Advice - What would you do?

22 Replies

Hello everyone,

My name is Brian and I need advice. I've been playing tennis in my head about what I should do for the past few months and now I'm even more confused than when I started to think about everything. I would love to hear different opinions/advice just to see if my thinking is somewhat correct.

I'll keep it short and on point:

I own two homes free and clear.

1. My residence in the Phoenix metro area - I bought a short-sale, fixer-upper. I had originally planned to fix it and settle down here, but the quality of homes in this area has really made me think otherwise. In my mind, Phoenix homes are not assets, just future liabilities and money suckers. In 50 years, I think Phoenix will look like a shanty town with all these wood-framed stucco track homes decaying underneath the blazing sun. But, of course, this is just my opinion.

2. My investment property in Baltimore - It's doing well, in a great neighborhood, solidly built (brick), never sits more than a month without a renter. I bought it for $230K, my average rent is around *net $1500.00 a month. I'm not looking to do anything with it, other than expand in this area.

My question is, what do I do with the Phoenix home? Do I sell it outright and expand into other RE opportunities? Do I keep the home, live in it, and leverage it somehow? Do I keep it, rent it out (cap-rates are not that great here), and leverage it?

In my mind, keeping it and leveraging it is just asking for future problems. The house is only 20 years old, but it's already falling apart. I've done a lot to it already, but I see all its future problems staring at me everyday. It still needs an exterior paint job, updated master bathroom, possibly a roof, at least one AC unit replaced, landscaping, and potentially all new windows within a couple years. In order to sell it, all I need to finish is the paint job, bathroom, and landscaping. I could easily walk away with 100K in profit afterwards.

My issue is, if I sell it, I'm going to get hit with a tax bill unless I dump the money into a new home, correct? I've been living in the home for over two years, but that matters little, right? I still need to use the money on a new home.

I guess my question is, can I sell the home, and use the money to finance new rental units without being hit with a tax bill? Or should I not sell it, but leverage it to finance new rental homes?

This is where I'm confused.

I want to use these two homes to start walking my way towards financial freedom, but don't know which path to take. I know I have a pretty solid foundation to build on, but I need advice on how to start building.

Anyhow, any help would be greatly appreciated.

(I'm not looking for a professional consultant so don't bother to solicit me.)

Thanks in advance!

@Account Closed I suggest you speak with a CPA to guide you in tax law and what you may face if selling the Phoenix home and not buying another one. I believe you’re correct if you sold AZ home and didn’t buy another house you would pay capital gains. If it was me in your situation, from what you describe I would definitely finish up and sell the AZ home. Then I would move to a city or area I like and buy a multi family home to occupy. Triplex or larger is key because then your other units pay your entire mortgage and you’re living rent free. Baltimore if you like the city then I would move there. Finally if you wanted to, leverage Baltimore home to pull cash out and buy a 3rd investment property. Just my 0.02

Consult a tax professional, but the law didn't change regarding tax exemption on capital gains for the first $250k for single people and $500k for married when selling your primary residence. I don't invest in properties or areas I wouldn't live in.

For investment property, the first thing I look at is where people are moving from and where they are moving to. Here are some statistics to consider:

Baltimore lost population last year as more than 5,300 people left the city, continuing a downward trend with a decline of about 6,000 people from 2015 to 2016. 

Baltimore 2017 - 611,648 population. -1.5% growth

Phoenix gained approximately 24,036 people last year, just behind San Antonio on the list of fastest-growing large cities, continuing decades of population growth.

Phoenix 2017 - 1,626,078 population. +1.5% growth

Also, while Phoenix has it's share of subpar construction I don't think it's unique to the city and I'm sure Baltimore has it's newer home construction issues. A lack of pride in work and craftsmanship is a nationwide problem. Phoenix also has block/brick homes. One thing Phoenix doesn't have is snow and ice. Growing up in the midwest, I saw the wear winters cause to homes.

Most of the things that you mentioned in the house that is "falling apart" are things that are usually at or near the end of their lifespan for a twenty-year-old house anywhere.

If the house was your primary residence for at least two of the last five years you may qualify for a tax exclusion up to $250,000 single/$500,000 couple. If not, you may be able to do a 1031 exchange. (Seek professional advice)

As far as what to do? I would need more information about you and your goals. Are you staying in Arizona?

Well, that's my two cents. I'm an Associate Broker at HomeSmart, and if I can help you just let me know. My resume is in my profile.

Good luck!

@Matt Shields , right now 6700 new units are being built in South Baltimore alone, crime is down this year, and the only reason why Baltimore is losing people is because the biggest voucher program in Baltimore called MBQ is forcing all new voucher holders to rent in opportunity areas, ie towns outside the city in Baltimore County areas with low crime, low unemployment, ie really nice areas where houses sell for 300K.  Its a strategy that's already backfiring and will fail, so before you look at just numbers, it might make sense to understand the facts around those numbers.   My Average Baltimore City rental I'm all in for 85K with a voucher tenant, making 1400 a month, less than $1000 dollars property tax, good luck finding that in Phoenix.

