To Sell or Rent? My first real estate dilemma

Buying & Selling Real Estate
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To Sell or Rent? My first real estate dilemma

Alessandro Grandjacquet
Member since 2020 · 4 posts · 2 votes

Hello - this is my first post on this forum and I am hoping for some advice for a newcomer.

In 2016 I purchased my first piece of real estate, a condo in Clearwater, FL for $222k.

In early 2018 I relocated to LA for work and was able to rent this condo on short notice to a Tenant for a 3 year term. Two weeks ago I received notice from him that he would be returning home to Japan and breaking his lease at the end of September with 6 months left on the term. I was able to negotiate a 4 month term fee.

My question is do I sell this home (estimated current value of $255-260k with around $160k left that I owe on the mortgage) or do I look to re-rent the property to another tenant. Estimated rent would be $2,100-$2,300/month.

A few things to consider:

1. The HVAC on the unit, although still functioning, is a ticking time bomb and will need to be replaced ASAP ($5-6k cost). Everything else in the unit is less than 4 years old.

2. I am not sure if it matters in this context, but I rented this unit furnished in 2018 and would do so again if I was to re-rent.

3. My wife and I are in the process of leaving LA for upstate NY (where we are from) before moving overseas to Europe for the next few years in December. The conservative part of my brain tells me to get rid of this property as it is one less thing to worry about with all these other things going on.

Basically, I am contemplating whether it is worth holding on to this property with hopes it's value increases like it has over the past 2-3 years or if I sell it for cash flow to put to better use in other real estate ventures. I am interested in trying my first BRRRR but any other tips/ideas for where I can get started would also be highly appreciated!

Thank you!

Alex

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Joe Facenda
Realtor / Investor · Vienna, VA · Member since 2014 · 133 posts · 114 votes
6y

Your time line is very interesting.  No one has mentioned taxes.

Remember if you have lived there 2 out of the last 5 years, there are no capital gains.  As of today, it looks like you have. 

Now, granted there may not be a lot of gain with the numbers you have and you still may have recaptured depreciation but it is worth thinking about.

Check with a tax professional to review whatever I am writing.  I'm just a Realtor, not a CPA.  However, I can give you the questions to ask the professionals.

So, if you rent another cycle, you will likely lose that option.  Now, you can sell and hold the funds for another investment(s) down the road without the time constraints of a 1031 exchange.

I have a large network of investor oriented Realtors throughout the country so I have a bit of handle on various markets.  My guess is that you might be able to buy 2 doors in upstate NY for the amount of your one door in FL.  If not in upstate NY, certainly in other market like Fayetteville NC, Kansas City or others.  If you are not buying NY does it matter whether you have a rental in FL, KS or NC?  All would have the same logistics.

Anyway, the way I look at whether the cash flow is "good" is to compare it to an opportunity to purchase a similar quality home in another market with the same appreciation potential.  There are markets with high appreciation and low cash flow like mine in Northern Virginia and there are other with great cash flow but less potential for appreciation.  You need to decide where on that continuum you want to be.

Last point, just because you own something doesn't mean you should keep it.  

I do lots of estate work helping heirs decide what to do with inherited property.  Some say they want to keep it as a rental.  If it is for emotional reasons, that is fine.  But if it is for financial reasons, I ask them if someone gave them $550,000 (our average price point) to invest in real estate, would they buy their parent's home?  Would that be a smart investment?  Often they say no and realize, just because you own it doesn't mean you need to keep it.  Put your money to work in a way that best matches your goals. 

Hope that helps

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  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    6y

    @Alessandro Grandjacquet

    Really depends on your investment goals and strategy. Do you really want to be an out of state / long distance landlord? How much cash reserves do you have? How much is this property really cash flowing?

    I’d say selling it doesn’t sound too bad. The market is strong now. Sounds like you were close to living there for two years and since the capitals gains appreciation is limited you could get that tax free. Meanwhile, you’d get a chunk of cash to use for other investments.

    Good luck.

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    6y

    If you sold it, what would you do with the money?  What is the market like there for selling homes and renting?  As you are moving yourself across country, a clean start might be good and as David mentioned, there might be tax benefits to selling now (I don't know the rules in the US).

