Sell or rent, home is owned free and clear

Buying & Selling Real Estate
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Sell or rent, home is owned free and clear

Matt Ridenour
Rental Property Investor · MI · Member since 2019 · 113 posts · 39 votes

Ok, here's the situation.  I own a 3/2 free and clear in an up and coming hipster market.  I had a tenant buyer in the place but he defaulted on the taxes. The only debt I have on the property is the 30k I had to pay in taxes, plus about 7k in rehab costs once he leaves (2 weeks.)  The rehab is paint and carpet plus a bit of landscaping so not much at all.  

The market is super hot still and I know I could get top dollar for it as a sale.  (About 220-230k.  Don't laugh, it's not San Francisco or New York!  :)  Rent should be around $2k per month but a range of 1800-2100 is what I'm looking at. Taxes are pretty high at 9k non homestead.  

Would you:

A. Sell the property and use the funds to reinvest elsewhere

B. Rent the property and take out a heloc to fund more brrrrs

C. Rent the property and take out a 30 year fixed

I'm looking for a mix of cash flow and portfolio growth.  I've got 4 years left in my w2 job before I retire.  

Any thoughts would be welcomed!

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Darius Ogloza
Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
6y

One way to surely lose money is to be constantly in search of the perfect or better deal. Owning assets that generate positive cash free and clear is the goal. You have won. Never, ever sell unless at gun point. Using a portion of equity through a HELOC to make additional investments is a smart strategy provided you do not tank the initial investment through this tool.

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  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    6y

    What are your goals?  If you want to do rentals, then keep it and take out a mortgage.  You can use some of that money to buy a second place.

    1Reply
  • Jai Reddy
    Edmond, OK · Member since 2012 · 456 posts · 270 votes
    6y

    @Matt Ridenour

    Property tax of 9K on a home valued at 230K? Where is this place?

    I would sell, then get multiple rentals with 25% down in each and a 30 or 15 year low interest rate locked.

    2Reply
  • Hai Loc
    Specialist · Toronto, Ontario · Member since 2012 · 2k+ posts · 891 votes
    6y

    1031 exchange and leverage a multi..

    2Reply
  • Aaron Flake
    Real Estate Agent · Mukilteo, WA · Member since 2018 · 124 posts · 148 votes
    6y

    Keep it. Take out a HELOC. Use HELOC to BRRRR multifamily homes.

    2Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    @Matt Ridenour, You've got a beautiful blank palette to create using a 1031 exchange.  But first I gotta say that $2K a month on a $200K house (after closing costs and negotiate price etc) isn't shabby at all.  The only downside I can see is that prop taxes are a joy kill.  And they still have two things in Michigan that I don't like - state taxes and snow!  Both of those will put a damper on your return.

    So that being said a 1031 would give you ultimate flexibility to move your portfolio to at least as good if not better performance.  You and also use your free and clear property to put together a little defensive investing.  Use $150K to purchase a property for cash.  That keeps risk very low which is important as you look at the end of a market and looming retirement.  Use the other $50K as a down payment on a property such as a small MF as @Hai Loc suggested.  Yes you've got some mortgage risk.  But you have mitigated much of that with your other purchase.  And the leverage let's you capture some of the higher roi of leveraged properties.  

    Lastly you ought to be thinking about long term goals for yourself.  Do you want to stay in MI forever?  Or is a move to a milder climate in the works.  Getting your properties positioned in states where there is no state income tax now could be a massive money maker for you if you later relocate yourself also to a tax free state.  And you'll be done buying snow shovels - which ain't a bad thing!!

    The 1031 Investor5140 Reviews
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    4Reply
  • Matt Ridenour
    OP
    Rental Property Investor · MI · Member since 2019 · 113 posts · 39 votes
    6y

    Thanks everybody for the thoughtful replies.  I'll dig in to these after work today.

    1Reply
  • Pierce R.
    Real Estate Agent · Wilmington, NC · Member since 2017 · 17 posts · 13 votes
    6y

    I'm not so sure this would cash flow very well on a 30 year fixed with $9,000 in taxes. Even $160,000 at 5% you are looking at over $1,600 PITI.

    I would look to sell and, if it makes sense for you, look to use those funds as a down payment for a multi family. Will increase cash flow greatly and ideally you will have additionally equity by the time you are ready to retire, should your goals change.

    Good luck!

