Sell Now For a Nice Gain or Rent and Cash Flow?

Question

I purchased a condo in 2012 for around $425,000.The property is now worth around $600,000, maybe a tad more.

The local rent is roughly $3,200+, while total housing costs are ~$2,400 per month, factoring in mortgage, taxes, insurance, and HOA. No advanced deprecation or anything is involved.

Question is; do I sell now or hang on to it and rent? I don’t see the property appreciating much more anytime soon. My general thought is that home prices are overheated and the building itself is getting older, built in the ‘60s. It's in a great area with high demand and that will never change. So over time the price will certainly increase, but I can’t see it selling for more than $650-$700k in the next 5-10 years, at best.

If I sell now I can take the profit tax-free thanks to the exemption for owner-occupied properties held for two+ years in the past five.

Thought process is that ~$175,000 in profit would be taxed at 15% as long-term gain (I believe, correct me if I'm wrong) if I don’t get the home sale tax exemption and keep renting for more than three years, thereby nullifying the exemption.

I suppose I could rent for a year or two to test the waters and still sell after and qualify for the occupancy exemption, right, since I still would have owned for two of past five years in that case? Is this true even if I rent and buy another owner-occupied property during that time?

Is it worth the potentially limited upside? Renting leads to wear and tear, vacancy-related costs, I may need to put in upgrades as the current stuff gets older. Should I just book my gains and wait for another downturn? Or do I hold onto the unit in a very popular area and rent at a decent profit? Assume I don’t need the cash proceeds at the moment, can find another place to live, and don't want to live in the unit much longer.

Thank you for any and all input!

Todd S. · Answer

That's certainly a thought but I think the price of RE is very high at the moment...and I don't know if I want to manage a property from a long distance.  Additionally, I like the idea of getting my profit tax-free...maybe I'm getting hung up on that but it'd be nice to take ~$150k or so tax-free wouldn't it...and I could use that, not cash-out, to invest in other properties in the future if/when prices do normalize.

Thanks.

Steve L. · Answer

What would you do with the money?  If you don't have a good plan, keep it.  If you do have a good plan to earn better returns sell it.

John Thedford · Answer

sell sell sell

Arnell Enriquez · Answer

@Todd S.

Do the numbers including all costs and that will give you a  fair idea on what to do. Good luck.

Jerry Padilla · Answer

@Todd S.

Have you thought of cashing out and using the profit to invest out of state, where the returns maybe greater?

Todd S. · Answer

Thanks for all the responses.  I didn't think I'd be losing money long-term because I can probably rent for $800 profit per month less any expenses/vacancy/repairs and I'd be socking away $500+ in principal each month too.

Are you factoring in the tax deduction as a huge money-saver?

I actually assumed everyone would tell me holding made a lot more sense, but maybe that's not the case.  Or maybe I only received input from folks who like to turn faster profits and move on to the next investment.

Not sure what I'd do with the money to be honest.  I wouldn't want to turn around and buy something at the same lofty heights when I sold seeing that that's the basis for selling to some extent.

I'd probably rent something and feel out the market, maybe invest the cash in stocks/bonds/etc.

Thanks again.

Jason Farmer · Answer

Sell, cash is king, put it to work, im assuming your form Ca, you'll have enough money to use someones money to make you alot of money..Im not expert but clearly the market isnt moving upwards much more anytime soon...

Wilson Churchill · Answer

What would you do with the money if you were to sell it? Compare the rates of return for selling and doing whatever versus holding.

Sam B. · Answer

@Todd S.

You're going to be breaking even or quite possibly losing money over the long term by renting (factor maintenance/repairs not covered by your HOA, vacancy, tenant damage, property management).

Short term, you might be ahead a few bucks a month but the cash on cash ROI is probably quite abysmal, depending on how much you put down on this property.

You can sell now but don't forget to factor in closing costs and a good chunk of change given to the agents, not to mention fixing anything that comes up on the inspection report (they always find something), etc etc...your net certainly won't be $175k.

You could get creative and run some numbers on operating this as an Airbnb rental.  Your gross income would certainly jump but don't forget to factor increased labor costs and other things like utilities that will be your responsibility.  However, pending the location, this may be a good option to cashflow while you let the property appreciate/paydown that mortgage for a few more years.

Hope this helps & welcome to BP.

Sell Now For a Nice Gain or Rent and Cash Flow?

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