Sell or Hold?

25 Replies

Hey guys,

I just recently discovered biggerpocktes and I am very excited to start investing in real estate. I think I will want to be a buy and hold guy with an interest in multifamily properties. I bought my first property in 2011 at age 21 and got a great deal. I am now having to re-locate with my company and I was hoping to get some insight or advice if I should sell my house or rent it out. I am nervous about not being in the area for my first rental and was wondering if it would be better to sell and use the profits to re-invest. I am a newbie at all this and I am just now starting to educate myself on the real estate world so I would greatly appreciate any advice. Please bear with me if I am not including enough info. Thanks to all in advance! 

This house is located in Douglas County about 20 miles south of Denver and housing prices are sky rocketing here with very low inventory.

Hold Option:

Could rent for about $1,750/mo.

Mrtg- $1,065 ( I think the tax is included in it) (pmi of $149 in this too)

HOA- $103.70

Property Mngmt- $140

Total expenses- $1,308.70

Cash Flow- $441.3

Sell Option:

Loan amount: $143,080.43

Potential sale price: $240,000

Expense to close I estimate 5%?: $12,000

Profit to re-invest: $84,919.57

Interesting that your in Oklahoma, that is where I am re-locating to. Tulsa to be specific. 

I'm with Aaron. There are other expenses that you haven't worked into that yet. For a first property it can be difficult to take care of from a distance. It can be done, but is more difficult. 80k to purchase an owner occupant multi you could make something nice happen.  That all depends of course on where you are getting relocated to...

Also one more thing to think about is how you plan to sell. Are you using an agent, doing FSBO, etc? It's very likely you will end up paying a buyers agent either way so calculate that into your numbers. The running average right now is about 2.8% per agent so of 240k for FSBO that's another $6720.

Why not refi or HELOC and keep the property? You would get some of that appreciation out to invest in more properties.

Sell it. Cash out in this crazy market and set up shop in OK. You will be able to profit without paying taxes on the gain. If you were living in OK you likely wouldn't buy this house in Colorado, so why keep it. You could probably buy a home to live in and two rentals with the proceeds (using financing) exceeding the cash flow of this one in Tulsa. 

Your cost to sell will likely be closer to 6-7%. 

Arlan,

Why do you say sell? My only concern is that Tulsa may not be a long term play and I might have to re-locate again in two years. This would not give me a good reason to re-invest in Tulsa if I am only there temporarily. Should I hold the property until I find a place I will be long term and then look to re-invest? Thank you for your response-

Originally posted by @Joel Kadlec :

Arlan,

Why do you say sell? My only concern is that Tulsa may not be a long term play and I might have to re-locate again in two years. 

Tulsa native here in Denver. I say sell or at least refi and get rid of PMI. For $80k, you could buy 2-4 homes in Tulsa depending on financing. IIRC it was just voted best town for small landlords. I am seriously looking into investing there since it is so crazy in Denver.

Buy your 4 homes and in 2 years 1031 them into a multifamily;) 

You would find it hard to manage and know what is going on with your property and you will probably have to add the cost of a PM company handling things for you. I would sell the property and reinvest in your new area. Keep your property close to you so you can control everything about them better and have communication with renters if you purchase another rental. You might also consider buying a multi unit even a small one and live in one of the units yourself. Your interest on a loan will be lower. I would think that you have built up your credit by buying and paying your current loan on time and you can use that good credit to buy another property where your new home will be plus you may be able to add to your current liquid assets meaning cash on hand. Make things comfortable for you if you can. Real estate values can be subject to many variable and you cannot always count on your property appreciating significantly. Its a personal decision of course but this would be my take on your particular situation. 

You may try just leaving well enough alone and see how things begin to develop and take time to evaluate the real estate market where your new home will be looking for a potential alternative property you can purchase and maintain the same level of cash flow or even an improved level of cash flow. If after a while you begin to feel a sting about your decision you can always elect to sell and do some kind of follow through on a prepared deal you have planned for at your new location. 

No one can really tell you what to do and what the end results will be but I own 4 properties on the east coast and I live on the west coast and I have always had a hell of a time keeping up with everything from far away. There is noting like keeping all of your properties within a convenient  driving distance away from you. 

Matt-

Just to make sure I am getting this right you are saying buy the 3-4 homes and when I have to re-locate again 1031 them into multi and sell again?

Thanks everyone for the advice I greatly appreciate it

@Joel Kadlec -- Hi! I'm a Denver resident, Tulsa native who has a property in each location.  As @Matt M. said, Tulsa is an excellent choice for small landlords.  Happy to share my thoughts on long distance, Tulsa investments if you're interested.  This is also my first venture into long distance, but having a working knowledge of the area and local contacts make it possible for this relative newbie.  Good luck with the move!

@Joel Kadlec

As @Kimberly Gillock mentioned, Tulsa is a great market for small landlords. You could likely acquire 2-3 nice class A/B single family rentals in Tulsa with the equity you project to have after the sale of your residence.

If you choose to go this route and plan on retaining your rentals after leaving Tulsa in a few years, I would recommend you stick with class A / B rentals. I don't know of too many out of state owners of class C/D properties that are happy with their investment in the long term. 

By investing in a few Tulsa rentals in the near future, you would be able to take advantage of low mortgage interest rates before the Fed raises interest rates, which will likely push mortgage rates higher. 

@Joel Kadlec

I live in Denver, and recently bought my first Duplex.  While this is a personal choice, I would say that as an investor actively looking for a next property, I would not purchase yours.  I guess that extrapolating that means that I would sell.

