flow just to gamble that appreciation will make up the difference. Also, if this is a "forever home" my bet is that you took good care of it, maybe even upgraded a few things. As you probably already know, most renters are pretty hard on stuff and don't take care of things like an owner would. Not all renters, but most. In other words, if you decide to sell after 5 years of renting the value will take a big hit and/or you'll spend a lot more getting it ready for market.

Hereís the breakdown:

Market Value: $750,000 (probably more in this market)
Original Purchase price: $655,000
Original Mortgage Amount: $524,000
Interest Rate: 2.875%
Mortgage Term: 30yrs
Term remaining: 29yrs and 7mos
Amount remaining on mortgage: $504000
Gross Rents: $2900
Principal and Interest (the P&I of your PITI - should match with the above info): $2107
Taxes and Insurance (the T&I of your PITI): $770/mos or $9240/yr
HOA costs: None
Deferred maintenance notes: Roof will need replacing in 7 years. Capex was updated within past 5yrs.

Anything else special or unique in regards to the numbers of the property (not the property itself; things such as city assessments, back taxes, special costs due to unique features of the property, etc. etc.): This is a highly appreciating suburb of Los Angeles and great schools. Can add an ADU for $120k and rent for $1800.

Guessing you recently refinanced and have not lived in the house only 5 months.

Again, I would not make a decision based on how quickly you believe this area will appreciate going forward. This is not just speculation, it's leveraged speculation.

If youíre wondering why we are still building our income stream despite being FI, itís because we donít want to base our expenses on the $2900, but on what our average is: $6500.

Well, now I'm even more confused. One is either FI or not. If you're truly FI then what's the point of taking gambles on new income streams? Not that a side hustle is a bad thing, but side hustles by definition don't have the potential to set you back to non-FI. Whereas buying 5-6 more houses, or going cash flow negative on your current house, does. Sounds to me like you're on your way to FI, and could maybe do it if you cut your lifestyle way back. And that's fine, you do you. Just be crystal clear with yourself that you're not ready to quit your day job.

waltworks

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #2 on: November 28, 2020, 10:33:13 AM »
Where on earth are these 7 rentals that are collectively only cash flowing $3000? Unless they're in super LCOL places and worth next to nothing, you probably should re-evaluate them.

Sell your current primary.

-W

PMJL34

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #3 on: November 28, 2020, 10:39:47 AM »
"If you’re wondering why we are still building our income stream despite being FI, it’s because we don’t want to base our expenses on the $2900, but on what our average is: $6500."

?????????????????

PMJL34

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #4 on: November 28, 2020, 10:44:18 AM »
I thought I was optimistic about real estate. The OP believes that in 2020 when the prices have been out of control with ultra low rates, that their home still has "significant potential for appreciation."

So let me get this straight, you could sell the home and purchase cashflowing properties to the tune of $3000/month or you will be heavily negative cashflow with your current home on the basis that it could appreciate?

I'm not sure either option is realistic, but I'd prefer the positive cashflow lol.

the internet is wild. anything is possible.
« Last Edit: November 28, 2020, 10:47:35 AM by lilbenny34 »

Mrs. Healthywealth

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #5 on: November 28, 2020, 01:06:55 PM »
"If youíre wondering why we are still building our income stream despite being FI, itís because we donít want to base our expenses on the $2900, but on what our average is: $6500."

?????????????????

To explain, we are moving in with my MIL since her husband passed. Sheís elderly, donít want to bank on $2900 being our spending b/c itís not realistic- in the event she dies, we will need at least $2400/mos to rent, and $6500 if we bought a house, plus a cushion to purchase medical insurance.

Mrs. Healthywealth

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #6 on: November 28, 2020, 01:16:18 PM »
How long have you lived in the house? Basically, do you qualify for the homeowner capital gains exemption if you sell?

Well, now I'm even more confused. One is either FI or not. If you're truly FI then what's the point of taking gambles on new income streams? Not that a side hustle is a bad thing, but side hustles by definition don't have the potential to set you back to non-FI. Whereas buying 5-6 more houses, or going cash flow negative on your current house, does. Sounds to me like you're on your way to FI, and could maybe do it if you cut your lifestyle way back. And that's fine, you do you. Just be crystal clear with yourself that you're not ready to quit your day job.

