Vienna, VA · Member since 2016 · 8 posts · 2 votes
So I've been kicking around the idea for awhile of keeping our townhouse and renting it out when we eventually buy a SFH in a year or two. I just don't know if it's a wise decision. I feel like part of the reason is sentimental, we've lived here for 5 years and I've become a little attached. But I do think it would be a nice rental property, in a prime location in Northern Virginia(right outside DC). It would cash flow barely (2500-2600 rental income vs 2400 in mortgage/hoa) but should improve over time. We might have to eat some maintenance costs early on. I'm a CPA so I understand the tax implications, particularly capital gains. I either want to sell the place and get the full exemption or hold it long term as a rental.
Anyone else deal with a similar situation? Selling the place seems like the easiest thing to do but I feel like if we can hold onto the property we'll thank ourselves 20 years from now, even though it could be harder in the near term. Or maybe it will end up being a huge drain on our resources and we'll regret it.
@Alec Norman One option to consider is to get a SFH and rent out the lower level to supplement your cash flow. This way you are better protected in both short-term and long-term. One of my friends was in the exact same situation (except it was in Maryland), and he now has multiple cash flows coming in that cover about 75% of the mortgage dues from both the townhouse and SFH.
@Alec Norman One option to consider is to get a SFH and rent out the lower level to supplement your cash flow. This way you are better protected in both short-term and long-term. One of my friends was in the exact same situation (except it was in Maryland), and he now has multiple cash flows coming in that cover about 75% of the mortgage dues from both the townhouse and SFH.
@Sam Lin makes a great point! @Brandon Turner (and probably many others) call this "house hacking" where you buy a multifamily property (like a duplex/triplex/fourplex) and live in one of the units, or create a multifamily situation within what would otherwise be a SFR by renting out part of it and living in the rest of it. It's advice that people having been giving to first time home buyers for years, apparently. Wish someone had told ME about that strategy years ago! :)
Anyway, just chiming in here. I'm a newbie; I don't know how to advise you on your particular situation in a logical way, but I'd be tempted to keep that townhome too. :) Best wishes!
Hey, I'm a newbie and also happen to be a CPA, but this seems like one of those situations where the only reason to hold on may be appreciation, where an experienced investor may not necessarily count on appreciation as much as return from rental income. Seems like once you factor in vacancy costs (albeit you may not be running a high vacancy rate in NOVA), maintenance, any turnover costs, liability (holding this in an LLC, management company, etc.., those also have some level of fees to maintain), and management (even if you're self managing, do you want to be making a return on your time?). Just a few thoughts.
@Alec Norman personally I would sell it and do a 1031 if possible. The cash flow is basically non existent. It's not just the maintenance but you get a turnover with a two month vacancy and now your down about 5K out of pocket. You also mentioned HOA... What if they do a special assessment? And lastly, have you looked at landlord insurance policies? Sometimes it can be cheaper and sometimes it can be more, just depends. Not trying to be a naysayer but for the little you will make in the loan pay down and appreciation, I'm sure you can find a property that still has some room for appreciation but also cash flows a lot better than that. Lastly, we are in a sellers market in most of the country and from the way things are looking, we may not be in a sellers market for a whole lot longer so you might be stuck spending thousands of dollars hoping that appreciation helps you out, only to see that you have to unload the property for less.
Try using BP's rental calculator or just pen and paper to calculate your true cash flow from that townhouse, considering PITI and whatever utility services and maintenance the HOA doesn't cover, to help realize the property costs and others that @andrew grant referred to. It appears you could be in a negative cash flow situation.
Is there a way to reduce the mortgage payments?
You're not eligible for a 1031 since it's not yet been a rental.
It might be prudent to sell (without tax consequences) and put that money into a higher cash flowing property or as mentioned above, consider a house hack instead of a SFH.
@Sam Lin the house hacking is a good idea, however I think it's off the table for us. The wife isn't interested and we probably will need all the space in the SFH with 3 kids.
@Dawn Brenengen I think about $600 a month goes to principle.
@Gabriel G. I don't think I'd need to 1031. We're eligible for the full cap gains exemption so we can easily sell and cash out. There won't be any big HOA assessments, the HOA basically just covers trash and landscaping. Good point about the market dropping though. We could sell for a good price right now, could be a good time to just sell it and deinvest although most of the equity would probably just go into the SFH in that case. I think there is opportunity for lots of appreciation though, even if we hit a short term drop. Our location is a few miles from Tysons Corner which is prime real estate and is gong through some huge redevelopment.
I'll check out the rental calculator but it sounds like maybe we shouldn't bother renting. One issue with selling it and trying to find a better rental property is we'll get hit with significant transaction costs from selling the TH and buying another rental. That would eat up a lot of the equity we had to reinvest. I appreciate the responses.
@Alec Norman I would probably hold on to it for a little while as a rental. Sounds like you will be slightly cash flow negative, but gaining 7k/year in principle pay down. You could rent it for 3 years and then sell it and still qualify for the capital gain exclusion, right? So, rent it for two years, and then reevaluate whether it makes sense to hold on to the property at that time. Maybe it will have appreciated a lot more and you should sell (or not). Maybe your are having an awesome rental experience, and you're good with keeping it. Maybe it will be a nightmare, and you'll have an easier time knowing that selling is a good choice.
