Rent Vs Sell (Santa Clara county).....April 2017.....(n+1)th time

Hi folks, I am new to this forum. I have enjoyed the conversation on this forum. I am currently faced with the age old dilemma (rent out vs sell in Santa Clara county). Here are some details :

Current annual household income : 300K

House 1 in average school district: bought in 2009 for 700K, still living in it, present value 1.2M, outstanding loan 600K, 5/1 ARM until May 2021, 2.75%, Monthly PITI = $3500, Projected rental monthly income = $3500

House 2 in good school district – bought in 2017 for 1.95M, plan to move in August 2017, loan 1.35M, 5/1 ARM until March 2022, 3.25%, Monthly PITI = $8400

Cash on hand: 200K
Stocks : 100K
Both are Single Family homes in Santa Clara county

Question : What do you recommend I do with house #1 ? If the response is to sell, what do you recommend I do with the profit? Thanks in advance.


You have both homes on ARM - high risk with growing rate hike environment. Once you turn primary into rental, you are likely loose 500k capital gain exemption (after 2 years of rental).

If you had locked with 30 year fixed mortgage less than 4% or around range, you can easily rent it and hold for long term.

Think this way, after two years you loose Home owners capital gain exemption 500k

At the same time, mortgage rate hike kicks you additional 2% increase in ARM

If there is a Recession/Correction, your rent goes down (and unable to sell a home during recessionary trend), you will ultimately regret.

I am projecting all negative scenarios, kind of stress test. If you are fine to take that chance, it is good to go.

Your cap rate works at 3.8% leaving 10% on maintenance includes property manager. If I change the rate to 4.75% and rent reduced to 3000, you may end up spending $1400/month appx.

The is a risk on having ARM, but if you can withstand the risk, it is fine to rent forever.

Normally, I support renting,, esp bought between 2008-2011, but ARM lock makes me there is higher risk on turning rental in growing rate hike environment.

I would suggest sell it and take capital gain exemption. You save 33% (Marginal IRS)+9.3% CA tax, almost 42.3% savings by taking capital gain exemption.

If you sell, pay down the New home mortgage and lock it with 30 year fixed.

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Hi nsj,

Normally I would advise against selling. It’ll always be more lucrative in the long haul to rent than to sell.

However, I see that you have almost no stock equity exposure. In that case, I would advise selling house #1 and use all of the proceeds to invest in equities (you can borrow 100% on margin and with the 500k proceed you can increase your equity exposure by $1M).

If you can’t stomach that risk, then it’s best to leave that as a rental.

I follow 30 year fixed and assume that as standard low risk return. Current 30 year fixed for Primary mortgage is 4.25%.

If he pays mortgage by locking 30 year fixed, he gains non-taxable return of 4.25%.

If he investing in long term equity holding, he needs to earn taxable portion (20% LTCG+9.3% CA) appx 29.3%.

The break even growth must be 4.25 x (1.293) = 5.49525%, still workable by all means. This has not accounted any inflation !

I think the worst thing one can do is to reduce asset exposure and pay down debt. Especially when you are young and working! Now it’s time to increase leverage not the other way around. I made that mistake long ago when I was much younger. And I paid that price dearly.

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Agree with Jil and wuqijun to sell the house and take the $500k capital gain exempt.

Agree with Jil and disagree with wuqijun as to what to do what the proceeds.

wuqijun - You didn’t pay dearly, you are lucky to be in the beginning of a RE/ stock rally when you’re ready. Now is beginning of the end. Bad for beginners who usually take a long time to make decision as this is the first time they experience anything. This is pretty obvious, earning $300k till need advice is not because he is stupid, he is just too new to these type of decisions, need time to learn :). So is better to play it safe this time, plenty of opportunity to make big money. Btw, you’re doing much better than me at the same age, so you’re doing phenomenally well.


Hanera, old people shouldn’t be giving young people advices concerning finances… because they are too conservative! It’s the last thing a young person would need. What makes you so sure that we are at the beginning of the end? I think we are at a new beginning.

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Thought you would respond as such. If I can predict how you respond, what do you think. Actually he has $200k idling in bank, he can deploy that in equities or just paid down $400k, invest the other $100k.

