Stay in over-saturated market or cash out?

Question

I have a 3/2 SFR (mortgage free) in a college town (90 minutes away from where I live) that is over-saturated with rentals. In the last few years, large apartment complexes have been sprouting up left and right. Rents have dropped by about 10% recently. In the same time period, the house has appreciated in value by close to 20%. The house no longer meets the 1% rule.

So, should I keep it, or sell it and buy closer to where I live in a better market for rentals?

Marisa R. · Answer

If you can use the funds to make more money I would cash out

Allyssa McCleery · Answer

@Joe Alford I can imagine so!

Joe A. · Answer

@Allyssa McCleery, Thanks for the advice.  It has been a struggle to find tenants with so many other options for them out there.

Allyssa McCleery · Answer

You definitely want to take into consideration your return on equity. It sounds like you would have better opportunity by selling this and moving the money into a better market where you don't have to fight for tenants.

Cassi Justiz · Answer

@Joe Alford Given that information, I would sell and then re-invest closer to home. $200/month drop in rent is wild.

Joe A. · Answer

Thanks @Cassi Justiz.  I'm not targeting college students, but there are some college students in the neighborhood.  The current tenants are not college students and do not want to renew even after I dropped the rent nearly $200 per month.  They know they can still get a better monthly price somewhere else.  The house is pretty nice, but not high end.  To answer your last question: Yes, I believe I could find a better opportunity where I live.

Cassi Justiz · Answer

Are you trying to target college tenants or are you in an area with primarily college aged renters? I have a rental house in a college town, but it's far enough from the college that it doesn't appeal to the college demographic that feel the need to live next to campus.

The house is nicer than average with bamboo floors, granite, white kitchen, cool accent wall, etc. I haven't had any issues getting top market rents, even with the rest of the town showing decreased rents.

I wouldn't get caught up in the 1% rule if you own it free and clear. My big question would be could you take the cash from the sell, reinvest it into an equal or better opportunity (cash flow, appreciation potential, and effort)  in the area you live? If so, then it may be worth considering.