Should my partner sell or rent?

Question

Hi everyone. I'm a newbie to investing (only 3 SFHs) and my partner is considering whether to sell or rent out his home. His house is in Clifton, NJ and has a 3.25% interest rate, monthly PITI of $1920, He could probably rent it out for maybe $2600-$2700 on the high end but if he sells he'll prob walk away with around $200k. Personally I think it's a lot of money to have wrapped up in one property when he could sell and maybe buy a couple properties in different areas but I'm curious to know what other people who are more experienced think? I'd be grateful for any insight!

Jonathan R McLaughlin · Answer

remember the tax break for owner occ. 2 of the last 5 years and the first 250K (single) is tax free. Go beyond that and its probably taxed at 30% between Fed capital gain and state, other issues, etc. $60K.

Leo R. · Answer

@Jordan Sachs  I've personally been wrestling with similar questions.

I've run a lot of financial models over the last couple months, and most of my models end up making me decide to hold on to cash flowing properties. It usually comes down to the fact that all my properties are locked in at around 3-3.5%, and if I sold, I'd either have to 1031 into other properties at higher rates (probably 6.5%) and with less cashflow, or I'd have to keep the cash and get hit with large capital gains taxes...and for me, this makes selling unappealing. All other things being equal, why would I sell a cashflow rockstar with 3% locked interest (during 8% inflation) just to buy a mediocre cashflower at double the interest?   ...on the other hand, if you think you can sell and use that money to get a property that's an even better cashflower, and which also has better potential appreciation, then that might be worthwhile (but, personally, I haven't seen that type of opportunity lately).

Other considerations: what grade is the current property, and what grade would the new properties be? How easy is the current property to manage, and how easy would the new properties be to manage? Is the current property likely to appreciate more/less (or is it more, or less, protected from a market downturn) than the new properties? How confident are you that you can complete the 1031 to the new property/properties? What types of looming capex do you anticipate for the current property vs. the new property? (e.g.; will the current property need a new roof in 3 years?)  ...discussing these types of questions with your partner may give you a better idea of which course of action is best for you...

Good luck out there!

Kyle Miller · Answer

What are the cash flow estimates? Simple conversation really…if he can take his profit and redeploy for higher cash flow in a more suitable rental he should sell.

Jordan Sachs · Answer

@Steven Wilson I was thinking that as well. Thank you!

Steven Foster Wilson · Answer

I like to hold onto my cash flowing properties. What if you rented it our and pulled a HELOC to buy another property or refinanced it?

Jared Hottle · Answer

I agree I think this is an opportunity cost situation. Do you have a plan for the money to deploy, what are the implications of a higher interest rate/capital gains. Definitely a good problem to have!

Jordan Sachs · Answer

Thank you very much! All great points to consider and I really appreciate the input!

Theresa Harris · Answer

I'd ask them what they could do with that money if they sold.  The tax implications are also important.  Even if they held onto it for a year or two, they can still get the tax break.  Something like a duplex where you have two units under the same roof might be a good option.  It also depends on the quality of the tenant you get.

Dan Nelson · Answer

Very good answers above about why to sell and how to analyze.  With no information except what you provide, I am certain  I would Get a Heloc on my property and use that money to buy my next property and rent the current one out.

Should my partner sell or rent?

Most Popular Reply