No capital gains. I like the extra income we are steadily receiving from rental income, and find it less risky than stocks. But I also have a pension kicking in at 50, which covers 30-50%  of our expenses, so yes itís overkill. I have a high risk tolerance, been investing since 2002.

Removed 20% from the actual cashflow for any Capex issues, but the reality is they are not expected to have Capex issues for at least 10yrs since they are all fully rehabbed. So the actual cashflow is $500-$700 in and the properties range from $100-$150k. All are .9 or 1.1% rent to value.

Oh and 100% agree with comment that thereís no such thing as a forever house.

Mrs. Healthywealth

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #7 on: November 28, 2020, 01:20:28 PM »
I thought I was optimistic about real estate. The OP believes that in 2020 when the prices have been out of control with ultra low rates, that their home still has "significant potential for appreciation."

So let me get this straight, you could sell the home and purchase cashflowing properties to the tune of $3000/month or you will be heavily negative cashflow with your current home on the basis that it could appreciate?

I'm not sure either option is realistic, but I'd prefer the positive cashflow lol.

the internet is wild. anything is possible.

Yup, Iím optimistic, plus thereís a housing shortage. Just waiting 6 mos, my realtor thinks it will appreciate another 5%. We have a lot of investors investing in this area. Real estate is local, this area will go up. But, given that we have enough, I agree that we donít have to take that chance.

Mrs. Healthywealth

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #8 on: November 28, 2020, 01:23:50 PM »
Where on earth are these 7 rentals that are collectively only cash flowing $3000? Unless they're in super LCOL places and worth next to nothing, you probably should re-evaluate them.

Sell your current primary.

-W

I have evaluated it for a looonnnggg time. Iím underestimating the numbers, I like to take out a chunk for unforeseen expenses. They cashflow $4000 after PITI, PM and avg expenses, and thatís good enough for us. They are in LCOL areas.

waltworks

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #9 on: November 28, 2020, 04:02:17 PM »
In that case, so long as:
1: New rentals you purchase aren't in the same town/region as the ones you already have
and
2: You have some significant non-RE investments as well

Then I'd sell primary and get more rentals.

-W

PMJL34

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #10 on: November 28, 2020, 09:00:55 PM »
OP,

My apologies for my snide comments and thanks for your response.

Please help me understand your rentals, because I am not following how you are getting 4k cashflow from the 7 properties. Since you say that you average between .9% and 1.1 percent and 100k-150K value, let me take one in the middle as an example (1% home that costs 125K) with very very minimal associated costs.

Market Value: $125,000
Original Mortgage Amount: $100000 (I'm assuming somewhere around 20-25% down, but to make numbers easier I chose 20%)
Interest Rate: 3.5%
Mortgage Term: 30yrs
Gross Rents: $1250/month
Principal and Interest (the P&I of your PITI - should match with the above info): $449
Taxes and Insurance (the T&I of your PITI): $150
HOA costs: None
Deferred maintenance notes: None
Property management: $125
Vacancy: $100
Maintenance: 100

= $326 cashflow

How are you getting 500-700 cashflow? The above example has a very low property tax, low vacancy, and very low maintenance. I am genuinely trying to learn. You could have 0 vacancy and 0 property management and you still wouldn't hit $500 cashflow. It sounds like you also put some money in to take care of the major maintenance items, are you counting that towards your 1% rule?

Also, if you have 7 great rentals, then you know real estate well. What makes you trust a real estate agent? I too am very familiar with the LA market (granted, it's a huge county) and it's very much over priced everywhere with virtually no deals. From the sounds of it, it's on the outskirts that recently became popular due to COVID, but those areas are not areas where people pay $1800/m to rent an ADU. Again, I fully admit I could be wrong, but I am just not following.

either way, my vote is to sell your primary and double your cashflow with the LCOL rentals and you can be FI right now instead of hoping for appreciation.