    0Reply
  • Ryan Howell
    Rental Property Investor · Hendersonville, NC · Member since 2016 · 446 posts · 412 votes
    6y

    Do you plan to continue investing in Clearwater? I'm not a big fan of only having one unit in a town across the country. If you plan to continue investing there, then I would just consider the opportunity costs of holding and BRRRR'ing vs selling and reinvesting. It looks like you may be able to do a cash out refi and still cash flow.

    0Reply
  • Stephan K.
    Rental Property Investor · Clearwater, FL · Member since 2013 · 151 posts · 41 votes
    6y

    How big is the unit? $5-6k for the A/C sounds expensive.

    (There is a shortage of A/Cs on the market right now, so don't replace it now.)

    0Reply
  • Alessandro Grandjacquet
    OP
    Member since 2020 · 4 posts · 2 votes
    6y

    @Stephan K. the unit is 1,200 SF - I received a few quotes in this range when I bought it in '16, I also found them to be a bit high. Also very good to know on the shortage, thanks for the info!

    0Reply
  • Alessandro Grandjacquet
    OP
    Member since 2020 · 4 posts · 2 votes
    6y

    @David M. thank you for the reply. 

    With a new Tenant I believe it would cash flow around $500/month - regardless of this example, what is a good target of cash flow per month I should keep in mind going forward when looking at properties? Is it a % of the value of the house or just as simple as the most you can get?

    As for investment plans, we want to start holding more properties, but in a different area of the country (upstate NY) so I agree that a fresh start might be best. We could probably buy one, maybe two more cheap properties with cash reserves on hand but the influx from this sale would certainly make things easier.

    0Reply
  • Stephan K.
    Rental Property Investor · Clearwater, FL · Member since 2013 · 151 posts · 41 votes
    6y

    If it is time to replace it, let me know, I can give you recommendations.

    0Reply
  • Mya Toohey
    Real Estate Agent · Tampa Florida · Member since 2013 · 630 posts · 303 votes
    6y

    @david 

    @David M. Hi David,  If you plan on moving out of the country, it sounds like you will have to get a property manager.  Fees here are between 8-12% depending on what services you want.  What about using it as a short term rental?  Clearwater is pretty strict but if you have a good manager, you can creatively market it and it falls within the legal limits of the city.  You can charge between $100-$300 a night depending on the time of year.  I would also think about doing the cash out refi.  Like everyone said, it really depends on your strategy and tax implications.  Best of Luck!

    0Reply
  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    6y

    @Alessandro Grandjacquet

    The amount or percentage of return is really up to you...  Everybody has different goals/tolerances, especially I think depends on what their market can bring.  Why not compare the % return in FL vs NY?

    0Reply
  • Luke Rorech
    Real Estate Agent · Greater Tampa Bay · Member since 2017 · 392 posts · 290 votes
    6y

    @Alessandro Grandjacquet Clearwater, like a lot of markets, is very hot right now so you'd have a good chance to get top dollar for the property. Clearwater is one of the strictest as far as STR goes, so that option is most likely out. Is HOA a huge factor from how well it cash flows? Depending on your long term goals, it may make sense to sell and put that money into a BRRR. If you plan to continue acquiring property in Pinellas county, it may be a good foundation for your portfolio. The AC isn't a fun thing to have to replace though. If you decide to go that route, let me know and I can refer a good HVAC company. Best of luck.

    0Reply
  • Joe Facenda
    Realtor / Investor · Vienna, VA · Member since 2014 · 133 posts · 114 votes
    6y

    Your time line is very interesting.  No one has mentioned taxes.

    Remember if you have lived there 2 out of the last 5 years, there are no capital gains.  As of today, it looks like you have. 

    Now, granted there may not be a lot of gain with the numbers you have and you still may have recaptured depreciation but it is worth thinking about.

    Check with a tax professional to review whatever I am writing.  I'm just a Realtor, not a CPA.  However, I can give you the questions to ask the professionals.

    So, if you rent another cycle, you will likely lose that option.  Now, you can sell and hold the funds for another investment(s) down the road without the time constraints of a 1031 exchange.

    I have a large network of investor oriented Realtors throughout the country so I have a bit of handle on various markets.  My guess is that you might be able to buy 2 doors in upstate NY for the amount of your one door in FL.  If not in upstate NY, certainly in other market like Fayetteville NC, Kansas City or others.  If you are not buying NY does it matter whether you have a rental in FL, KS or NC?  All would have the same logistics.

