What do you think? Sell or keep as rental?

25 Replies

I have a SFR rental in Utah. It makes about $140/month in cashflow. The city it's in is growing quickly (new hospital, a new high school, businesses, etc.). I would like to free up some cash from the property and I don't think I can get any sort of line of credit, or equity loan (still waiting to hear back from the loan officer though). I have about 20% equity.

I have a couple of options:

#1. Keep as a rental to gain equity and rental income. I would sell in about 2 years depending on the market. 

#2. Sell when the lease is up this spring and use part of the the money to buy a primary residence using a FHA 203K loan, and use the rest to reinvest in other real estate.

I want to walk away with a minimum $30,000 with the sale of the house and use that for real estate investing. If I waited, I could get more (from equity and rental income), but if I sell in the spring I can use the money for other investments...which could, in the long run, possibly mean more money if everything goes well. 

I've been going back an forth about this for a while now....thoughts? Ideas? Advice? Thanks. 

Have you thought about what the tax implications would be? If you owner occupied for any two of the last 5 years you could sell it without capital gains. That is where I would base my timeline. If it's been a rental for longer and you'll pay taxes either way then I'd debate how much I liked being a long distance landlord. 

I never sell to buy what I sold...If you are going to get a primary residence with an FHA loan, you only need to cashflow 3.5% down payment. You indicate you want to use some of the money form the sale of this rental property to buy a rental property It seems counter-productive to me to do so. But that's because I have different goals with my own REI's. At the end of the day, it comes down to your goals...

I'm just starting to get into the game, but I have a background in business and taxes, if you want my two cents... If you want to replace your income (which looks like your goal) then you'll have to scale at some point. As far as taxes you can just 1031 exchange... I'm with Mike, I'd sell and invest in more or bigger properties. 

P. S If you decide to sell and gave me more details there's a possibility I may be interested in buying 

Originally posted by @Becca Summers :

Have you thought about what the tax implications would be? If you owner occupied for any two of the last 5 years you could sell it without capital gains. That is where I would base my timeline. If it's been a rental for longer and you'll pay taxes either way then I'd debate how much I liked being a long distance landlord. 

 It's only been a rental for a little over a year, so I don't have to worry about the capital gains taxes. I've also been living out of state and using a property manager with minimal issues..so the long distance landlord isn't really a concern either. Good things to think about. Thanks!

Great then if you where to sell it I would do so in the next few years which is your plan to avoid the taxes. 

My debate would be is ifs the home fits your rental description is it a home you'd want in your portfolio or do you want to invest elsewhere like multi family or commercial?

I agree with Charlie Fitzgerald. It depends on your goals. It sounds like your primary concern is to get a house. I would see what the loan officer comes back with about the equity you currently have. If you can get equity out and continue to cash flow I would hold it. But if the numbers don't work then I would sell.

Originally posted by @Charlie Fitzgerald :

I never sell to buy what I sold...If you are going to get a primary residence with an FHA loan, you only need to cashflow 3.5% down payment. You indicate you want to use some of the money form the sale of this rental property to buy a rental property It seems counter-productive to me to do so. But that's because I have different goals with my own REI's. At the end of the day, it comes down to your goals...

The house was originally my primary residence, purchased using an FHA loan...and I'm pretty sure I can't get another FHA loan without selling. I would want to get an FHA 203k loan so I'm able to purchase something that needs renovations with only 3.5% down, instead of a conventional loan and using money out of pocket.
The idea would be to use the extra money for a flip and eventually purchase another rental when I have more cash on hand. 

Originally posted by @Becca Summers :

Great then if you where to sell it I would do so in the next few years which is your plan to avoid the taxes. 

My debate would be is ifs the home fits your rental description is it a home you'd want in your portfolio or do you want to invest elsewhere like multi family or commercial?

 See, that's the problem. It does fit into the criteria of what I would want in my portfolio for long term rentals. BUT, then it would take quite a bit longer to add to my portfolio if I held on to it. 

@Alicia Hensley

Okay so if your goal is to sell and use the proceeds as a down payment on another FHA loan, and keep the remainder as a down payment another rental than do that! Sounds like you've just answered your own question! Haha

Originally posted by @Damien Hall :

I agree with Charlie Fitzgerald. It depends on your goals. It sounds like your primary concern is to get a house. I would see what the loan officer comes back with about the equity you currently have. If you can get equity out and continue to cash flow I would hold it. But if the numbers don't work then I would sell.

 I would definitely have to look at the numbers if I am even able to get any cash out of it. Thanks!

Originally posted by @Dominic Jones :

@Alicia Hensley

Okay so if your goal is to sell and use the proceeds as a down payment on another FHA loan, and keep the remainder as a down payment another rental than do that! Sounds like you've just answered your own question! Haha

 Every time I think I've answered my own question, I come up with something else to think about! Haha.

Originally posted by @Dominic Jones :

I don't know the Utah market but is 30k enough to buy and renovate for a flip? Most flips run a lot more than that from beginning to end.

 I would have to use Private and HM lenders, but my brother is also a contractor, so that lessens the cost of a renovation. I would just want it to have on hand for contingencies and other related flipping costs.

From everything you've shown us so far I would probably sell once the current lease is up. $140/month is nice cash flow, but if your investing horizon is just 2 years out vs now, I would probably capture the equity while the market is good. That cash flow is nice, but sounds like it's probably tight if something goes wrong. So much could happen, and you're one disaster or problem tenant from not having a viable exit 2 years out. If you were deciding between selling now or selling in 10-15 years, I'd probably say hold. Where it's such a short time frame, I'd say take the money off the table and get going on that 203k rehab, which will probably accelerate your equity much faster than $140/month.

