Should we rent or sell our free and clear property?

Question

Hello BiggerPockets,

We are looking for some advice. We have two properties. One of them has a mortgage and our intention is to rent/Airbnb this property. The other one is free and clear (no mortgage or other liens on the property). We are trying to determine if we should sell this house and use the money for other investments or if we should hold onto this property and rent it out as well. We are looking to get started as a real estate investors and grow beyond these two properties. We know that keeping this property would give us good practice to see if real estate investing is right for us. In addition, most of the research we have done to this point says that you should not give up property if you don't have to. If anyone with more experience would be able to provide us with some tips or guidance, it would be greatly appreciated. Any specific factors that we should be taking into consideration or any lessons learned you have to share on this topic?

Thank you,

Chris and Rachel

Chris Czernisz · Answer

Thank you to everyone who has responded, I now feel like I have some calculations to do and take an educated risk. I will post what we have decided to do. And soon I hope.

Thank you again,

Chris and Rachel

Rachel H. · Answer

@Chris Czernisz What you do will depend on your goals and your comfort level. If you're committed to becoming a landlord right now and don't need the cash from the sale of your property, then you can go the rental route. Though, it is pretty risky to get into the rental business right now especially with the national eviction moratorium. So, you'd have to be cautious and pretty careful about the types of people you put in your units and the landlord/tenant laws which are being modified due to COVID-19.

On the other hand, if you're not quite sure if you want to be a landlord at this point you may want to just sell your property and cash out. Then, you can think about your next step from there. This way you won't have your money tied up in a property and will be free to purchase other properties with the money from the sale if that's what you want to do.

Honestly, there's no right or wrong answer. It all depends on your investment goals, your comfort level, and your overall situation.

Hope that helps!

Chapman Walsh · Answer

You avert risk of renting (Tenants, toilets , taxes !!)  and Sell Your Property to an intelligent investor who'd be willing to work out Accommodating Terms for you.  We work out deals like this all of the time, they're my favorite. Become the bank and sell your property on terms and it's customary for the buyer to absorb Taxes, Insurance and Repairs.

You'd have to decide what you fancy the most and prioritize in that order. Do you want or need a lump sum for lump sums sake? Or are you looking to get a rate of return on the proposed money you'd get from a lump sum sale? You could avoid the transaction costs, whether closing costs or taxes (not assuming whether you 1031 tax exchange  or whatnot) and also CASH FLOW this property through the agreed upon terms.

Adrian Smude · Answer

It’s all about ROI for me. What is the free and clear house worth NET to you if you sold it?  What is the NET monthly income that house will produce a year?  Now you have a ROI you have to be able to beat with the cash you’d get form selling.

We did sell a beautiful home last year. We loved the home and it was one of our nicest homes, but it was our worst ROI. We were able to sell it and purchase 8 mobile homes with land with the equity we had in the nice home. Our NET income is 8 times higher than it was. We made this decision also because we were in growth stage which it sounds like you’re in. If we were “Enders” meaning we were set for life but enjoyed being in real estate still we probably would have kept the nice shinny ranch style house because it’s less work. At that point in life people typically value time over money. we current find our balance between time & money.

The biggest thing you can do is take action & have a plan!

Marc Winter · Answer

One other option:  if you can find an investment property that will return 10% or more after all expenses and reserves, you could refi the free and clear property.  Interest rates are ridiculously low now, so go with a fixed rate mortgage and use that cheap money.

Joe Villeneuve · Answer

Let's say, ($20k) you have your current paid off property valued at $100k, and your debt free cash flow is at $10k/year.  If with debt, you had only $5k/yr in CF.

If you sold the property and bought 5 of the same property at 20% DP ($20k/each), that could get you 5 of what you currently have with only 1 property.  That would mean:  $25k/yr in CF; $500k in PV...all 5 appreciating together instead of just one property.

In both cases, the total equity would be the same.

Note:  I'm using 5 properties just for comparison purposes.  You don't have to buy 5 properties, you could buy just 1 using the full $100k as your DP...or somewhere in between

Chris Czernisz · Answer

Hi Joe,

Thank you for responding. Would you be willing to elaborate on your feedback? I see keeping it as an opportunity  to have a high cash flow property as an asset that is already paid off. On the other hand, I see selling it as an option too since this will allow me to spread out the profits by purchasing multiple properties. This is part of the conundrum I am facing.

Chris

Joe Villeneuve · Answer

Sell it.  If you don't, you're losing money.