Originally posted by @Ian Barnes :

@Matt Shields, right now 6700 new units are being built in South Baltimore alone, crime is down this year, and the only reason why Baltimore is losing people is because the biggest voucher program in Baltimore called MBQ is forcing all new voucher holders to rent in opportunity areas, ie towns outside the city in Baltimore County areas with low crime, low unemployment, ie really nice areas where houses sell for 300K.  Its a strategy that's already backfiring and will fail, so before you look at just numbers, it might make sense to understand the facts around those numbers.   My Average Baltimore City rental I'm all in for 85K with a voucher tenant, making 1400 a month, less than $1000 dollars property tax, good luck finding that in Phoenix.

 I agree the surrounding areas are growing because people are moving out of Baltimore and into the growing suburbs, but the fact is they are still moving out of Baltimore. But one of the great things about real estate is that there are so many ways to make money, even in a downturn, and if you're cash flowing with Section 8 more power to you! I like to say "Find where the government money is going and get in front of it." 

I think the bigger issue is that it sounds like Brian would prefer to live in Baltimore, and that should also factor into his decision. It is much easier to manage local property.  

Originally posted by @Matt Shields :
Originally posted by @Ian Barnes:

@Matt Shields, right now 6700 new units are being built in South Baltimore alone, crime is down this year, and the only reason why Baltimore is losing people is because the biggest voucher program in Baltimore called MBQ is forcing all new voucher holders to rent in opportunity areas, ie towns outside the city in Baltimore County areas with low crime, low unemployment, ie really nice areas where houses sell for 300K.  Its a strategy that's already backfiring and will fail, so before you look at just numbers, it might make sense to understand the facts around those numbers.   My Average Baltimore City rental I'm all in for 85K with a voucher tenant, making 1400 a month, less than $1000 dollars property tax, good luck finding that in Phoenix.

 I agree the surrounding areas are growing because people are moving out of Baltimore and into the growing suburbs, but the fact is they are still moving out of Baltimore. But one of the great things about real estate is that there are so many ways to make money, even in a downturn, and if you're cash flowing with Section 8 more power to you! I like to say "Find where the government money is going and get in front of it." 

I think the bigger issue is that it sounds like Brian would prefer to live in Baltimore, and that should also factor into his decision. It is much easier to manage local property.  

Matt, thanks, but you don't quite understand Baltimore. Baltimore is like Phoenix, as in you don't look at just the downtown area. Moreover, Baltimore City is surrounded by Baltimore County. Inside Baltimore County you have nearly a million people, and a variety of different income classes.

The cap-rates in Baltimore County are some of the best in the country. Towson is always in the top 10, thanks to the public schools, colleges, and hospitals there.

As to living in Baltimore, I haven't lived there since 1995 and I'm never going back. It's a hellhole, but one with great food. I personally love Arizona, but just dislike these cheaply built wood-framed stucco houses. The interesting thing about Phoenix, because all the houses look the same, you can't tell the difference between lower income and the middle classes. It's the oddest city I've ever seen in my life. I guess that's good and bad depending on which side of the table you sit on.

Anyway, I'm more than likely going to sell the Phoenix home, rent here, and invest in Baltimore. It just makes more sense to me.

Okay, I misunderstood. I thought you were in the city. Phoenix has had huge value gains in the last decade so selling the home here and cashing in your chips to use elsewhere isn't a bad idea.  BTW there are areas of the valley that aren't miles of beige stucco!

Hey Brian, I am not a CPA but I am a real estate agent in Phoenix. If you have lived in the house for 2 out of the last 5 years you shouldn't have to pay capital gains. Of course confirm with your CPA. 

Account Closed My recommendation is a bit different:  Sell the Baltimore rental!  Use the proceeds to purchase different properties.  If the value is near the $230k price you paid, and if the rent is only $1,500 this property is definitely not cash flowing.  You can get better returns than this in Baltimore.

With $230k you could easily buy TWO nice rowhouses in Baltimore County (not the city) with rents of $1,400/month each. 

Originally posted by @Matt Schelberg :

@Brian Harlow My recommendation is a bit different:  Sell the Baltimore rental!  Use the proceeds to purchase different properties.  If the value is near the $230k price you paid, and if the rent is only $1,500 this property is definitely not cash flowing.  You can get better returns than this in Baltimore.

With $230k you could easily buy TWO nice rowhouses in Baltimore County (not the city) with rents of $1,400/month each. 

Hi Matt. It's free and clear so by nature it is cash flowing. The value is slightly up, and I'm netting $1500/month. It is, so far, my favorite piggybank.