How much would you clear from the sale? Is the property in Vienna or some other area? Depending on the specific location, and how much you would walk away with I might actually hold it for appreciation. I have a number of rentals with poor cash flow I hold for primarily appreciation. Cash flow is how we pay our bills, but appreciation is how we build wealth.
We are in a similar situation and our line of thinking is would the tax free profit from the sale due to the appreciation since we bought it 4 years ago outweigh benefits of keeping it long term as a rental. Ideally, we could sell now and clear about 40K compared to similar recent sales in the complex and walk away trouble free, no worries, or we could rent it out, cash flow about $250 per month, and worry about tenant problems, vacancies, potential evictions. This is in Maryland, so a very tenant-friendly state, getting more so all the time.
We decided to sell. Unfortunately, our decision was just overruled as it's a condo and the Board just let the FHA approval lapse Mar 31, so while we would rather just sell it quickly, take the profit and forget about it as it would be our only rental in MD and we'd rather not keep one here, our best option is to rent now as the alternative seems to be much lower offers from a cash buyer or hoping for luck for someone who can get a conventional loan, which our lender says is highly unlikely as most conventional lenders still want to see FHA approval.
If it's not a good cash-flowing property and you can sell for a tax-free profit, I'd highly consider cashing out and focus your rental investment on something you know will cash flow.
We are in a similar situation and our line of thinking is would the tax free profit from the sale due to the appreciation since we bought it 4 years ago outweigh benefits of keeping it long term as a rental. Ideally, we could sell now and clear about 40K compared to similar recent sales in the complex and walk away trouble free, no worries, or we could rent it out, cash flow about $250 per month, and worry about tenant problems, vacancies, potential evictions. This is in Maryland, so a very tenant-friendly state, getting more so all the time.
We decided to sell. Unfortunately, our decision was just overruled as it's a condo and the Board just let the FHA approval lapse Mar 31, so while we would rather just sell it quickly, take the profit and forget about it as it would be our only rental in MD and we'd rather not keep one here, our best option is to rent now as the alternative seems to be much lower offers from a cash buyer or hoping for luck for someone who can get a conventional loan, which our lender says is highly unlikely as most conventional lenders still want to see FHA approval.
If it's not a good cash-flowing property and you can sell for a tax-free profit, I'd highly consider cashing out and focus your rental investment on something you know will cash flow.
If the FHA approval lapsed....priced can plummet very quickly. Be aware of that. Without the FHA approval, you've removed about 75% of the potential buyers out there.
@Dawn Brenengen yes we could still sell within 3 years of moving out and converting to a rental and still get the full cap gains exemption. I've thought about that possibility too, giving it a trial period for a year or two and then seeing if I want to keep it as a rental long term.
@Russell Brazil We'd probably clear a little over 100k from selling after closing costs. The townhouse is in Vienna, a few miles from Tysons Corner and a little over a mile from a metro stop. I believe it to be a great location which is part of the reason I want to hold it even though I know it won't generate much positive cash for awhile.
@Lynn McGeein Thanks for sharing your experience. The headache of being a landlord is a little scary. Seems like it could go either way based on what tenant we get.
I might consider holding it then since you are pretty close to the new metro line. It could prove to be a good location over the next 5 years as people start to consider that area metro accessible when in the past it wasnt.
How many months can you afford to carry the $2500/month without a tenant. How much do you estimate the reno costs to be at the time you decide to sell 3-4 years down the road. Are you prepared to go through a eviction reisking the tenant will destroy the property. Are you prepared to deal with complaints from the HOA regarding your tenant.
Are you prepared to take on the basic responsibilities of being a landlord or are you possibly just dreaming about the big profits you are probably not ever going to see.
I think what I was trying to say more broadly, not just our situation, was that if you can make 100K now tax free, how much more will you benefit if you hold it as a rental? Will you be able to make so much more by renting it for several years, not cash flowing well, to someone who won't care for it as you would, or will you then end up selling it for about the same as you could right now? Or worse, will you go over the tax-free time frame and then sell and pay capital gains on all that appreciation or have to 1031? In our analysis, we didn't think ours would appreciate more to make it worth keeping as even with the $250/month cash flow, that's years of cash flow just to get the 40K we could walk away with right now with no hassles (If the condo board hadn't just wrecked it for us).
I have been Realtor in Northern Virginia for over 25 years and lived in Vienna for all of that time so I understand your (our) market.
I am also a record keeping nut. I have average price points in the area since 1975. I know we have had a strong history of appreciation and would venture to guess that historically we are one of the best in the nation. I also we only had 4 down years in all that time. Of course the past is not a predictor of the future. And like Warren Buffet says, he is confident 10 or 20 years from now the stock market will be higher than today but next year? Who knows.