$140/month * 12 months / $30,000 equity = 5.6% return on equity per year before depreciation, loan pay down, and an interest deduction. All said and done you're probably at 8-9% annual return. If you're already looking at the 203k rehab, put it into a spreadsheet and see which will give you the best return. Hopefully you'll grow your equity much faster than that on your new home, and you've already seen that equity on your primary residence is tons easier to tap in to than a rental property. Let's not forget to figure what your return on that equity will be on the next flip you plan to do. You'll probably double that $30k in a year on a decent flip. Also, before making your final decision, double check the $140 cash flow figure. How much in repairs + vacancy is factored into that $140? You might have a bit more risk than initially estimated if the rent is just $140 more than the mortgage payment.

If you'd like to message me the address I could send you some sold comps in your area to verify the sale price you're using in your projections.

@Alicia Hensley

My 2 cents is that selling makes more sense if you will continue to live out of state. I do not like having rentals far from where I live. Many people do well with long-distance landlording, especially if they have a good property manager, but generally it just adds another layer of problems when you can't check in on your investments every month or so. The biggest problems I have had with tenants were with properties out of state. Another 2 cents is that I think Utah will have a very strong spring and summer for home sales. I have one property in SLC that just had 3 offers in the first week. I have 2 other SFRs in SLC that are ready for the market but I'm waiting for slightly warmer weather for maximum exposure. The retail buyers really come out starting in March!

If you don't mind sharing, what area of Utah is the home and what is the price range?

Why is everybody recommending selling?   Never sell real estate unless you absolutely have to.  The only reasons to sell are:

  1. You have a much better opportunity that you can't pass up
  2. You need to pay off the mortgage to satisfy debt/income ratios for a new loan (see 1)
  3. You have a dog of an asset that is hurting your bottom line with limited up side.

Even with $0 cash flow you are benefiting from depreciation, appreciation, and principal reduction.  This return alone could be double digits.  Compare this to money sitting in a savings account waiting for the next opportunity.

I would spend more time looking for money from other sources: unsecured loans, private friends-and-family money, retirement accounts, seller financing, etc.  When your equity gets higher in this property, it is much cheaper to tap into by borrowing against it than liquidating the property.

With your brother being a contractor, you may be able to get 100% financing from hard money lenders, particularly if you cross collateralize your Utah property.  Or partner on projects where you find the deals and have your brother do the work while a financial partner puts up the cash.

Learn more about how people are financing deals, both here on BP and at your local REIA's.

Would you cash out your retirement account and take the 10% hit to start a real estate investment business foregoing all the future benefits of compound interest?  That is what you'd be doing by selling this perfectly good asset.

My 2 cents.

Hi @Alicia Hensley you may still be able to get another FHA loan, check with a lender about your situation. One of the exceptions is relocation.

http://homeguides.sfgate.com/can-two-fha-loans-one-time-3232.html

Relocation

Another exception to the single FHA mortgage rule comes into play if the homeowner moves to a new area not within commuting distance of the current home. The person can buy an FHA-insured home in the new location and keep her existing home as an investment property. And the homeowner can relocate for reasons other than in an employer-forced move, according to the FHA handbook.

Alicia,

Reasons to sell:

If you can 1031 into a similar or better rental close to you. And I would definitely to that because out of town rentals are hard to deal with.

If you can get a LOT of cash out of it, tax free with the 121 rule, if you've lived 2 of the last 5 years, but because you've rented it, there are some tax consequences, regardless

Reasons to keep:

You have a good note on it, Rental market is strong there and you have a good tenant.

You don't have enough equity to make much difference but have reasonable cash flow (sounds like that's where you are, $30K is not much, and you do have a 5.6% return on equity, plus depreciation, inflation and mortgage pay down. )

For "me", I'd sell and get something closer to home. Just don't like long distance properties. Ideally, sell to an investor, with perhaps $20 down, you finance (not subject to Dodd Frank because you're selling to an investor), and retain half interest in the upside. The buyer gets a reasonable return on his $20, plus tenant in place, and the tax benefits and part of the upside. You get some cash out, retain some upside and invest in another one in your area. 

The cost associated with selling property is rather expense.  I wouldn't sell any piece of real estate unless I have already identify a new asset that produces as much more more income and have potential to create new equity or I desperately needed the capital to pay for a tragedy.  

The one thing nice about owning real estate is if you have a maniac personality the process to sell property is lengthy and causes you to think through your cash problems.  It is much easier to liquidate your bank account and charge up your credit cards.  Buy more real estate.


Frank

Another option possibly if you'd like to keep the property and buy a new primary home: Look into refinancing your current SFR rental out of an FHA loan (hopefully to a lower interest rate for greater end return) and then you'd likely be able to take out another FHA loan on a new primary home. Check with your lender(s) and good luck whichever way you choose to go :)

@Alicia Hensley Some of the previous comments are correct. Because you owner occupied the property 2 out of the last 5 years, you won't be paying capital gains tax. However, you'll still have a cost to sell (I'm guessing around 5-6% of the purchase price). Which is going to leave you less than your $30k you're hoping to walk away with.

It sounds like you're exploring this option already, however, I've had luck with a local bank that will lend up to 90% LTV on investment properties as a line of credit. they will even cross collateralize multiple investment properties. This option would save you the cost to sell as well as provide you with enough for your next down payment. I also believe you can get a second FHA loan if relocation is in play.

The next best option might be to first refi the home into a conventional 80/20 loan, then take out the line, then make your next purchase.