    Anyway, the way I look at whether the cash flow is "good" is to compare it to an opportunity to purchase a similar quality home in another market with the same appreciation potential.  There are markets with high appreciation and low cash flow like mine in Northern Virginia and there are other with great cash flow but less potential for appreciation.  You need to decide where on that continuum you want to be.

    Last point, just because you own something doesn't mean you should keep it.  

    I do lots of estate work helping heirs decide what to do with inherited property.  Some say they want to keep it as a rental.  If it is for emotional reasons, that is fine.  But if it is for financial reasons, I ask them if someone gave them $550,000 (our average price point) to invest in real estate, would they buy their parent's home?  Would that be a smart investment?  Often they say no and realize, just because you own it doesn't mean you need to keep it.  Put your money to work in a way that best matches your goals. 

    Hope that helps

    4Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    @Alessandro Grandjacquet, Welcome to the first of probably many of those pesky should I .... questions.  As about 20 people here have said in different ways - it depends on you.  Your situation is interesting because there are so many mitigators that could go either way.  

    The only thing I would recommend is that if you decide to sell and 1031 then think long and hard before moving your 1031 to CA.  Once you own investment property in CA it becomes subject to oversight by the franchise tax board and they will keep their claws in your property from that day forward even if you later sell and 1031 out of the state again.  

    If you are thinking to become and stay a CA investor that's not a concern.  But to go from FL a tax free state to CA the 2nd most heavily taxed entity in the world I believe is going to be a shock for you.  I'd look to other geographies before giving the property to the clutches of the FTB.

    The 1031 Investor5140 Reviews
    WebsiteView Page
    0Reply
  • Alessandro Grandjacquet
    OP
    Member since 2020 · 4 posts · 2 votes
    6y

    @Joe Facenda @Dave Foster thank you both for the replies. If I were to sell I would be looking to buy 1-2 door in the Glens Falls market in NY. I didn't know about the window of being tax free so it sounds like it would be very beneficial to sell now if that was my plan

    1Reply
  • Account Closed
    Rental Property Investor · Glens Falls, NY · Member since 2016 · 176 posts · 169 votes
    6y
    Originally posted by @Alessandro Grandjacquet:

    @Joe Facenda @Dave Foster thank you both for the replies. If I were to sell I would be looking to buy 1-2 door in the Glens Falls market in NY. I didn't know about the window of being tax free so it sounds like it would be very beneficial to sell now if that was my plan

    Real estate is moving quickly in GF. It's getting eaten up as soon as it hits the market. 

    0Reply
  • Account Closed
    Rental Property Investor · Glens Falls, NY · Member since 2016 · 176 posts · 169 votes
    6y
    Originally posted by @Alessandro Grandjacquet:

    @Joe Facenda @Dave Foster thank you both for the replies. If I were to sell I would be looking to buy 1-2 door in the Glens Falls market in NY. I didn't know about the window of being tax free so it sounds like it would be very beneficial to sell now if that was my plan

    I'll "trade" you one of my Glens Falls properties for your property in Florida... Problem solved for you! :) 

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    6y

    Great catch @Joe Facenda!!  as long as you sell that property so that you have lived in it for 2 out of the 5 years immediately prior to selling it you'll get the profit tax free.  That would tip the scales I'm thinking!!!

    The 1031 Investor5140 Reviews
    WebsiteView Page
    0Reply
  • Joe Facenda
    Realtor / Investor · Vienna, VA · Member since 2014 · 133 posts · 114 votes
    6y

    @Account Closed mentioned that homes are flying off the shelves in Great Falls NY which is probably true.  In most markets inventory is low and demand high due to super low low interest rates.  It is a sellers market in most of the country.

    Which is why selling now, outside of the time pressure of a 1031 could be a good idea.  Take the proceeds and buy something in NY (or elsewhere) if the numbers makes sense.  If not, wait. 

    Being able to execute a 1031 vs paying taxes is fantastic but the 45 day identification period can feel short when the market it hot and you may be forced to buy a less than optimal investment to avoid taxes. 

    Selling now gives you control.

    Another way to avoid the time pressure of selling and the buying an investment property is to do everything in you self directed IRA but that is a story for another day.

    0Reply
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