Rental Property- To sell or not to sell....

[Meaney77]

Need some input from you guys, I am having a hard time with this one.

My wife and I have a rental property not to far from where we currently live. We have been pretty fortunate and have no issues keeping it rented out. We break even each month after mortgage, insurance, property tax, etc.. We haven't increased rent either because we wanted it rented.

Up until recently we have both been in it for the long haul- hold on to the property, keep it rented and hopefully one day have a fully paid for property making positive cash flow. Maybe even keep it as a starter house for one of my kids.

The reality is that the house needs some love. Cosmetically it looks descent, but it was built back in the 60's and its probably a matter of years before we see issues with plumbing, heating, landscaping, etc... We've had to put some money in recently but nothing to major. The neighborhood is okay, not great, not terrible.

Market seems to be doing really well and its tempting to sell.... We would be at our break even point if we sold- we could sell for what we bought it for. If we sold we could walk away with a pretty nice chunk of change which would be tax free. We could reinvest into another property or we could put the money in an account making interest and have a nice little nest egg or buy a nice new boat! Kidding....

So need some advice- do we sell? Do we hold onto it and increase the rent a few hundred each month and put the extra money into an account anticipating repairs????

What to do what to do...Kind of at a loss on this, there is nothing forcing us to do anything but the though of selling and tucking the cash away and not being a landlord is appealing. Looking for your input.

 

[RCDave]

Don't sell to use the proceeds to buy a toy.

Would the net pay off the mortgage on your primary residence, or make a huge dent in it? If yes sell it and pay it down

 

[Bobby V]

If you sell do you have to do a 1031 exchange?

 

[LargeOrangeFont]

If you are not making money every month, sell it.

Couple follow up questions-

If you increased the rent to market rate, how much would you be netting per month?

How far into the mortgage are you? How long until paid off?

How much is the stuff you think it will need?

If you raise the rent, as still can’t pay for all that stuff in a handful of years with the profits, sell it, unless you have less than 10 years left on the mortgage or something. Then I’d consider keeping it.

 

[hallett21]

If I am understanding you correctly the property hasn’t netted a profit YTD.

And current appreciation just got you back to even?

If that’s the case I would get rid of the house. Unless it’s getting paid off in the next 5-7 years.

Roof, HVAC, repipe etc could easily get you into 30-40k in bills.


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[Havasu blue label]

Not much tax benefits this days

 

[Meaney77]

Don't sell to use the proceeds to buy a toy.

Would the net pay off the mortgage on your primary residence, or make a huge dent in it? If yes sell it and pay it down

Wouldnt be buying a toy, but sounds tempting!!
Wont pay off our primary residence but would take a descent chunk off...

 

[ChumpChange]

Sell

 

[Meaney77]

If you sell do you have to do a 1031 exchange?

Dont know much about the 1031 exchange, but according to my account we wouldnt have to pay capital gains.

 

[Meaney77]

If you are not making money every month, sell it.

Couple follow up questions-

If you increased the rent to market rate, how much would you be netting per month? I think we could easily get another $300/month but not sure how the current tenant would feel about the increase. And from a legal standpoint not sure how much we are able to increase? any input?

How far into the mortgage are you? How long until paid off? We still have 18 years left on a low interest 30 year fixed.

How much is the stuff you think it will need? I could see central AC/Heating unit, main line, patio cover.....Patio cover is nothing to
extravagant, some facia board need repair and paint.

If you raise the rent, as still can’t pay for all that stuff in a handful of years with the profits, sell it, unless you have less than 10 years left on the mortgage or something. Then I’d consider keeping it.

 

[LargeOrangeFont]

Yea I would sell. Even at $3600 profit a year from raising the rent that will start getting eaten up fast with those maintenance items. You’ll quickly be looking at a decade of no profit at all.

There are better investments that will yield a better return.

 

[RCDave]

Wouldnt be buying a toy, but sounds tempting!!
Wont pay off our primary residence but would take a descent chunk off...

Sell, paydown the primary, and reset the mortgage payment!! Added security for your family and major interest savings over the life of the loan

 

[LuauLounge]

In 1991, we purchased a home to use as a rental and 6 months later had the same issue as you.
Purchased a house from a coworkers son, in a divorce and wanted out. He talked to a couple of realtors who ran the numbers and came up with him writing a check for 5 to 10k at close of escrow. He wanted the 5k he had put dowm 5 years earlier and it had an assumable FHA loan.
So, we went in, spent a weekend touching up and put the rental sign out front. Rented it in one day to a branch manager of a bank. We discussed the back yard, as it was bare dirt and the renter wanted to know if we'd pay for materials if he cleaned it up. We said we would and that was the last we talked to him until 6 months later.
He called, said he was transferred to another city and would we come meet with him.
Went over, he had put in pea gravel walkways with borders, flowers, lawn, etc. and a garage door opener. Material bill was $600.
He moved out in the middle of the month, and we could'nt decide whether to rent or sell. So we put out a For Sale by Owner sign out and sold it in less than a week, no realtor involved, highest price in the neighborhood. Made 25k in 6 months time. The market took a real dip in the years following and it was nearly 10 years to where it was when we sold it.
On the other hand, it was a great rental area and would be paid off if we kept it.

