Need some professional opinion here? Should I sell or should I rent it out?

M

MazToMars

New member
Property type: Single House Property Location: Orange country California.
Current approximate value: 1.7 to 1.8 million. Remaining loan amount: $500k at 4.125% 30yr fixed.
Monthly payment: $4200 including Property tax, HOA and insurance.
Income 2023: $300000, filed joint
Debt: $220,000 student loan, $50000 car loan.
Liquid: $100000 cash and $250000 stock.

Plan: Purchase 2nd house in different neighborhood. 1.4 million.

Scenario 1: Sell current house and use proceeds to buy 2nd house as primary residence and maybe a 3rd one in the $500k range. Use 3rd one as rental property for tax write-off.

Scenario 2: Rent out current house as short or long term rental. May generate $5000 to $6000 monthly. Take out Heloc to secure 2nd house as investment property.

Scenario 3: Any suggestions? My problem here is I am short on cash flow to secure the 2nd house. And it will be very competitive.
 
Rent out current house to pocket the difference; become a renter your self and buy a small property as investment. Whats the interest on the student loan?
 
MazToMars said:
Property type: Single House Property Location: Orange country California.
Current approximate value: 1.7 to 1.8 million. Remaining loan amount: $500k at 4.125% 30yr fixed.
Monthly payment: $4200 including Property tax, HOA and insurance.
Income 2023: $300000, filed joint
Debt: $220,000 student loan, $50000 car loan.
Liquid: $100000 cash and $250000 stock.

Plan: Purchase 2nd house in different neighborhood. 1.4 million.

Scenario 1: Sell current house and use proceeds to buy 2nd house as primary residence and maybe a 3rd one in the $500k range. Use 3rd one as rental property for tax write-off.

Scenario 2: Rent out current house as short or long term rental. May generate $5000 to $6000 monthly. Take out Heloc to secure 2nd house as investment property.

Scenario 3: Any suggestions? My problem here is I am short on cash flow to secure the 2nd house. And it will be very competitive.
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You are dangerously close to screwing yourself. Your non-mortage debt is sky high for your income - that is your cash flow drain. Sell the stock and use your cash to eliminate the debt, but you have to pay cap gains so maybe do a cash out refi for $300K at 6.5 or 7% which is a lot cheaper than a HELOC though with your DTI you may not qualify for the best rates but that could be a good thing as it will maximize your mortgage interest deduction vs trying to manufacture tax savings from a rental, and with a $500K current balance the new $800K mortgage with fat deduction would be manageable even at 7% as the efective rate would be sub 5% - a financial judo move. Channel the savings into stocks of great companies with great balance sheets which will greatly outperform a residential rental in a higher for longer rate environment.

In other words, stay put, retire your non-mortgage debt which is strangling you, and channel savings into what looks to be a long term bull market driven by productivity gains from Silicon Valley, just like the 90s. Mortage rates won't go below 6% maybe forever.
 
A better tax write off would be to max out your retirement accounts. Assuming you are W-2 wage earners, you and your spouse can each contribute $23,000 to your 401k's this year. That would reduce your taxable income by $46,000.

You didn't state what your car loan rate is, but using $50k of your idle cash to pay that off seems like a no brainer.

You're saying you can net $5-6k/month on your current home? Is that as a short term rental? Keep in mind a short term rental is not nearly as passive as a long term rental. You would be running a hospitality business and keeping your customers happy at all times is a must. It also depends heavily on the city where it is located. Some cities have strict rules and some areas are oversaturated with vacation rentals and have suffered from a drop in nightly bookings. You should study the market closely before going that route.

Buying a third property for the tax write off doesn't seem like a good idea. I would look for a property with compelling returns (if you can find one) and only then think about the tax implications. If the property is negative cash flowing, keep in mind there is a cap on how much you can write off unless you qualify as a "real estate professional" under the tax code. However, if the first property is cash flowing well, it may not matter. This topic can get a little complex, so the main point is to make sure you understand the tax implications really well before carrying out your plan.

The good thing about selling your current home is you would get to use the $500k capital gains exclusion to protect some of the gains from being taxed. The bad thing is you would be giving up a good rate of 4.125% in exchange for a rate of 6.5-7%, plus a higher property tax rate. On the other hand, you can afford to pay cash for your next property if you sell the current one, so you could determine how big of a monthly payment you want to take on.
 
MazToMars said:
Property type: Single House Property Location: Orange country California.
Current approximate value: 1.7 to 1.8 million. Remaining loan amount: $500k at 4.125% 30yr fixed.
Monthly payment: $4200 including Property tax, HOA and insurance.
Income 2023: $300000, filed joint
Debt: $220,000 student loan, $50000 car loan.
Liquid: $100000 cash and $250000 stock.

Plan: Purchase 2nd house in different neighborhood. 1.4 million.

Scenario 1: Sell current house and use proceeds to buy 2nd house as primary residence and maybe a 3rd one in the $500k range. Use 3rd one as rental property for tax write-off.

Scenario 2: Rent out current house as short or long term rental. May generate $5000 to $6000 monthly. Take out Heloc to secure 2nd house as investment property.

Scenario 3: Any suggestions? My problem here is I am short on cash flow to secure the 2nd house. And it will be very competitive.
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Need more details on the debt - interest rate, loan terms, monthly payment, etc.

If you need to improve your monthly cashflow, the first item I'd tackle is the car loan.
 
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Have you discussed your situation with a lender? It sounds like you can qualify on paper to purchase a loan the cheaper home by renting your home but it's hard to know for sure without knowing your monthly payments for the your student loans and car loan. If you are going to go with option 2 (only if the lender gives you the green light that you can purchase without selling your current home) you'll want to open your HELOC before you go house shopping because there aren't any lenders that do HELOCs on rental anymore. Assuming the numbers work out, I'd lean with option 2 and then re-evaluate selling your current home every year as you have up to 3 year after moving out to sell it and get your $500k capital gain tax exemption.

In terms of finding a rental for $500k, you'll be best served to look at lower cost areas like Vegas, Phoenix, Texas, Georgia, etc. Focus on getting a 3+ bedroom and those will have attract move-up renters and move-up buyers when it's time to sell.
 
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