Should we sell our duplex?

Question

We purchased a 1940s up down duplex in 2018 in Pocatello, ID for $124k. At the time the basement unit had been renovated up to the sheet rocking phase and the upstairs unit was vacant. We did a facelift on the upstairs unit, placed a tenant and then proceeded to finish the downstairs unit. We moved into the basement when we completed it. All in all, we spent about 18k total fixing up both units before moving in.

The duplex is located close to a university, both units have high ceilings (9-10ft), and are in great condition inside. Many of the houses in the surrounding area aren’t super well maintained, though the city has a couple of housing projects planned to try to help rehabilitate the area. It is relatively easy to rent to students despite the area being a bit more rundown. In 2021 we did a cash out refinance, and pulled out enough money to replace the roof and repair a sagging front porch (about 16k). We refinanced at 2.5% on a 15 year mortgage and owe about 127k.

Our current monthly payment is about $1000/month with about $150wsg/month. We have since moved out, and rents are $1600/mo., though they could be closer to $1800/mo. (we have fantastic tenants and don’t want to risk pushing them out). We anticipate more repairs to the exterior and the upstairs unit bathroom in coming years.

Recently the market has increased dramatically in our area and based on comps we could sell for $270k+. The market is artificially high in our area right now, and we aren’t sure we could ever sell for this much again. Also, we could sell without paying capital gains tax since we lived in the property for 2 of the last 5 year. We never intended this to be a long term hold due to the age and location of the property, but other deals are hard to come by right now. Would we be better off selling now and looking for deals as the market stabilizes, or hold, and hope that future appreciation/mortgage pay down will offset future repairs and capital gains taxes?

Side note: We’re also doing a live in flip at the moment, and the sale proceeds would help us to complete that more quickly and additionally have enough for about 2 down payments on other properties.

Also, just a note, due to zoning changes in our city, if the duplex were ever to burn down or be destroyed in a natural disaster etc. (Unlikely) it would have to be rebuilt as a single family home in a neighborhood that is predominantly multi family.

Thanks in advance for your advice.

William Hochstedler · Answer

Never sell unless you have a better opportunity that requires it.

With the kind of equity you have, you should be able to get a non-occupant HELOC at 75-80% LTV.  (If you search here on BP you can find lists of banks that offer these).  That means that you can access at least another $75K for your current project that way.

A couple of side notes:

• Others may disagree, but I recommend against shorter term amortizations on properties where you can get good 30 year fixed rates (1-4 unit residential properties).  Here's why:  1) Equity in investment properties is hard and costly to tap into (in the HELOC example above you only have access to 80% of it.)  2) A few extra hundred dollars a month now can be reinvested in the property to increase performance and income faster than the interest you save.  3) Your return on equity declines faster meaning you are making less income as a percentage of your net worth.  4)  And if you want to extinguish your mortgage faster, you can always pay additional principal.  But if you run across hard times, you can't pay less on a 15 yr am.  Certainly take advantage of lower interest rates and shorter length mortgages on your primary residence so you can more quickly get to debt free.  But leverage is your friend in real estate, particularly when you're in growth mode.
• Double check with those city codes, the government can't deprive you of a legally established existing use without compensation.  It is usually only if you abandon the use (duplex) voluntarily that you become restricted from rebuilding it's non-conforming use.  Most municipalities allow you to repair damage from natural disasters to it's current use and total destruction falls into that category.

Good luck!

Steve Vaughan · Answer

I've sold several over the last few years but they were headaches and I knew exactly how I was going to redeploy for yield and tax efficiency.

A couple times I also felt that little rural market was peaking and it was a headache, mostly because it was 30 miles away.

I didn't read that this was a headache or where you're going to re-deploy the capital?

Other than trying to market-time are there other reasons to sell?  Facing capital improvements is certainly a valid reason and why I'm saying bye-bye to a 7 fam now.