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Come on now. I advised him a pathway to hold $1M worth of equity. And you asked him to invest a measly $100k? What will $100k do for you? That’s investing peanuts. Even if you are going to be totally risk taking and invest all of that into TSLA or SNAP or something of that nature, and assume that stock increased 10 fold over the next decade, you would end up with 1 million after 10 years. And that’s a big gamble. Investing $1M in the S&P will get you to $2M in ten years. Much less risk taking and more likely scenario.

Hi folks, love the responses and the passionate arguments. Looks like we got agreement on the selling house #1 part. There seems to be conflicting views about what to do with the proceeds. Let me add couple pieces of information which I am not sure if it matters in this discussion :

  1. Age 38
  2. 80% of 500K retirement account is in stock

Does it change any of your opinions ?
Thanks again in advance.

Sell take the tax free gain…

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No, it will not change. What can change the decision, then?

Here are the details that can change.

In order to defeat 4.25% mortgage, you need to earn equivalent money through investment returns.

Based on 300k pay, I assume 33% marginal tax rate and 9.3% CA tax.

If I assume 2% inflation, your break even comes, for long term capital gain, to 4.25 x (1.293) * (1.02) = 5.6%

If I assume 2% inflation, your break even comes, for short term capital gain, to 4.25 x (1.423) * (1.02) = 6.168705%

If you earn above 5.6% (or 6.17%) every year, which is possible, you are getting better returns than paying down the mortgage.

I would hold onto house #1.

Unless after you sell, you plan to do other real estate investment. I don’t think buying RE investment is good idea in today’s market. And I suspect you are busy working and RE is not your primary focus. So if you sell, I suspect you will be out of the real estate market for investment (except your primary residence). Thus, I suggest holding onto house #1.

But shouldn’t you make the decision yourself. Rather than really making a decision based on online forum talk.

If he holds on to it, he needs to let go 500k long term capital gain exemption. If he sells within 2 years, he can claim pro-rate LTCG exemption, beyond which he needs he looses 42.3% almost 210k.

On the other hand, he needs to wait for years of appreciation to match 210k loss, almost 17.5% of 1.2M. If the home makes 5% appreciation year over year, he manages to get the returns in 3.5 years.

Let me bring here that I recently suggested my friend to turn rental, Fremont, exactly like his case bought at 750k and now almost 1.2M.

He has locked at 3.75% thirty year fixed and his cap rate is 5% and appreciation rate 4% year over year. When I suggested renting, he has to go on rental more than 5 years to defeat not taking CG exemption. The longer he makes rental, better he is.

Alternate way if he wants to make rental home #1, better to lock primary home with fixed mortgage so that he has less risk. This way his challenges are limiting to rental home ARM alone.

BTW: I may be too conservative (being old as mentioned by wuqijun) as I always look at financial safety than aggressiveness !.

My experience is different, even though I agree with your statement !!!

You know how I came to know this?

Sharing true story !

I offered my son 20% free down payment to buy this home instead of paying $2200 rent for his apartment.

He declined to take on mortgage as he feels it ties him forever 30 years !

My ultimate lesson is “old people shouldn’t be giving young people advices concerning finances

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First rule in investment is never lose money :grin: wuqijun happened to ride the bull when he is ready, he has yet to see the bear! I’m wary of those who has not experienced one full cycle of stock/RE market. Those happened to ride the bull, always advise buy buy buy, those happened to ride the bear, always advise sell, sell, sell.

$500k capital gain exempt is just too good to pass. Take it without hesitation. Forget about all other analysis. Anal… means clueless of future, claim the easy money, duh.

Asset allocation:
$500k Stock equities
$600k Equity in primary residence
Cash $200k + $500k (from sale)
Obviously too much cash :slight_smile: usually cash equals to one year expenses (exclude income tax, 401k and IRA contributions) suffices. Since I’m a great believer in 50/50 stock: RE, I would deploy $300k to equity, $200k to pay down primary residence mortgage.

You’re responding to wuqijun yet quoting me :slight_smile:


I guess your son thinks he can’t sell ever. Long term he is missing out on the chance to live rent free.

How old is he? Does he have a family?

There is a saying, Don’t listen to the advice of the wise old man, suffer the consequence :slight_smile: of a bad decision.


A lot on millennials are very conservative with money… .the recession scared a lot of them…They will be like the boomer’s parents who were raised in The Depression…Risk adverse

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