 

[DLC]

You need to look at what market rate is for rent.
Sounds like you are behind.

How do you know your at market rate for rent? Just because it’s rented doesn’t mean your at market rate, you might need to change your mind set about being a land lord

Not sure what part of town/city but maybe interview several property managers in your area to get some feed back about rents and condition of your property to rent. Get feed back Example - if you paint the inside can you rise rent. If they managed your rental what would they set rent at.

look at apartments /condo rent rate to see what they are at.

with these great times you should at least making something....

 

[oldschool]

Sell it, take the money, go to Tahoe with Grads and put it all on black.

 

[King295]

You may want to consult with another accountant. Depreciation recapture comes into play on on rental properties and the tax is based on your income levels.

 

[DC-88]

It would depend on location to me whether or not to sell. There's more than a couple properties we sold over the years that a renter could've made the stroke that would be great to have kept in hindsight. Having said that, if you sell, I've always felt getting to write off primary residence mortgage interest is a drop in the bucket compared to not having to pay any at all because it's paid off-- If sold, get a HELOC on the paid off primary res, save whatever the payment was on the rental for a few years , and make a good buy on a distressed property when the time comes would be the alternative imho--

 

[jet496]

Depends on where you live. In San Diego, my $155,000 in 1991 is now $600,000. We almost sold it in 2003 when moving less than a mile away but people needed places to rent because of the Cedar Fire. Now it's paid off, cash every month, but the equity is the biggest gain.

We have another rental that is like yours bought in 2005, has washed itself out every month (no loss, no gain) & it just now came back to original value, but the renter paid the mortgage all these years so now we have $300k in equity since it's paid down so much, plus every month more goes towards principle than interest.

Once again, this is San Diego, high rent, high prices, housing shortage. So, if you live in Iowa, Ohio or someplace where the prices will never skyrocket, then I'd unload it.

 

[Devious_Chris]

My wife and I had a rental that we had owned for 11 years. It was in Idaho while we were in Havasu. It was negative in rent since the crash in 09. We had great renters and never raised the rent for fear of losing them. This year we sold the home for 40k more than we paid and walked away. That was the right choice for us and worked out well.....


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[HB2Havasu]

If your not pulling in at least 15% profit margin on your rental property it's time to sell. When the large maintenance items you mentioned start coming to fruition your going to be taking a lot of money out of your savings just to keep the property going at 0% realization. There is a lot of other great investments, even other rental properties if that's what you want to do. Good Luck!

 

[Spudsbud]

Sell.
My wife and I had 3 rentals for nearly 20 yrs.
Short version, SELL.
Consult your tax guy about this. Be prepared.

 

[LuauLounge]

We had a neighbor that purchased very nice family homes, one every 4 years. When he retired, sold his primary home, took the tax free cap gains and moved into one of the rentals for 2 years, then sold, took the tax free cap gains and then moved into the next rental and did the same. Great strategy.

 

[OldSchoolBoats]

Sell and stick the money in an S&P Index Fund.

 

[pronstar]

How far below market is your current rent?

If you do a full rehab, what can you charge for rent?

Depending on the numbers:
If you do a full rehab to increase the ARV...
And you can increase the rent...
And this new, higher rent covers the payment for equity you pull out AND nets you positive cash flow...
...then it could make sense to keep it.

I like building the asset column.

If you can turn this into an asset - something that puts money in your pocket every month - then I would take the steps to hang onto it.

If it’s a liability. - takes cash out of your pocket every month - then sell it and use that money to buy an asset.

Pouring that money into your primary residence doesn’t turn your primary into an asset...just food for thought. Your primary home is in your liability column.


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[squeezer]

Have a half a dozen rentals as well...

My gut call is don’t sell.

If you are at the break even point with property values after depreciation recapture and real estate fees you are likely going to owe $$$.

You walk away with some equity and little else. Depending on the situation it’s a negative ROI. I’m no financial guru but I hear it’s best to avoid negative returns...

The option I would look at with interest rates where they are is a refi. Two things that gets you. First it’s a way to pull some equity out with favorable tax implications vs selling. Second, you can set up the loan so the property can be cash positive. (Depending on your equity and rental rates of course)

Assuming the above is possible you now have similar cash in hand to invest as an outright sale gave you while still having the long term outlook of the rental.