That said, let me tell you what I tell all of my clients in this dilemma. If you have even a small positive, give it a try. (By the way, saying this is, of course, against my best interests as I make a living selling property. But this advice is in the client's best interests and that is all that counts.)
You are a CPA and know that to avoid capital gains, you need to be able to say at settlement that you have lived in the home 2 out of the last 5 years. So your true decision point is not today but 3 years down the road.
If keeping the home is the wrong decision because a) you don't like being a landlord or b) economic factors change in the short run - what is your downside? How much can you lose?
But say you sold the home and invested the proceeds in something outside real estate, what are your downsides there? Likely if the real estate market collapses, other markets do not fare well either. So it really is not a decision of losing in real estate bit one of the risk in real estate vs the risk in the alternative investment.
Recently my kids went to college and both went to private colleges. It was quite expensive and really hurt! But the decision wasn't that high tuition vs zero, it was that high tuition vs a a state college tuition. That delta was smaller and made the decision easier to swallow from a financial perspective.
On the flip side, I do point out to clients in this dilemma that the home will probably never show as well as it does now with you in it. So that too, is something to think about.
Nonetheless, without knowing your total financial situation, I would still be leaning toward keeping the home.
I assume your HOA allows rentals, because I've heard some don't or only allow a certain percentage. When I bought my townhouse last fall, even though I live in it now, I wanted the option.
To me the answer is simple. If you are going to lose a night's sleep worrying about whether you did the right thing in renting it--sell it. Sell it now while the prices are high. If you want to be a Landlord try it with something you are not sentimentally attached to.
@rich baer. Agree. Forgot about sleep. That is critical. I always suggest to clients if one decision or the other will cause lost sleep, go the the way of less stress and worry and forget about which path offers the best returns. This is suppose to be fun and rewarding. If real estate investing isn't fun, find something else that matches your temperament even if less rewarding.
Alec Norman you've gotten some great advice. I agree with what Joe Facenda e is saying. So the big analysis that needs to be done, is what your expenses would look like for the next 3-5 years and if you can foot that bill so to speak.
After vacancy, cap ex, repair costs, etc you will not be cash flowing. So can you, or do you want to hold those expenses in the short term so that you can benefit greatly 20 years from now? Thats the question to analyze. But, you're a CPA so I bet you're aware of that.
Some thoughts for you based on my experience as an owner/landlord with properties both here in Arlington and in TX:
Its a terrific time to sell in NoVA at the moment. A great agent in our area can get you top dollar and potentially even multiple offers if your house is priced well and in great condition. If I was in your situation, I would sell tax free now and roll that $100k+ into multiple turnkey properties or even a small multifamily and get some serious cash flow going without having the hassle of managing your property yourself (or having that terrible feeling when tenants abuse or destroy something in a home you have cared for and loved). If you buy the right properties in the right market and set up the right property management, it IS possible to have your cake and eat it too - my A+ rentals in TX, for example, have appreciated nicely since I bought them and they continue to put a nice chunk of cash in my pocket every month.
Our market here in NoVA has terrific appreciation potential, for sure. But for me, I decided I would let my primary SFH be my appreciation play and use any additional money to diversify my strategy so I had a consistent source of cash flow. Once you have both, you have a lot of options. For example, I now have enough equity in my primary residence that I could use a home equity line of credit to finance a flip, buy an additional rental property outright, or invest in a multifamily deal. I haven't used it as of yet, though, and currently have no plans to, so all that appreciation is currently dead equity and isn't earning me much "trapped" in my one house. My TX properties, however, are not only appreciating nicely, but every month I also see a nice fat check, which I just save up and then reinvest into more real estate.
It all comes down to your comfort level and your objectives: what works for one person might not work for you. Either way, it sounds like you are in a great situation - having an appreciating townhouse in Vienna or $100k tax free to invest is a great problem to have!
@Alec Norman sounds like you have already received some outstanding advice here. I think @Tanya S. seemed to consolidate it best. If you can take your cash out of the town house (realizing the full tax exemption) and use part of it as a down payment on your new primary residence, and invest the rest into one, or more, of the revenue options she pointed out, you might find yourself in a much better situation than just holding this property. As you will hear time and time again on BP, every situation is different. You have to decide what is best for your situation. Best of luck.
This is a pretty simple question to my way of thinking. How much money will you cash flow on the home if you rent it?
I run into this all the time with potential property management clients who own condos. It usually involves a move out of town and they would like to keep the current home as a rental.
I run comps which suggest the optimal rental price is $1600. But their PITI is $1000 a month and their HOA fee is $300 a month. Add on PM fees, maintenance/repair, etc., and you can see where the math is taking you. In cases like this I always recommend they sell.
So the bottom line is if you can make money by holding on to it, then rent it. If you're going to break even or lose money, then it's probably best to cash out and use the equity to invest somewhere else.
@Russell Brazil I think I found the first thing we don't agree on hahahaha.... I just can't see myself holding something that has a mortgage and doesn't cashflow. Now if there wasn't a mortgage then I would be ok with that but having to pay $2400 out of pocket, even if its for a month or two, hurts. (hope you still come to out to the meetups lol)
