Should I sell rental properties

Question

I have two rental properties which I bought 4 years ago.  My initial investment in each home was $40,000.  Our market has gone crazy, and at this point, if I sold, I would net around $150,000 on each house after taxes and expenses.

I am currently cash flowing around $500 a month on each home.  I am wondering if I should sell now that I have so much more money invested and am actually getting a much lower return on the total investment.

I would use the money to pay off my current home where my payment is $1400 a month for principal and interest.

With our mortgage paid off my husband and I would then be able to retire at age 55 because we also have a solid military pension in place.

I do not want o buy any more rentals at this point, so exchange the property or reinvesting is not an option.

Please let me know your thoughts.

RaKell Adams · Answer

I wanted to update everyone on what we chose to do with our rentals. We did sell both of them and paid all the associated taxes. The markets continued to rise and the houses continued to go up in value which we missed. So, had we kept the rentals we would have made more money.

With our proceeds we paid off our current home and bought out years in my teaching retirement. I’m sure we could have made more money through other investments.

I have no regrets on our decisions. Our life is simple and secure. We are no longer landlords and have non of the accompanied stress. We are now able to volunteer our time in our community and spend our time doing things that are important to us.

Real estate allowed us to retire early and gave us the gift of time to enjoy life.

Frank Adams · Answer

Dave Foster has good advice regarding a 1031 into another rental and then converting that to your primary. We had a "well-matured" rental in California that we had decided to sell for a variety of reasons. We had about $250,000 of gain in it. We spent about 6 months looking for where we wanted to retire, Texas Hill Country, and narrowed it down to a few more than acceptable houses. We sold the CA home, put about 2/3 of the money into the house we would move into and did two IMMEDIATE flips, bought for cash and seller financed with $2,000 down.

We rented the place for 2 1/2 years and then moved into it. The net result was no taxable gain to the feds or CA. I think the rule is still that it has to be a rental for 2 or more years and then live in it for ?? to qualify as primary residence so there's no gain on the sale.

If these places are worth $150,000 each and you're only netting $500 on each you need to re-evaluate their potential. If you're getting market rents it's probably time to sell, if you're not it's time to raise the rents as someone above suggested. The difference is that I've never met this elusive, hard nosed residential property manager. I had up to 16 rentals for a bit over 30 years and I never met one. Maybe they exist but I've never seen one.

Dave Foster · Answer

@RaKell Adams, The 1031 exchange is for a sale of investment property followed by a purchase of investment property.  But there is a way to later convert that property to your primary residence without recognizing the gain and continue the tax deferral indefinitely.

RaKell Adams · Answer

I really appreciate everyone's thoughts on my post. It has really got me thinking about all my possibilities. I met with a good property manager yesterday, and I'm looking into that.

I am also really considering the 1031 exchange option.

My husband and I are looking to retire in Tennessee. Is it possible for us to sell our rentals and use the 1031 exchange to purchase an investment property in Tennessee with the idea of possibly making it our primary residence in five or so years? What would be the tax implications on that?

Thanks in advance for sharing any wisdom you might have regarding this. :)

Dave Foster · Answer

@RaKell Adams, At this time in a maturing market it's very natural to move into a more defensive posture to protect those gains.  Colorado has been a great appreciation play for several years but you're absolutely right - cash flow is underperforming for the equity in your assets.

One option certainly would be to pay off your primary residence.  That's got to be very tempting so you can move on to retirement.  But you'll pay a heap of tax and depreciation recapture that can easily be avoided.

Using a 1031 exchange and staying in real estate with that asset but repositioning it correctly can let you accomplish the following

1. Significantly increase your ROI

2. Create a long term passive income stream with no expense variables

3. Provide cash for your retirement but without the expense of paying tax.

Jasmine Vida · Answer

I just came across this and read through everything. I'm so happy y'all got to retire early :-)

Mike McDevitt · Answer

Huh?

You're going to NET $300K on an $80K investment in 4 years?

Why is this a question?

If I were you, and I were staying in RE - then I'd either cash out refi (to acquire add'l property), or 1031 exchange (because the current return on equity is poor).

But you said no more RE - - - in which case the question of whether or not to sell is clear.  Sell.  Nice job - - you've won!

RaKell Adams · Answer

Jim Cummings, good advice on the military retirement part. My husband retired almost 4 years ago, and did find it very difficult to actually retire. He is currently working as a Dean of Students, and he seems to love his job! I teach at the same school, so I see first hand that it is good for him. He has a lot of military related health issues, so I do worry about how long he'll be able to work.

I think I've decided not to sell and pay the house off. I see how that's probably not the best way to make our money work. I do not think we're getting a very good return on our investment now that the properties have appreciated so much. I'm leaning towards he 1031 exchange, but I would like a little more hands off approach to being a land lord. We're probably going to go ahead a renew the leases for another's year and start really exploring 1031 options.

Thanks to everyone for helping me sort through this. Everyone's advice was so helpful.

Steve Burgess · Answer

If I was going to sell I would be looking at what other property or investment I could put it in.  I would not be excited to pay off home loan where you get the best finance terms.  Keep the money working for you.

Jim Cummings · Answer

@RaKell Adams. From my perspective (Military Retired) I would think your Husband is not going to be happy going from a High Energy Environment (Military) to total Retirement overnight.

Sitting at home, wondering about who's on Oprah or Maury Povich today, gets old quickly, and you can only play so much golf! I would think, He will be looking for some type of Job opportunity within 6 Months or so.

As A REALTOR, I've had clients convert a property from a 1031 Exchange Purchase into their Personal Home. I'm not cognizant of all the necessary documentation to make the conversion, but surely you can find an Intelligent CPA to guide you through the Process.

Good Luck!

Should I sell rental properties

Most Popular Reply