I'm very familiar with the county, grew up in Perry Hall. Outside of Towson, maybe White Marsh, there doesn't seem like much hope anywhere else. Parkville has been dying for decades and so has Loch Raven. I believe the West side is similar, with Owings Mills as the exception, but maybe I'm wrong. Towson is getting a breath of fresh air with the redevelopment of downtown Towson, and I personally believe that Towson will become the center of the entire Baltimore region in the future, simply because Baltimore City will never not be a crime infested hellhole.

Anyhow, enlighten me, what say you?

Account Closed Phoenix is not a desirable investment place unless someone in your family wants to retire at that home. Here in SFBA most people will not touch homes in that area unless you are giving homes away.  Suggest you put it up for sale with a 1031 tax deferred exchange agreement. The 1031 cost is through an exchange company costs ~$500 with it as an intermediary.  You can use the proceeds, for example, to get a like property-a home or a piece of land. You can put in more money combined with $100K gain within the 180 day/45 day time frame.  

Frankly, the long term capital gain tax has reduced a great deal this year by Trump. Most people like to pay no tax in investment, but you will need to pay tax later. In the past a businessman can exchange a restaurant to a home etc. That got stopped by Trump this year.  Congress wants to eliminate 1031 tax loophole.

At 100K I think long term cap gain is just $15K capital gain tax under 39.5% tax bracket assumption.   If you have other savings you can add more money with $100K to a home in East Coast or a land. 

Hope that helps,

Sam Shueh

PS: Howard Hughes Corp is developing new housing in Columbia, MD. I know that city is more expensive than others. Do not have latest home prices. 

Account Closed When you describe it as a rental in Baltimore I think many Marylanders will assume you mean Baltimore City.  That's how I read it.  But if it is Towson (Baltimore County) that's different -- lower taxes, higher rents, better schools, better tenants.

You say it is rented for "net $1,500/month" but what does that mean?  The fact that it is free and clear doesn't make it a better investment than if it had a mortgage.  You can juice up any deal with a high down payment and it will produce cash.  

I recommend posting some actual numbers:  actual rent; taxes; and your estimate of maintenance; capex; vacancy; etc.  

That will allow you to look at your return on equity...which in this case is really the same as your cash-on-cash return because there is no leverage.  I'd guess you are making around 5% on your money after budgeting for all expenses.

That's not bad, especially in an appreciating market like Towson.  And I think the decision to refi and load up on debt to finance more rental mortgages is a personal decision.  It will definitely boost your returns and in 30 years you will own a bunch of properties free and clear.  But there is more work and more risk.

Originally posted by @Sam Shueh :

@Brian Harlow Phoenix is not a desirable investment place unless someone in your family wants to retire at that home. Here in SFBA most people will not touch homes in that area unless you are giving homes away.  Suggest you put it up for sale with a 1031 tax deferred exchange agreement. The 1031 cost is through an exchange company costs ~$500 with it as an intermediary.  You can use the proceeds, for example, to get a like property-a home or a piece of land. You can put in more money combined with $100K gain within the 180 day/45 day time frame.  

Frankly, the long term capital gain tax has reduced a great deal this year by Trump. Most people like to pay no tax in investment, but you will need to pay tax later. In the past a businessman can exchange a restaurant to a home etc. That got stopped by Trump this year.  Congress wants to eliminate 1031 tax loophole.

At 100K I think long term cap gain is just $15K capital gain tax under 39.5% tax bracket assumption.   If you have other savings you can add more money with $100K to a home in East Coast or a land. 

Hope that helps,

Sam Shueh

PS: Howard Hughes Corp is developing new housing in Columbia, MD. I know that city is more expensive than others. Do not have latest home prices. 

Thanks Sam.

As for Phoenix, beyond the crappy built houses, everything else is very good! We have a business-minded governor, and corporations are moving here on a pretty regular basis. Intel is almost finished their facility in Chandler, and supposedly Phoenix metro is to see somewhere close to 500K California residents moving here to fill open employment positions. Moreover, California is such a basket-case politically, we should enjoy the fruits of California's idiocracy for years to come. 

Alternatively, something cosmic could happen, and Phoenix could become the place to be in the next few years:

https://www.express.co.uk/news/science/1010638/cold-weather-forecast-big-freeze-solar-minimum-maximum-space-news

Originally posted by @Matt Schelberg :

@Brian Harlow When you describe it as a rental in Baltimore I think many Marylanders will assume you mean Baltimore City.  That's how I read it.  But if it is Towson (Baltimore County) that's different -- lower taxes, higher rents, better schools, better tenants.

You say it is rented for "net $1,500/month" but what does that mean?  The fact that it is free and clear doesn't make it a better investment than if it had a mortgage.  You can juice up any deal with a high down payment and it will produce cash.  