Papa bear

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #11 on: November 29, 2020, 06:08:20 AM »
As is typically the case, I agree 100% with waltworks recommendations. 


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waltworks

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #12 on: November 29, 2020, 08:55:23 AM »
Some (or all) of OP's places might be paid off? That would probably give you *more* cashflow than claimed, though I could see how with higher taxes/expenses you could end up around $500-600 per door as OP's updated numbers say.

Regardless, in answer to the original question, even if the rentals only cash flow a tiny bit, that's a much better idea than losing money on some big house you hope will appreciate at this point in the RE market cycle.

-W
« Last Edit: November 29, 2020, 08:59:08 AM by waltworks »

Mrs. Healthywealth

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #13 on: November 29, 2020, 11:50:27 AM »
Thanks all for the info everyone. 4 of the rentals are in areas with low property taxófor 1 of them the tax is $115 per year, so that opens up the cashflow. The PM is at 6%. I also put aside $20k for any issues that may come up, so I take the cash from the rentals monthly vs putting it aside (itís more psychological, but I understand math is still math so a $680 cashflow, if subtracting repairs/vacancy, will come down to letís say $550/mos. Thereís other factors that improve vacancy and turnover in the areas, but I donít account for that.

Thanks for being a good sounding board. Wanted to make sure we didnít miss something by selling vs renting. Will purchase more rentals across the 3 different states.

Walt-Iím curious what made you say not to purchase in same town/region. The ones we have are in the same 3 states but in various cities that are serviced by the same 3 PMs in that area.

Mrs. Healthywealth

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #14 on: November 29, 2020, 12:10:25 PM »
OP,

My apologies for my snide comments and thanks for your response.

Please help me understand your rentals, because I am not following how you are getting 4k cashflow from the 7 properties. Since you say that you average between .9% and 1.1 percent and 100k-150K value, let me take one in the middle as an example (1% home that costs 125K) with very very minimal associated costs.

Market Value: $125,000
Original Mortgage Amount: $100000 (I'm assuming somewhere around 20-25% down, but to make numbers easier I chose 20%)
Interest Rate: 3.5%
Mortgage Term: 30yrs
Gross Rents: $1250/month
Principal and Interest (the P&I of your PITI - should match with the above info): $449
Taxes and Insurance (the T&I of your PITI): $150
HOA costs: None
Deferred maintenance notes: None
Property management: $125
Vacancy: $100
Maintenance: 100

= $326 cashflow

How are you getting 500-700 cashflow? The above example has a very low property tax, low vacancy, and very low maintenance. I am genuinely trying to learn. You could have 0 vacancy and 0 property management and you still wouldn't hit $500 cashflow. It sounds like you also put some money in to take care of the major maintenance items, are you counting that towards your 1% rule?

Also, if you have 7 great rentals, then you know real estate well. What makes you trust a real estate agent? I too am very familiar with the LA market (granted, it's a huge county) and it's very much over priced everywhere with virtually no deals. From the sounds of it, it's on the outskirts that recently became popular due to COVID, but those areas are not areas where people pay $1800/m to rent an ADU. Again, I fully admit I could be wrong, but I am just not following.

either way, my vote is to sell your primary and double your cashflow with the LCOL rentals and you can be FI right now instead of hoping for appreciation.

😊😊 no problem. I mentally prepare myself for how people tend to respond in Internet forums vs in-person. Coincidentally, my relatives did have a convo about my optimism during thanksgiving, but I do tend to be realistic about it too. So if these rentals only net $300/mos over 10yrs, itís been accounted for in our FIRE plan.

PM-$75
Tax/ins: :65
That adds $130/mos. interest rate is lower 3.25-3.375%. 

The shack in our yard was renting for $1800, and that was very old (we were living in the main house as renters). A new ADU probably will get moreóitís crazy!

Mrs. Healthywealth

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #15 on: November 29, 2020, 12:33:46 PM »
In that case, so long as:
1: New rentals you purchase aren't in the same town/region as the ones you already have
and
2: You have some significant non-RE investments as well

Then I'd sell primary and get more rentals.