    0Reply
  • Darius Ogloza
    Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
    6y

    One way to surely lose money is to be constantly in search of the perfect or better deal. Owning assets that generate positive cash free and clear is the goal. You have won. Never, ever sell unless at gun point. Using a portion of equity through a HELOC to make additional investments is a smart strategy provided you do not tank the initial investment through this tool.

    7Reply
  • Courtney M.
    Lake Elsinore, CA · Member since 2018 · 235 posts · 300 votes
    6y

    I agree with @Darius Ogloza. If you own an asset in an up-and-coming market, why sell now? I'd hold onto it for at least a few years. Leverage if necessary to buy other assets. If you don't have anything in mind I wouldn't go to the hassle of a 1030 exchange.

    0Reply
  • Bob Prisco
    Specialist · Cleveland, OH · Member since 2018 · 1k+ posts · 666 votes
    6y

    @Matt Ridenour refi cash out , buy another, then do again, rinse and repeat Its all about cash flow. Flipping is a job, a good one but still a job 

    Good Luck 

    1Reply
  • Matt M.
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    6y

    @Matt Ridenour

    I would... get a payment plan going with the taxes, put the $ into fixing it up. Rent it for another year or two and see how the market is. Let your new tenant help pay off the back taxes..

    0Reply
  • Greg H.Pro Member
    Moderator
    Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
    6y

    Lots of questions that need to be answered:

    -Since you mentioned non homestead, I assume you did not occupy for 2 out of the last 5 Years?  No capital gains if you did

    -What is your basis in the property?  Capital gains amount makes a difference whether to do a 1031 or not

    -Do you live close by the property? A stray rental not close by can eat up cash flow

    -Mentioning non- homestead and high taxes, is the property in Texas?

    0Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    6y

    Doesn’t sound like a good rental Going forward with those numbers . I believe I’d 1031 this in into a multi in the Midwest 

    1Reply
  • Kelly Skeval
    Investor · Ithaca, NY · Member since 2015 · 49 posts · 34 votes
    6y

    If this is an up and coming area it should continue to build value, correct? I would hold it and take out a HELOC to purchase more properties.

    1Reply
  • Nicholas Mann
    Valhalla, NY · Member since 2013 · 132 posts · 84 votes
    6y

    Since you own the property free and clear it looks like you would cash flow about $800 a month after Taxes, Ins, Cap Ex and Repairs. Analyze similar deals in your area and see if its worth it to do a 1031 exchange. Good Luck!

    1Reply
  • Adam Leitman Bailey
    Attorney · New York, NY · Member since 2019 · 72 posts · 27 votes
    6y

    Your individual goals probably vary from everyone else on here. Do you have any mentors who you've received advice from in the past? They will probably be your best bet to keep you on track with your immediate and future goals.

    0Reply
  • Todd Powell
    Rental Property Investor · Corvallis, OR · Member since 2018 · 840 posts · 1k+ votes
    6y

    @Matt Ridenour. Easy. 1031into multi units that will cash flow better ! Good leverage

    0Reply
  • Jack B.
    Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
    6y

    There is a lot of bad information in this thread. Do NOT HELOC, the interest rates are variable and the loans are easier to call...Do not keep the house, the property taxes are a joke. Sell and invest outside of Texas (I presume that's where you are at). And do NOT speculate on the value of the house going up because it's an "up and coming area".

    We don't know the insurance costs for this property but the property taxes alone are $750 a month. Assume $100 a month for insurance you're at $850. Now add $200 for maintenance, vacancy, capex and you're at $1,050. So you're left with $950 a month after all expenses assuming 2K a month rent on a 220K house which is a 5% return...not bad but not great either. And ALL your eggs are tied in that one basket/house.

    I'd sell, do a 1031 exchange (I've done them before, I might recommend a reverse 1031 but have not done that yet) and put 25% down on multiple houses with fixed 30 year loans. Let time drive up rents and pay down your mortgage. THIS is how wealth is built. 

    I remember a realtor back when I was in my mid to late 20's, having just bought my first home in cash a couple years prior, telling me that I was making a mistake buying another house in cash...I thought he was wrong back then, because of the risk. Now with a 2 mil net worth I'm happy to say I found the light....

    Interest rates are low. Leverage that s UP! Looking at what time has done on my rentals as far as values, cash flow and principal pay down, I wish I had bought more long ago. And regardless of values, the cash flow and PPD alone has been phenomenal, with appreciation (doubled in value) a bonus on top. Had I maxed out all my loans 7 years ago, I'd be pulling in 180K a year between CF and PPD...