I recommend posting some actual numbers:  actual rent; taxes; and your estimate of maintenance; capex; vacancy; etc.  

That will allow you to look at your return on equity...which in this case is really the same as your cash-on-cash return because there is no leverage.  I'd guess you are making around 5% on your money after budgeting for all expenses.

That's not bad, especially in an appreciating market like Towson.  And I think the decision to refi and load up on debt to finance more rental mortgages is a personal decision.  It will definitely boost your returns and in 30 years you will own a bunch of properties free and clear.  But there is more work and more risk.

Hi Matt,

Net is net. This is my 2-year average after all my deductions/expenses (gross: $1800/month).

I never said it made a "better investment." I said it's cash flowing, counter to your statement that it wasn't.

If you read my original post, I'm not planning to sell the Baltimore rental. I'm planning to sell my Phoenix primary and buy more rentals with the sale. My original question was basically how to do it without being raped on taxes. I think Sam might have answered it, but I'll talk to a CPA to make sure.

Originally posted by Account Closed:

Net is net. This is my 2-year average after all my deductions/expenses (gross: $1800/month).

I am pointing out some flawed math in your analysis of profitability.  Two years of operating performance does not provide a realistic picture of income.  How will you account for the next roof replacement; water heater; tenant turnover; and vacancy?  

Basic 101 stuff.   Why use metrics that are misleading?  I'll jump off now -- nothing more to add on the topic.  

Originally posted by @Matt Schelberg :
Originally posted by @Brian Harlow:

Net is net. This is my 2-year average after all my deductions/expenses (gross: $1800/month).

I am pointing out some flawed math in your analysis of profitability.  Two years of operating performance does not provide a realistic picture of income.  How will you account for the next roof replacement; water heater; tenant turnover; and vacancy?  

Basic 101 stuff.   Why use metrics that are misleading?  I'll jump off now -- nothing more to add on the topic.  

Well, if you have to know, the roof was replaced 6 months before I bought it, and the water heater and AC are brand new! The woman who owned it before me had a son that took really good care of the house for her. The vacancy rate in Towson is not an issue. It's a three bedroom right in the heart of Towson, if I can't get the ideal family in there, then students are a quick fix, but I haven't had to worry about that because I have a single mother in there with a really good job who loves Towson's public schools.

As to your "profitability" statement, the house is paid for, value is up, and I have a bank account that is growing. In what world is that not profitable? If I sold the house this year, I'd have better 2 year returns overall than many hedge funds and mutual funds out there. Could I have gotten a better ROI in some other property, investment vehicle, or asset class out there? Of course! But I'm not a glass-is-half-empty type person.

Asking me to predict the future on past results pretty much breaks every disclaimer in finance--basic 101 stuff!

Account Closed your PHX property does not qualify for 1031 treatment.  It is your primary residence.  There are rules that would allow you to sell your residence tax free.  If you don't want to avail yourself of a professional to get the true story then you can always read publication 523 and figure it out yourself.  Several have stated the answer several times in this string.

I think Phoenix is a more desirable area than Baltimore to live in. Blackstone, one of the largest private equity firms, invested quite a pretty penny in the Phoenix area :)

I might have missed it but when did you purchase your Phoenix property? All those repairs you listed sound like normal CapEx to me.

@Account Closed Sometimes in real estate as in life, it’s not just about what makes the most financial sense. There are people that pay off their primary mortgage even though most everyone will say it doesn’t make financial sense.... but if paying off your mortgage removes a huge chunk of stress from your life, then that needs to be factored in and weighed against the financial sense. In your case, it sounds like continuing to own the Phoenix house is going to cause you stress. You fear for the future of that market. Whether you are ultimately right or wrong doesn’t matter, it worries you now and will continue to worry you. Also, you don’t plan on buying other properties in that area so it will be the outlier as you grow your portfolio. Check with your CPA but that should only be part of your decision making process. And the real estate market is arguably near a high so the next year or two is probably the best time to sell for someone who is not planning on holding a property for another 10+ years.
Originally posted by @Jeffrey Almonte :

I think Phoenix is a more desirable area than Baltimore to live in. Blackstone, one of the largest private equity firms, invested quite a pretty penny in the Phoenix area :)

I might have missed it but when did you purchase your Phoenix property? All those repairs you listed sound like normal CapEx to me.

I bought the house in early 2016. It was a pre-foreclosure. The owners (original) allowed the house to get extremely run down. I had to redo the kitchen, swimming pool, outdoor patio, bathrooms, and much much more. I now see all the Capex in front of me, and I've finally have had enough. These "modern" houses out West are money pits--it really never ends.

I guess I'm spoiled, I grew up in a brick home back East, and I'm kind of biased. My parents really never had to do anything to our old house, and when they sold it, they made a decent chunk of change.