To sell or not to sell?

Question

Hi,

We flipped a home last year
for $300.000 and used the money to purchase another home for $296,000
that is way better in all aspects. ( age, layout, location, looks, yard,
etc. ) We decided to give Airbnb and VRBO a try. After all of last
year we have a 5 star rating, but it was a lot of hands on work. (
cleaners not doing a fantastic job, unauthorized guests and pets in
home, Airbnb and VRBO would not try to help us get rid of the with
the extra guests and pets. They would not pay us enough for the
damages, etc. )

This home is now worth
about $350,000 to $375,000, but all of the long term rentals around
here of the same size, value, location, and amenities are renting for
$1,800.00 to $2,000.00 per month. We have no mortgage on the home. We
are located 3 miles from Holden Beach, NC, so a 5 minute drive to the
beach. How much money should the home make per month, in a perfect
world, going by the numbers and “Percent Rules”? …. I figure
about $3000.00, right? Some might say, why don’t you flip this
home. The problem is, if we sell it, there’s not much to purchase
around here except cheap slab homes and triple wides in the $350,000
range. If we sell it we might not be able to buy something as nice as
we have now. We could put that money in the Stock Market. I am no
longer working due to a recent surgery and disability. My wife still
works.

Here’s the point of this
post….You can do the same thing and most likely get the same
results that I did this week.

I got on YouTube and typed,
Rental Homes or Stock Market Investing. Lots of videos of this exact
subject will show up. I was really surprised that at least 65% of the
hundreds and hundreds of comments were for Stock Market Investing.
Most people said that Real Estate is too hands on and time
consuming….. We really do not want to sell the home because it is
pretty darn nice. We are both going on 60 years old and want to make
the most money for retirement. We are trying to figure out why we
should keep it or why we should sell it, and are leaning towards
selling it unless someone can change our mind. Please let me know
what you think or why you would keep it and deal with the overhead,
renters, and home maintenance issues or why you would not go the
Stock Market route instead.

Thanks!

Dave Foster · Answer

@Michael Lynch, If you decide to cut ties with the property, you'll face not only tax implications but also depreciation recapture for the duration you've owned it if you don't do a 1031 exchange. For you, that could be anything between $30K and $60K of profit plus the depreciation recapture.  For some, that's not a lot.  But depending on your location, it could still be a chunk of tax!

I like what @Rick Albert mentioned about the passive opportunities that qualify for 1031 exchange treatment. Syndications like DSTs (Delaware statutory trusts) allow you to defer all of the tax but also provide some cash flow, while eliminating the hands-on aspect of real estate investing.

Investors who aren't super excited to invest in their local market will park their proceeds (tax-deferred) in these syndications until they sell, and the market is a bit more attractive.

Ned Carey · Answer

Real Estate tends to go up with inflation. The stock market compounds at about 10% over the long term. If you pay all cash the stock market wins. If you leverage your real estate then real estate wins easily but it comes with more work.

Myka Artis · Answer

Great question, Michael, and congrats on your purchase!

I have been offering short-term rentals for the past eight years, and I quickly grew tired of it, so I transitioned to mid-term rentals. If you transition to mid-term, all of the STR problems you mentioned will go away, and you will get consistent increased cash flow. I would attempt this model before selling the property. If you were to sell, would you be looking to cash out or do a 1031 exchange? I just completed a 1031 exchange, and we're planning to triple our cash flow by acquiring a small multifamily property. Therefore, you should also consider what you will do if you decide to sell the property. My take is to try out MTRs, and if you don't like it, then reconsider your decision.

Michael Lynch · Answer

Thanks everyone,

I really appreciate your great feedback and comments. I like the thinking that RE rentals is a bond/fixed income. I believe we will go ahead and long term rent the home and see how that works out for us. We have to do a serious background check and move forward. The home is in 5 star Airbnb condition just sitting. I didn't want anyone in it until we were sure what we were going to do with it. We do really love the home and neighborhood.

John McKee · Answer

Have you heard of private equity? (not syndications) Take your cash off of the table, pay the tax, and earn 10-14% with no hassels and the same low risk as a DST.    I recommend this strategy for people that are done with all of the headaches of real estate and are in wealth preservation mode. Feel free to PM me and I will give you details.

Rick Albert · Answer

Did you look at the tax implications of selling if you don't do a 1031 Exchange? One option is to do a 1031 Exchange into a DST (Delaware Statutory Trust). It's still real estate but 100% hands off and you still defer the capital gains taxes.

Another interesting option since you own it with no mortgage is to do a cash out refi and put that money into the stock market. Your tenants are paying off the mortgage and you are benefiting from the stock market.

The challenge with real estate is it only really makes sense if you have a mortgage on the property. Otherwise, an argument can be made that the stock market outperforms with less headache.

With that said, I could also make the argument that there is more risk with the stock market. You have no control over how companies are running their business.

Unless you have a clear path on what to do with the cash once you sell, I wouldn't make any moves.

Jules Aton · Answer

What is your chosen asset allocation at this time in your life? Like @Travis Timmons noted I keep RE in what I consider my bond fund allocation. I’m 4.5 years from fully retiring if all goes as planned and remain fairly heavy in total stick market index funds due to the truly passive nature of the product and also historical returns which I know aren’t guaranteed but have resulted in significant compounded gains over the past 30+ years.

Michael Lynch · Answer

Thanks Guys,

I really appreciate your great feedback so far. :)

Travis Timmons · Answer

Turn the decision around...let's say that you can sell for $350k and walk away with $330k cash after transaction costs.

If you had $330k in cash, would you buy this house (at that price)? Or consider refinancing to pull out cash and hang on to the property. Index funds beat paid off real estate over the long term based on historical averages, but the predictable income from real estate is nice. I look at paid off rentals like a bond/fixed income. You don't have to sell something to make money (outside of dividends).

To sell or not to sell?

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