    At that point I'd feel COMFORTABLE retiring...because I spend waaaaay less than that and my income will keep growing and decades from now those properties will be paid off and my CF will REALLY spike.

    0Reply
  • Matt Ridenour
    OP
    Rental Property Investor · MI · Member since 2019 · 113 posts · 39 votes
    6y

    This is why I love real estate!  So many different ways to solve the same problem of building wealth.  

    Boiling down the questions and answers provided above:

    Property is near Ann Arbor Michigan, Ypsilanti to be exact.  Insert keyword alert here.  Hi Ann Arbor investors!

    Taxes in Ypsi are the 2nd highest in the state, 2nd only to Ann Arbor, making it tough to cash flow a rental unless you absolutely buy it right.  (Ann Arbor just passed a billion dollar bond for school improvements.  Great for my kids, terrible for my wallet.)

    I am secretly in love with multi family apartment buildings but I have very few connections with multi family investors.  If I cash it out, I'd have about 180-190k left over to reinvest which would make an awesome 1031 I presume. @Adam Leitman Bailey thanks for pointing me down that route.  

    Holding the property and letting values increase seems risky both because of the sheer law of averages on our market curve, and also due to the limiting factors of our high taxes.

    I have to confess that I spent a long time in the HELOC zone. I love the idea of not making payments on a debt unless I'm using it.

    @Greg H. it's been a rental since 2004.  Our basis is high at 180k.  Kind of a long story, but we bought a tiny terrible house and fell in love with making it our dream home.  First house, ya know. :)  Also the house is definitely local to us.  That said, I have been looking around at other markets trying to get a feel for where I could invest. (@Dave Foster) :)

    Ok, more to consider.  I'll reread these all and make some connections.  

    Thanks again everyone.  What a community!

    3Reply
  • Zachary Metler
    Rental Property Investor · Ann Arbor, MI · Member since 2017 · 50 posts · 17 votes
    6y

    @Matt Ridenour

    You could always sell it to your good pal Zach!

    J/k......not really. 😬🤷‍♂️

    0Reply
  • Matt Ridenour
    OP
    Rental Property Investor · MI · Member since 2019 · 113 posts · 39 votes
    6y

    @Zachary Metler

    😎

    0Reply
  • Matt Hurley
    Ypsilanti, MI · Member since 2018 · 189 posts · 128 votes
    6y

    I'd 1031 if I was in your position. That cash could be real useful right now for a larger investment and that's a ton of cap gains to move down the line :)

    0Reply
  • Matt Ridenour
    OP
    Rental Property Investor · MI · Member since 2019 · 113 posts · 39 votes
    6y

    @Matt Hurley getting closer to that possibility. Doing some valuations. See you at the meetup next Thursday?

    0Reply
  • Matt Hurley
    Ypsilanti, MI · Member since 2018 · 189 posts · 128 votes
    6y

    @Matt Ridenour yes sir, see you there :)

    0Reply
  • Account Closed
    Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes
    6y
    Originally posted by @Matt Ridenour:

    Ok, here's the situation.  I own a 3/2 free and clear in an up and coming hipster market.  I had a tenant buyer in the place but he defaulted on the taxes. The only debt I have on the property is the 30k I had to pay in taxes, plus about 7k in rehab costs once he leaves (2 weeks.)  The rehab is paint and carpet plus a bit of landscaping so not much at all.  

    The market is super hot still and I know I could get top dollar for it as a sale.  (About 220-230k.  Don't laugh, it's not San Francisco or New York!  :)  Rent should be around $2k per month but a range of 1800-2100 is what I'm looking at. Taxes are pretty high at 9k non homestead.  

    Would you:

    A. Sell the property and use the funds to reinvest elsewhere

    B. Rent the property and take out a heloc to fund more brrrrs

    C. Rent the property and take out a 30 year fixed

    I'm looking for a mix of cash flow and portfolio growth.  I've got 4 years left in my w2 job before I retire.  

    Any thoughts would be welcomed!

     I'd borrow as much as I can against it (tax free), rent it out for more than the payment or sell it on Lease Option with $20k down and use the money I borrowed to buy more properties.

    Or conversely I'd place it all on Red 32 in a game of roulette. 

    0Reply
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