Having said all that, residential rentals take WORK. Not everyone is cut out to be a landlord if you hate that part of it enough no amount of financial upside is worth it.

 

[LargeOrangeFont]

We had a neighbor that purchased very nice family homes, one every 4 years. When he retired, sold his primary home, took the tax free cap gains and moved into one of the rentals for 2 years, then sold, took the tax free cap gains and then moved into the next rental and did the same. Great strategy.

Well played!!

 

[LargeOrangeFont]

Have a half a dozen rentals as well...

My gut call is don’t sell.

If you are at the break even point with property values after depreciation recapture and real estate fees you are likely going to owe $$$.

You walk away with some equity and little else. Depending on the situation it’s a negative ROI. I’m no financial guru but I hear it’s best to avoid negative returns...

The option I would look at with interest rates where they are is a refi. Two things that gets you. First it’s a way to pull some equity out with favorable tax implications vs selling. Second, you can set up the loan so the property can be cash positive. (Depending on your equity and rental rates of course)

Assuming the above is possible you now have similar cash in hand to invest as an outright sale gave you while still having the long term outlook of the rental.

Having said all that, residential rentals take WORK. Not everyone is cut out to be a landlord if you hate that part of it enough no amount of financial upside is worth it.

That is a good thought if the conditions are right for that. We just don’t know enough of his current situation.

 

[pronstar]

We had a neighbor that purchased very nice family homes, one every 4 years. When he retired, sold his primary home, took the tax free cap gains and moved into one of the rentals for 2 years, then sold, took the tax free cap gains and then moved into the next rental and did the same. Great strategy.

There’s a retire-in-15 plan that’s similar.

Buy one property per year.
Take out a 15 year note, let renters pay the note + positive cash flow c
On year 16, the first house is free and clear. This repeats each year.
Pull equity, sell, or keep renting it out.


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[squeezer]

There’s a retire-in-15 plan that’s similar.

Buy one property per year.
Take out a 15 year note, let renters pay the note + positive cash flow c
On year 16, the first house is free and clear. This repeats each year.
Pull equity, sell, or keep renting it out.


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This is a great strategy if the Cap rates are favorable. (The cap rate isn’t the best qualifier here, would keep an eye out for at least a positive C on C return. Negatives here burn cash quickly. Particularly when juggling a dozen single family homes)

One also gets into portfolio lending which changes things all around

We will add 10 doors in the next 5-10 years. Set up for cash flow not equity growth... ( No intention to sell)

 

[2Driver]

So we could be near the housing market high, if nothing else its been a long run. You are facing major repair cost in the short term. If the home had run away upside you most likely would have seen it by now - sell

Knowing when to get out is the half of the equation where most people miss it

Do the math on the carrying cost you will save by paying down your mortgage. You dont have to slam the whole thing on your primary, put the money in an account that could grow and draw 3 extra month’s mortgage payments from it each month until its gone.

 

[Meaney77]

Having said all that, residential rentals take WORK. Not everyone is cut out to be a landlord if you hate that part of it enough no amount of financial upside is worth it.

They do take work..... I am fairly handy and can do most of the work on my own. However it hard to break away from my day job or wife and 3 little ones to go deal with a clogged drain, leaky faucet, broken sprinkler kind of stuff.

We had some renters that were great and handled everything, never heard a peep and they were never looking for a discounted rent payment for any repairs made- they were awesome.

We have good renters now, but I hear about everything and usually have to drop everything I am doing to resolve- that gets old especially when most of the stuff if preventable on their part.

 

[COCA COLA COWBOY]

Keep it.

It will be part of your portfolio when you retire. Once paid off, it will be an income generator.

 

[pronstar]

If you rent-out homes that you’ve renovated, you can keep repairs you a minimum for quite some time.

Use the positive cash flow to build-up an account for CapX, and hire a property manager to run the thing.

Then your job becomes cashing monthly checks.


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[pronstar]

This is a great strategy if the Cap rates are favorable. (The cap rate isn’t the best qualifier here, would keep an eye out for at least a positive C on C return. Negatives here burn cash quickly. Particularly when juggling a dozen single family homes)

One also gets into portfolio lending which changes things all around

We will add 10 doors in the next 5-10 years. Set up for cash flow not equity growth... ( No intention to sell)

Yeah when it comes to renting SFH, there’s more to the equation than Cap Rates.


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[hallett21]

OP remodeled how much more per month would your unit get?


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[boatnam2]

Would age also be a factor in decision? if one in his upper 50's were to purchase something 70-80k under market value is it worth the risk to hold onto it for 2 years and hopefully rates stay close to the same market holds and sell it. Or sell it and try to make a quick profit and take tax hi?, would only have to pay buyers fees on this deal? Little different situation then ballsdeep but a scenario none the less.