-W

1: curious about reason for this one. Would investing across 3 states be enough?
2: currently $500k in stocks/bonds and have 2 pensions with COLA that will provide 36% of expenses at 50 and quality medical insurance. My spouse plans to work a few more years, so the stocks and bonds will probably double over 8yrs.

Itís a bit overkill, but I feel comfortable with having $150k of passive income it gives us breathing room if we ever have to rent/buy in the area we are moving to.

waltworks

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #16 on: November 29, 2020, 01:16:23 PM »
1: Those are the most insanely low tax/insurance numbers I have ever heard of. Property management, too, which everywhere I've ever owned was 8-10% minimum. Where on earth is this?

2: Think of region/area diversification like stocks. You don't want all your houses in one place (just like you don't want to just own a half dozen pharma stocks and nothing else) because if a big business moves out of town, or a natural disaster hits, you're completely f'd.

-W

Papa bear

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #17 on: November 29, 2020, 02:47:16 PM »
Thanks all for the info everyone. 4 of the rentals are in areas with low property taxófor 1 of them the tax is $115 per year, so that opens up the cashflow. The PM is at 6%. I also put aside $20k for any issues that may come up, so I take the cash from the rentals monthly vs putting it aside (itís more psychological, but I understand math is still math so a $680 cashflow, if subtracting repairs/vacancy, will come down to letís say $550/mos. Thereís other factors that improve vacancy and turnover in the areas, but I donít account for that.

Thanks for being a good sounding board. Wanted to make sure we didnít miss something by selling vs renting. Will purchase more rentals across the 3 different states.

Walt-Iím curious what made you say not to purchase in same town/region. The ones we have are in the same 3 states but in various cities that are serviced by the same 3 PMs in that area.
Whoa.  115/year for taxes? Typo?  I pay more than that per week on some of my places. 


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waltworks

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #18 on: November 29, 2020, 04:23:41 PM »
Whoa.  115/year for taxes? Typo?  I pay more than that per week on some of my places. 

Yeah, I'm increasingly dubious about this, it sort of feels like the numbers are being shoehorned in to create the desired cashflow number (which already changed once) rather than the other way around.

On a ~$100k place taxes are one tenth of one percent? Very low property tax areas are 10x that, though I know of a few unusual spots that get down to 0.5% or so (like in resort towns where most of the homes are vacation homes and year-rounders get a discount or something).

But if you can buy these magic no vacancy, super low maintenance, crazy cheap management, and taxes at 1/10 of the lowest I've ever heard of, places, then yes, you should buy them. I certainly would. But I've never heard of anything like that sort of a deal.

-W
« Last Edit: November 29, 2020, 04:48:03 PM by waltworks »

PMJL34

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #19 on: November 29, 2020, 05:25:14 PM »
I'm not buying it.

Papa bear

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #20 on: November 29, 2020, 08:17:16 PM »
Maybe itís tax abated?  Thatís plausible, but it wonít last forever.  Wondering if thatís the case, when the abatement runs out.   On a 500/month cash flow property, adding in regular property taxes kills the profits.


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Mrs. Healthywealth

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #21 on: November 30, 2020, 08:53:19 AM »
Whoa.  115/year for taxes? Typo?  I pay more than that per week on some of my places. 

Yeah, I'm increasingly dubious about this, it sort of feels like the numbers are being shoehorned in to create the desired cashflow number (which already changed once) rather than the other way around.

On a ~$100k place taxes are one tenth of one percent? Very low property tax areas are 10x that, though I know of a few unusual spots that get down to 0.5% or so (like in resort towns where most of the homes are vacation homes and year-rounders get a discount or something).

But if you can buy these magic no vacancy, super low maintenance, crazy cheap management, and taxes at 1/10 of the lowest I've ever heard of, places, then yes, you should buy them. I certainly would. But I've never heard of anything like that sort of a deal.

