Should I Sell or Continue Renting?

Question

Hi! I'm new to BP. I stumbled across the podcast while renovating my single-family rental unit, which was actually perfect timing. I think I know what I'm going to do with this rental (owned it 15 years) but I'd love to hear your thoughts about what you would do if you were in my situation. So here's the scoop. My wife and I bought the property 15 years ago when we were both working overseas and our employer was paying our mortgage, so we thought "why not?". We've since resigned our positions and live in a different state than the rental. Our tenant of 8 years bailed on us without any notice in April so now I'm left with an outdated empty house that no one will rent in its current condition. My original thought was to fix it up and rent it out again, but the neighbors (literally next door) recently put their house on the market and it sold in 2 days at a price MUCH higher that I thought it would be worth...we're talking $30,000 higher. My immediate thought was wow, I could SELL this house and start investing in Ohio, where I currently live. That would be much easier to manage. But after listening to some of the BP podcasts, I'm reversing course and considering the Brrrr method. We already Bought the house15 years ago. It's currently under Renovation by yours truly. We've had tenants and can get another one easily so there's the Rent part. Now all we would have to do is Refinance and THEN we could "Repeat" in Ohio and end up with our 2nd rental, rather than selling our current property and starting over. At the moment, this makes so much sense to me but I would love to hear opinions of others who have been in this situation or a similar situation. As a side note, there is about $80,000 in equity in the unit presently, and the new rental rate would create a cash flow of $600-$700/mo.

Dave Foster · Answer

@Jason Gray, Some good thoughts here.  I'm glad you picked up on the cash flow change for the worse with a refi.  I'm guessing it's maybe even worse than that if you factor in allowances for vacancy, repairs etc.  To get a true comparison you've got to get at the bottom net cash number and how that shapes up as a ROI.  Nothing else will tell you whether to sell or keep more clearly with actual numbers.

As a side note - you've depreciated that property more than half way.  So you want to really understand your tax situation.  It is not based on your net proceeds.  It's based on the net sale price minus your adjusted basis which is the purchase price minus depreciation and plus capital improvements.  So there could indeed be a substantial tax bill that isn't proportional to the amount of tax you get back.  In that case you can still sell and take the proceeds to OH.  But you'll definitely want to do a 1031 to avoid the tax entirely.

Kostas Vassalos · Answer

@Dave Foster your side note is a great point. Always need to consider the tax implications when it comes to a sale and pulling out your equity.

Brian G. · Answer

@Jason Gray if you would leave Ohio now and travel OOS there to buy that property and implement the BRRRR strategy then maybe your answer is yes to keeping it. If not, then sell it and use that money to invest locally in Ohio. In other words, it’s pretty risky to become an OOS landlord and especially by default. Also, if you’ve lived in that property 2 our of the last 5 years you are eligible for the 121 capital gains exclusion (consult a tax pro) allowing a profit upon selling of up to $250k with no tax burden other than depreciation recapture.

John Teachout · Answer

I can't tell you which way to go on this decision but you should probably make a decision soon as the "rehab" for a sale will be different than that for a rental. (at least in my world). So decide now so you can do an appropriate rehab.

Whitney Hutten · Answer

@Jason Gray At a high-level, keeping it and BRRRRing is sound.  However, your numbers will tell you the truth.  If you refinanced the property, calculate your COC, DSCR, AND the return on equity.  It should be higher at that point in time.  With the refinance you can pull out money tax free (opposed to selling).  However, your ROE will drop at some point and that is a great time to continue to refinance, or 1031 and step up into your next property.  Another avenue too, is to sell, take the money, pay the gains, then immediately purchase more property to get the bonus depreciation.  Talk to a CPA about this.

Billy Daniel · Answer

Personally, I think I would 1031 and get into closer properties.  Notice I said properties.  With that kind of equity, I would spread it out to reduce my losses if another tenant up and leaves without warning.  Like what @Sarah Brown said, those are MY goals.

Jason Gray · Answer

Thanks guys for the tips! Very much appreciated! Lots to think about... Now that you mention it, @Benjamin Siebert, I guess the cash flow wouldn't be as high as I was initially thinking because of the refinance, which would increase the mortgage from what it is now...good point.

Remington Lyman · Answer

I would probably sell and invest locally in Ohio. Which part of Ohio are you in?

Steve Morris · Answer

I'm cold-blooded.  Make a decision based on Cash-Cash, much simpler.

If you can earn 15% on your cash investment in OH and 10% with a rehab outside OH, seems pretty easy.

Benjamin Seibert · Answer

@Jason Gray in the end it's up to you but BRRRing this property (assuming it refinances high enough) sounds like a great option in my mind. If you can get all of your equity out to use on another property and the property still cash flows after the higher mortgage then that would be the ideal scenario and leave your with two rentals. If it's a SFH you would need to rehab it (which it sounds like your doing) to get the highest appraisal you can get. Just keep in mind some appraisers have been appraising SFHs low since COVID-19 - don't feel bad about questioning their appraisal if its low and contacting them. Never hurts to explain your research and why you think its worth more if it comes in low. Goodluck!

Should I Sell or Continue Renting?

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