 

[Ballyhoo]

Talk to a real and qualified financial adviser. Let them assess your entire financial situation. There a way too many unknowns with your situation to get sound advice here.

 

[BajaT]

Election could have a significant impact on property values moving forward and it's been a heck of a run. We were in a similar scenario, took the nice profit and ran.....

 

[Meaney77]

OP remodeled how much more per month would your unit get?


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Realistically maybe $300-400 more a month.

 

[hallett21]

Realistically maybe $300-400 more a month.

On top of the 300 you think you’re currently under charging?


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[Meaney77]

On top of the 300 you think you’re currently under charging?


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No, I think I could increase $300-400 and we would be at the top of the going rental rate in the area.

 

[DLow]

Talk to a real and qualified financial adviser. Let them assess your entire financial situation. There a way too many unknowns with your situation to get sound advice here.

Finally, solid advise. If you aren't a "money guy" go find one. Learn how to make money with money and not your back. Why you would want to sell that place and pay down your current house right now is beyond me...??? Interest rates are way too low for that.

 

[pronstar]

No, I think I could increase $300-400 and we would be at the top of the going rental rate in the area.

I thought you were below market for rents in the current condition it’s in?

A rehabbed house will rent for more than an old fixer...?


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[Motor Boater]

Talk to a real and qualified financial adviser. Let them assess your entire financial situation. There a way too many unknowns with your situation to get sound advice here.

This is the only advise you should listen to in this thread. You need to look at the entire picture. If you have little to no debt, lots of cash flow, other investments, maxing 401K then The answer is different from a guy that is highly leveraged, bad debt, no savings, no other investments etc.

 

[84miller]

Do not limit your possibilities. Do you have a favorite location or vacation spot. If so buy a vacation home "that" you can have a property management rent out as a vacation rental. Plan the weeks you want to use it for free. Best of both worlds.

 

[2Driver]

Talk to a real and qualified financial adviser. Let them assess your entire financial situation. There a way too many unknowns with your situation to get sound advice here.

The last thing Id do. They are all the same. Be better off talking to a good accountant /tax person and doing your own math and scenarios.
Would never want to be a landlord, let alone in retirement but thats me.

 

[RCDave]

Sounds like the property is too leveraged in conjunction with the rental income it can currently generate. Wjhen another recession hits and rental rates decline, its a risky proposition for the owner who then has to carry the debt service with lesser rents. There's no cushion. Better to redeploy whatever equity is in the property to better uses and reduce leverage.

Also, California is only going to increase regulation on residential rental units in the future, likely putting a ceiling on what a landlord can charge for a rental.

 

[thetub]

Sounds like the property is too leveraged in conjunction with the rental income it can currently generate. Wjhen another recession hits and rental rates decline, its a risky proposition for the owner who then has to carry the debt service with lesser rents. There's no cushion. Better to redeploy whatever equity is in the property to better uses and reduce leverage.

Also, California is only going to increase regulation on residential rental units in the future, likely putting a ceiling on what a landlord can charge for a rental.

just passed state wide rent control of 5 % plus inflation.

single family homes dont apply and apts. built after 2005 do not apply ( but that is going to voters in November) likely to pass...

and yes they are killing this business with regulations and rising costs(. After all its the big bad landlord making all the money...

but like you stated many risks involved if leveraged, but hey its the big bad landlord....

and as others have said its alot of work and not just collecting rents...

one eviction can cost anywhere from $5,000 to $20,000...

I know guys in the 80s who were almost losing their buildings and had trouble filling vacancies, but politicians dont care about that...

its the big bad property owners now... fu-ing news and politicians are relentless about reporting about the evil property owners...

they destroyed manufacturing businesses and are going after the service and property sectors now squeezing them to death...

in the end its Kalifornia state politicians causing ALL the headaches and ALL costs going up...

especially when Rods prop. 13 gets repealed then watch out for the next property crash... retail is already getting hammered and when this gets passed... shit...

my o2 1/2 cents rant over.

 

[LargeOrangeFont]

The last thing Id do. They are all the same. Be better off talking to a good accountant /tax person and doing your own math and scenarios.
Would never want to be a landlord, let alone in retirement but thats me.

This.

Do the diligence yourself, run few a few scenarios ask some questions/opinions to fill in the blanks to make an educated decision on how to proceed. You can make $300-$400 per month on a rental in places all over the country for wayyyyy less investment than here in CA.

 

[Boozer]

Dump it.

If you’re not getting a nice gain every month over your monthly payment and you can walk away with the cash do it.

A correction period is coming. If you’re not netting positive cash flow now you’ll likely be losing money in a couple of years. If you can cut it loose now and walk away with a net gain take the gain and put it in the bank. If that net gain it’s your current mortgage down a ton and reduces your monthly payment significantly you’re going to come out a major winner.


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