-W

Lol ThereĎa no magic, just the locations and sometimes Iím quickly trying to type stuff out. Just didnít come on the forum to discuss the nitty gritty of the properties, so just gave u ballpark numbers. Hereís how they calculate property taxes- take the average of a specific area, in about 3 yrs taxes will be reassessed, but not based on the property but based on the service area, so typically they only go up a little bit at a time every 3yrs. The other 3 in that area also have around $500/yr for property tax.  FWIW-the loan officer and I were both amazed at the low property taxes. I went to my actual spreadsheet last night that analyzes the properties and the cashflow, for the ones in this area the cashflow is $500 net, the initial pro forma I did prior to getting the loan anticipated $400, but certain things have worked out to our benefit. The rest are closer to $400, pro forms was $350. As I mentioned before, I ďpocketĒ what the spreadsheet takes out for vacancy, repair/Capex, and turnovers since I already put that money aside, so I consider it ďcashflowĒ too, which gets it closer to the 600-500 range.

The others have more normal property taxes, hence the cashflow is lower. Thanks for your tips on selling vs. buying rentals. We decided to sell, so now Iím in the middle of packing, buying more rentals, selling primary,  and renovating another, plus caregiving and working...itís been busy. As I mentioned before, people having a convo via a forum is harder than in person. If we spoke in person, you wouldnít think this is ďdubiousď cause we wouldíve asked each other clarifying questions and it wouldíve been easy. I donít have a Walt in my life at this very moment, so I came on the forum. 😊

Hope you all are safe, take care!

waltworks

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #22 on: November 30, 2020, 10:12:16 AM »
Fair enough, you have your answer, then.

-W

icebox92

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #23 on: November 30, 2020, 03:30:10 PM »
@Mrs. Healthywealth - I sent you a PM... but not sure it went through, I don't see it in my outbox. 

Mrs. Healthywealth

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #24 on: December 01, 2020, 02:32:57 PM »
@Mrs. Healthywealth - I sent you a PM... but not sure it went through, I don't see it in my outbox.
Got it and responded 😊

Dicey

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #25 on: December 01, 2020, 04:15:18 PM »
@Mrs. Healthywealth, there is nothing I like better than someone who asks for input and then makes a decision. I hope your house goes for way over asking and that you find great rental properties. Please keep us updated as to your progress!

Mrs. Healthywealth

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #26 on: December 01, 2020, 04:48:24 PM »
@Mrs. Healthywealth, there is nothing I like better than someone who asks for input and then makes a decision. I hope your house goes for way over asking and that you find great rental properties. Please keep us updated as to your progress!

Thank you for the well wishes, soooo hoping it will go way over asking. We havenít put the home up for sale but already have buyers interested, yay for that. Average time on market for this price point and area is 3 days. Will keep you posted!

Mrs. Healthywealth

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #27 on: December 18, 2020, 02:12:23 PM »
Hereís update on our house sale. Within 24hrs of the house being on MLS, we had 8 showings and 4 offers above asking price. 20 more showings scheduled, and that was only the first day.
This is the first house Iím emotionally attached to, so selling is not fun. But thereís no logical reason to keep it since we wont be moving back. Going to miss all the crazy work we put into it.

Will update after we pick a buyer.

Mrs. Healthywealth

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #28 on: January 07, 2021, 11:29:11 PM »
Final update on our home. Within 3 days we had 27offers all above asking price. Went with cash buyer that offered $55k above appraised value. We are very grateful and didnít expect to walk away with this much. Feels kind of nice not to own a primary residence, less to think about...and not having a mortgage letís us be FIíd...although it feels good to finally achieve this goal, we are a bit in shock, havenít fully absorbed it, and also think it will be good to have enough passive income in the event we have to pay for housing costs again, we live rent free right now...a topic for another thread.

Thanks for all your input. Just went into contract for another rental and plan to buy several more in the coming months.

FINate

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #29 on: January 08, 2021, 09:12:00 AM »
Congratulations! That's a great over asking cash offer.

Best wishes on the new rental properties.

Mrs. Healthywealth

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Re: Sell primary to buy more rentals or rent out primary?
« Reply #30 on: January 11, 2021, 02:06:40 PM »
Congratulations! That's a great over asking cash offer.

Best wishes on the new rental properties.

Thank you for the well wishes!