Here's are some of the key variables and why I would sell:

1) Based on the numbers you provide, your Cash on Cash return is about 6%, assuming that you net about $5,300 in free cash flow on your $85K in investable cash (the money you COULD be investing elsewhere). Personally, I'm skeptical of this cash on cash return. Will the tenant pay all the utilities, including water, trash, sewer, etc? Will you have vacancy and repair costs? Will CapEx need to be spent at any point? Assuming that these come in at 5% of rent each, you are looking at another $350 per month in expense on average, bringing your cash on cash return to a mere 1.3%. I'd try plugging the property into the BP calculator and seeing if you've really covered all the expenses.

My duplex (also $240,000) rents out for $2250 per month currently, and produces free cash flow in the ballpark of $450 per month so far. The duplex rents for over $500 more per month than the one that you discuss, and I manage it myself, with the greatest tenant and property manager of all time (me) working on it for me.  

2) This is your only rental - do you have a property management firm that you know and trust very well?  You will be hundreds of miles away, and will no longer have the luxury of checking this place out or taking care of simple repairs yourself.

3) HOT HOT HOT.  The Denver Market is hot right now.  I know it's tempting to ride the train, and I'm definitely a passenger riding with my duplex, but my biggest downside for me is that I'm stuck living in the duplex a few extra years, with my roommate and tenants paying the rent.  Your downside is a loss of $85,000 in investable equity.  Very different stakes.  You also have win in hand.  

4) You've got an HOA. That's unfortunate to deal with.

All that said, I'm looking to reinvest here in Denver, but in cash flowing properties that I'll manage myself.  That's because I love this city and want to live and invest actively in the community.  I don't plan on moving to Tulsa, but if I did, I'd be selling all my Denver stuff at a nice gain, and picking up a couple of nice stable cash flow properties in Tulsa.

Sell, for sure. Long distance rentals are often painful. If your length of residency is unknown, why not focus on wholesaling until you settle down? That way you can exit deals much faster and stay flexible (and portable). 

Brian

Sell, use a 1031, buy a duplex in Tulsa, live in one side and rent the other.  That way you will get started in rentals.  While living in Tulsa you can try to find a property manager and keep it.  If move again you could keep it or use a 1031 to move into a larger place say a 4 plex.

I believe this addresses some of your concerns, but still gets you started in rentals.

@Joel Kadlec

You mentioned the 1031 exchange as part of your strategy if you decide to sell. Of course that makes sense. Don't forget that you can continually change real asset classes and geography anytime you want using the 1031. You can sell this property and invest in multiple properties in OK if you want. Later you could sell one or all of those and invest in a larger multi as you mentioned. Or you could spin them into more multiples of SFH or commercial or or or.... Even greater than the tax savings and return boost of the 1031 is the opportunity it gives you to shelter your real estate where it will do the best at the time - providing your crystal ball is functioning.

@Matt Miller

Your idea of buying a duplex in a 1031 exchange is a sound one but @Joel Kadlec

 would not be able to live in half of it immediately.  His intent when he sells his property must be to buy property to be used for investment - not his primary residence.  Now after the dust settles in a year or two he can absolutely change his mind and move into any of his investment properties thus converting them into his primary residence and gaining the tax advantages of sec. 121.

Hold The goose will continue to lay golden eggs (cash flow) as long as you take care of it.

Not sure why everybody is talking about 1031 exchanges here.  You've owned this property as your primary residence since 2011 and stand to net about $80K in profit.  This is 100% tax free if you sell now.  If you start renting it out, then the tax situation gets muddy.  If you sell in 3 years and have 2 years of primary residence and 3 years of rental, then I believe a portion of gains are eligible to be tax free and a portion are taxed as LTCG or could be 1031'd into a new property.

Bottom line...you've got a tax free profit of $80K that you can take now and invest elsewhere in something that will be much better than ~6% COC return (you can stick it in the stock market and get that with no headaches). Sell the place and familiarize yourself with Tulsa then buy a few properties you want to hold for the long run as investments.

Selling seems the best option.  You may re-evaluate if you can't get a good price for it AND you might want to move back in the near future.

Does your relocation provide anything towards selling costs?

Originally posted by @Michael Seeker :

Not sure why everybody is talking about 1031 exchanges here.  You've owned this property as your primary residence since 2011 and stand to net about $80K in profit.  This is 100% tax free if you sell now.  If you start renting it out, then the tax situation gets muddy.  If you sell in 3 years and have 2 years of primary residence and 3 years of rental, then I believe a portion of gains are eligible to be tax free and a portion are taxed as LTCG or could be 1031'd into a new property.

Bottom line...you've got a tax free profit of $80K that you can take now and invest elsewhere in something that will be much better than ~6% COC return (you can stick it in the stock market and get that with no headaches). Sell the place and familiarize yourself with Tulsa then buy a few properties you want to hold for the long run as investments.

 Great catch.  I didn't read it as his primary.  He absolutely does have that window immediately for total tax relief or the 5 year look back at a reduced % of savings or the opportunity to 1031 at that point.  Patience might just be his best friend.

Originally posted by @Joel Kadlec :

Matt-

Just to make sure I am getting this right you are saying buy the 3-4 homes and when I have to re-locate again 1031 them into multi and sell again?

Thanks everyone for the advice I greatly appreciate it

 Ideally, but that might be too aggressive to 1031 so soon out of the Tulsa market. It depends on what they are worth, and if the selling costs make sense. You might have to keep them for a bit longer. 

I would have to say that I could not be more happy with everyones responses. It has certainly given me a lot to think about. Since then I have also upgraded to plus to run some numbers with the calculators. It looks more like my cashflow would be less than I originally thought. If it wasn't for the PMI I would be at $410 cashflow. Thanks everyone for some help and guidance, I think I will sell and educate myself to re-invest the money from the sale.

Cash out Refi while you still live there. Take advantage of a good rate, get rid of PMI, and use the proceeds to buy something when you get to OK.

Best of luck!

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