To sell or not to sell, that's the question

Buying & Selling Real Estate
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To sell or not to sell, that's the question

Julie S.
Professional · Aurora, CO · Member since 2015 · 71 posts · 40 votes

I purchased a primary residence about 3 months ago and have a mortgage. I’m trying to decide on my options with my previous primary residence with no mortgage and worth about $520,000. Previous residence is all fixed up and in great shape.

Option 1 – Rent previous primary residence. Rent amount will about cover the new mortgage….costing me about $300/mo extra. I can keep it 3 years and then sell with no tax penalty but how much will the market really move it 2-3 years. If market is good in 2-3 years, sell and payoff current mortgage. Open HELOC to use as needed. Downside – may have to put work into house to sell depending on tenants.

Option 2 – Same as option 1 but hold/rent for long term (10-15 years) or forever and/or can utilize the 1031 exchange down the road for another property or take the tax penalty as it is a goal of mine to payoff primary residence.  But if I decide to sell in 10-15 years, I still may come out ahead with the tax penalty.

Option 3 – Sell now and payoff current mortgage. I can open a HELOC and use for purchases as needed.

Which option would you choose and are there any other options?

Thanks for your help!

Julie

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Jaysen Medhurst
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
7y

@Julie S., the free-and-clear property makes no sense as a rental. You'll never get enough rent to break even, let alone make a profit.

I would sell it and put the proceeds toward an investment property. You should be able to do very well with ~$500k.

Make sure you talk to a CPA first. I don't know how the tax rules work in a situation like this, which you elude to. Typically you don't pay capital gains on a primary residence, but since you already bought another primary that might change things. If you are going to have to pay CG, I would consider renting it just long enough to "establish" it as a rental so you could then sell and do a 1031 exchange.

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  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    7y

    @Julie S., the free-and-clear property makes no sense as a rental. You'll never get enough rent to break even, let alone make a profit.

    I would sell it and put the proceeds toward an investment property. You should be able to do very well with ~$500k.

    Make sure you talk to a CPA first. I don't know how the tax rules work in a situation like this, which you elude to. Typically you don't pay capital gains on a primary residence, but since you already bought another primary that might change things. If you are going to have to pay CG, I would consider renting it just long enough to "establish" it as a rental so you could then sell and do a 1031 exchange.

    2Reply
  • Clayton MobleyPro Member
    Birmingham, AL · Member since 2014 · 875 posts · 947 votes
    7y

    @Julie S. The property you are considering selling (that's free and clear): How long have you owned it? How long have you lived in it? If the answer to these question is 'more than 2 years out of the last 5' and you didn't acquire it in a 1031 exchange (ie it wasn't an investment prop that you converted into your primary), then I would sell that bad boy and take the tax-free cash! Under the Sec 121 exemption, if you have owned it and lived in a property for at least 24 out of the past 60 months (and they don't have to be the same 24-month periods, and the months don't have to be consecutive) then you can take up to $250k of capital gain (ie value above your tax-basis) tax-free, or $500k if you're married and file jointly. You can only do this once every 2 years, so if you took advantage of this perk in the last 24 months (sounds unlikely if you just moved) then you'd have to wait a bit.

    I'd need to know the specific numbers for the rental option (ie how much rent are we talking here per month? what are your expenses? how old are your capex items?) in order to really weigh in on that. But, generally speaking, it looks like we're nearing the top of this cycle and, if you've already seen a lot of appreciation, I'd say sell it, take the cash, and reinvest elsewhere - or pay off your current mortgage if that's more of a focus for you. Especially if you owned this property for a while and haven't done any major updates recently, you're likely going to be looking at some larger expenses sooner rather than later (ie when did you last replace the roof, the flooring, the HVAC, the water heater, etc). Better to let the next guy take on those expenses. 

    Also, since it sounds like this prop is probably a pretty nice home and in a more owner-occupied area, you're likely to get an owner-occupant buyer, which means someone who will buy based on emotion, not cash flow calcs. If you have the opportunity to cash-in tax-free, I'd take it unless the rent numbers are simply amazing and all your big-ticket items have a lot of life left in them.

    If your goal (as stated under option 3) is to pay off your new primary asap, I'd say take that option and then use the HELOC or a refi down the road if you really need the cash.

    It's not a bad position to be in, congrats!

    1Reply
  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    7y

    @Julie S. If your mid to long term goals are to own multiple rental properties, neither keeping the paid off house OR paying off your current mortgage with the sale are good ideas. You're return on equity is very low in both of these scenarios. Of it were me, I would sell the paid off house, and invest that money into whatever gets you to your goals.

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  • Grant Rothenburger
    Investor · Taylor Mill, KY · Member since 2016 · 2k+ posts · 964 votes
    7y

    @Julie S.

    I agree with @Jason D., the answer depends on your own goals, and if multiple properties is the goal, his suggestion is a great one.

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  • Julie S.
    OP
    Professional · Aurora, CO · Member since 2015 · 71 posts · 40 votes
    7y

    @Jaysen Medhurst I have a HELOC on the previous primary and can use as needed. Thanks so much for your response!

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  • Julie S.
    OP
    Professional · Aurora, CO · Member since 2015 · 71 posts · 40 votes
    7y

    @Clayton Mobley This has been my primary for 20 years.  All the main components in the house except furnace are new.  So not much cap ex for a while.  Another reason I'm leaning more towards selling.  You hit one of my main concerns - nearing the top of this cycle and another concern is having to fix/replace items from tenants that were new. I guess I'm figuring out which direction to go...thanks so much for your insights!

    0Reply
  • Julie S.
    OP
    Professional · Aurora, CO · Member since 2015 · 71 posts · 40 votes
    7y

    @Jason D.  You're right....thanks for your comments!

    0Reply
  • Julie S.
    OP
    Professional · Aurora, CO · Member since 2015 · 71 posts · 40 votes
    7y

    @Grant Rothenburger  Thanks for your response!

    1Reply
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