Should I sell this rental now or wait?

Question

I have a portfolio of single family houses. I plan on slowly unwinding the portfolio over a decade. The house I’m considering selling now had the same tenant for 12 years. I’ve owned it for 15.

The house is in Maple Valley in a desirable neighborhood.

The tenant paid to have all flooring and paint in the interior redone. It is in pristine condition right now to sell.

I bought it for 300k and can sell for 750k. I have a 150k+ transaction cost and tax bill on it. The HOA is a PITA.

I have a new tenant lined up but worry about having to redo or touch up paint and carpet when they move in 2 years (their typical tenure).

I do also have cap ex coming up if I hold it.Roof, exterior paint, hvac, etc.

I wanted to put the money into stocks as I have been.

should I sell in its sale ready condition now or wait until this new tenant moves out IF I RENT TO THEM?

John McKee · Answer

Turn your 3% ROE into 12-15%.  How you say?  PPR Capital pays 12% dividends and Private Equity performs 15% depending on the fund.  Yes you pay the tax when you sell but your making up for it with great dividends.  1031 exchanges typically only pay 5% dividends when you are doing a DST rollover.   Your tax will be offset in a few years with the high dividends.  Just imagine No exchange fees, broker fees, future upreit, transactional paperwork, scrolling on this website in a few years when your DST comes due.  These are the unwinding years of your life so stop the paperwork and sell out completely and get back on that Jet Ski in your profile.

Eric Fernwood · Answer

Hello @Jack B.,

With the amount of capital gains you may be facing, you may want to consider a 1031 exchange. Having completed more than 90 exchanges, we often work with clients who are deciding how to handle an existing investment property. I created a decision tree that may help you think through the options.

Jack, I hope this diagram is helpful.

Dave Foster · Answer

@Jack B., if you dont want to manage RE anymore but are ok not entirely exiting RE, there are passive opportunities you could explore. For example, there are things like NNN leases and DSTs (Delaware statutory trust) that will eliminate the burdens of being a property manager but will still provide cash flow potential.

If you decide to reinvest in one of these types of investments, you would be able to take advantage of the 1031 exchange, which allows you to defer all of the tax on profit plus depreciation recapture and reinvest it into a passive real estate opportunity, because they are structured as real estate.

If later down the line you wanted to invest back into brick and mortar, you could do a 1031 into an investment property or into another DST, continuing your tax-deferred journey. You dont even have to put all your eggs in one basket; you could take some of the proceeds and pay tax on that to put into stocks, and put the rest in a syndication and defer the rest in a 1031.

Brandon Vukelich · Answer

@Jack B. Maple Valley is a great location, should always been in demand for the foreseeable future but its super hard to predict where things will be in ~2 years. We're taking a beating on tech jobs locally and our "leaders" keep making WA less desirable as a place to call home. Case in point, the recent income tax fiasco.

I highly recommend you have a conversation with someone like Richard Gann at 1031 Capital Solutions or at least read his free book, How to Retire from Being a Landlord. I get nothing for pushing him and his book but it gives you good food for thought. I know many smaller landlords are exiting the rental game in WA and placing funds in DSTs or other investments. Best wishes on your plans!

Charles Holder · Answer

i don't love selling it for stocks unless your gonna hedge your bets.   ( or if you have some insight and feel like gambling ) 1031 sounds pretty good but you don't want rentals. still probably the best play.

unless you got that fire insight. I've had it twice

Taylor Dasch · Answer

Man, this is the classic dilemma. IMO it really comes down to your return on equity (ROE) right now, not just what it cash flows. If you've got a ton of dead equity sitting in there and you could 1031 it into a couple of doors that yield way more, I'd dump it. But if you have a killer interest rate locked in and it's practically running itself, just hold and let the tenants keep paying down your debt. What are the actual numbers looking like? Hard to say without seeing the math

Jack B. · Answer

Cash ROE is 3% from cash flow and pay down, largely because of 500k equity give or take. It is west coast property, this is an equity play.

My films isn’t the numbers. I need to sell it. I want to eventually get out of rentals. I can Leo that now and take the tax hit of 120k plus selling costs or put cash in stock market and if there’s a downturn I offset cap gains on the house and buy more stock with the proceeds at a discount. Those are the real numbers.

Operationally, the HOA is a pain. I can eat the fines if 1k a year, still cheaper than the tax hit and wait to offset if there’s a downturn.

or I can pay the tax bill now and get rid of the hassle of this 1 property. I’ve dealt with the HoA for 12 years or so…

Chase Busick · Answer

@Jack B. This I feel like is a normal dilemma that many REI's may get if they have been sitting on the home for so long and there may not be as many ways to capitalize or access the equity of the home. I can say the same thing for when there is so much appreciation in the market value of the home, like yours has.

In my opinion, if it is cash flowing great and providing you solid returns then you need to weigh the risk of it being better invested elsewhere.

You may consider what your return on investment is, as well as the return on equity you are getting from your home and compare it to the stock investments that you are wanting to make.. You can still consider popular investment metrics in order to see if it is worth it or not, but that is primarily up to you to decide.

I am sure that home is providing you a lot of rental income, but cashing in can have its advantages. Definitely weighing all the pros and cons are important.

I am not sure how the investments in the stock you are looking at are doing, and whether its projected growth is as reasonable. No one can predict the market, and even if companies have steady growth, they can still encounter hard times. I'd ensure that if you decide to sell that you maintain as much of the capital as possible in reasonable investments that are hopefully still producing you cash flow.

So many more ways you can lead this conversation.