When to sell?

Question

My husband and I have owned this property since 2005—it was our first home, so there’s definitely some emotional attachment. However, from an investment standpoint, it hasn’t performed as well as we’d like. We’ve kept family in the home and consistently rented it below market value, which has limited its income potential.

With our current tenant moving out in June, we’re seriously considering selling. While we recognize the market isn’t at its peak, we feel this may still be the right time to reposition. Our long-term goal is to grow our portfolio from five rental properties to ten over the next few years.

This property is fully paid off, and we’ve already leveraged some of its equity to acquire another investment. At this stage, we don’t have a large amount of liquid capital, but we do see opportunity in the current market to acquire new properties. Selling now could allow us to redeploy that equity into one or even two stronger-performing investments that better align with our growth strategy.

Kenneth Garrett · Answer

This is definitely a personal choice as well as a business decision.  Being your first home brings emotional ties to it.

If you can or want to separate the emotional aspect from the business aspect, which is not always easy to do, I would look at the return on my money.

If I decide to sell and I can redeploy that capital with a greater return and feel good about it, I would definitely make the sale if the return makes sense.  If I could make a 15% or better return with that money then, I would make the change.  If less than that, I don’t think I would do it.

You need to consider the opportunity cost you are missing out on by holding this property without a great return.  Clearly, it’s never easy to make these types of emotional decisions, but if it is your goal to acquire additional properties then it makes sense.

I offer one more perspective.  The number of properties is irrelevant in many cases.  It’s the return of your money when you look at it.  Three properties with very small cash flow and not much appreciation v one high cash flowing property with better appreciation.  Which is the better investment and return.  That is the question I think you should ask yourself.  I know we get caught up in the number of doors we own, but I would rather have better net cash flow and net worth than the number of properties.

Best of Luck.

G. Brian Davis · Answer

Hi @Erica Gutke, You’re in a really strong position here. If it hasn’t been producing what you want and you’ve been intentionally renting below market, this transition point with the tenant leaving is a clean moment to make a strategic move. Selling and redeploying that equity into one or two properties that are better aligned with your goals could accelerate your path to ten doors much faster than holding onto something underperforming.

At the same time, it may be worth quickly running the numbers on what the property could do at true market rent, just to confirm whether it’s the asset itself or the way it’s been managed that’s been holding it back. That can give you more confidence in your decision either way.

Greg Weik · Answer

Hey Erica, as another stated on here, the number of rentals you own is an arbitrary goal.  I have clients with 25 doors that you couldn't pay me to own (we'll manage them for the client, no problem, but I would never in a million years want to own them).

From the details you've provided, it seems more likely to me that the problem isn't the property, it's how you've managed it.  No offense intended.

I see people on BP constantly talking about "sell it and get a duplex/4plex," and everyone on BP is for some reason obsessed with multi-family (spreadsheet cashflow), but I'm telling you straight up as someone who is an expert in the field of PM and who owns multiple properties personally: don't do it.

Spreadsheet investors don't know what I know.  20 years of managing properties for others (and my own properties) gives me unique perspective on what works.

Cashflow < appreciation + liquidity + stability.

I'd be happy to talk with you about your specifics, but I think it's a lot easier to sell and walk away from a property - and then check Zillow every year for the next 10 years and kick yourself when you see its value over time- than it is to manage it like an investment property should be managed.

Owning rental properties of any type is rarely fun, but over a 5 or 10-year period, the SFRs are the only smart play, in my experience.

David Krulac · Answer

@Erica Gutke  It sounds like you have not lived there for 2 of the last 5 years and therefore would not qualify for the Section 121 $250,000/$500,000 capital gains tax exclusion.  But as a rental property you would quality for the section 1031 Tax Free Exchange, where you would owe no capital gains now, and no depreciation recapture now and be able to use the total amount of the proceeds to exchange into another investment property.  Last year I was able to exchange one $360,000 into four investment properties (three of which were brand new buildings) worth $1,1050,000. It was pretty painless to turn one property into four properties.

I've sold my personal residence three times, the last time was the most emotional as we saw our kids grow and develop there.

Marc Winter · Answer

@Erica Gutke, this sounds like a great opportunity to use a 1031 exchange to eliminate any capital gains tax so you can better deploy all  the gain from the sale.

Bo Smith · Answer

Sell it. You've got 50k in equity (assuming current comps are right), the tenant situation is emotional rather than financial, and you already know what happens when family is involved -- good intentions don't pay the bills. The fact that you're even asking means you already know the answer. Properties with family tenants are anchor deals that drag down portfolio returns.

You're at an interesting spot: k/month cash flow on a 25k property is only 3.7% gross. That's fine for appreciation play, but if you're trying to scale a portfolio, that capital locked up with no real upside isn't working for you. Pull the 50k and put it into two deals that each make 00-1000/month. Now you've got ,600-2000/month on the same capital, doubled or tripled your tenant base (which means lower vacancy risk), and way more operational leverage.

One caution: selling now might trigger capital gains, depending on your cost basis and holding period. Run the numbers on taxes before you decide. But if the post-tax number is still 20-130k to redeploy, that's still plenty of fuel to buy better-performing rentals. Are you looking at single-family homes for your next purchases, or would you consider small multifamily?

Joseph Neri · Answer

Erica — congrats on being in this position. Paid-off property plus 5 doors is a strong foundation.

Before you sell, run one more scenario. Instead of liquidating to get capital, look into using whole life insurance cash value as a capital source. I've done this with my own portfolio — 100+ flips in Houston. You borrow against your cash value to fund acquisitions while the property keeps appreciating and generating rent.

The math: when you sell, you lose the asset forever. When you borrow against cash value, you keep the asset AND get capital. No bank approval, no credit check, and your cash value keeps compounding even with the loan outstanding.

Not saying don't sell — but if the property cash flows at true market rent, explore how to access capital without giving up a paid-off asset in Denver. Either way, getting it to market rent with the new tenant in June is the right first step. Good luck!

Erica Gutke · Answer

That is interesting I would be very interested in your ideas for how something like this would work.

Dave Foster · Answer

@Erica Gutke, you're probably looking at recapturing a bunch of depreciation, and I'm assuming tax on appreciation since you've owned it. A 1031 exchange would probably be a good option, as @Marc Winter mentioned.

A 1031 exchange would allow you to defer all of the tax and depreciation and reinvest it into another investment property or multiple properties with a better cash flow and appreciation potential.  And best of all, you can allocate your proceeds anyway you want.  So you could purchase one replacement for cash and a second one with leverage - however works best with your personal situation.

Erica Gutke · Answer

These are all great points.. thank you all so much.  The location is actually great it is in Arvada next to Red Rocks community college. You can walk to the light rail station at Kipling.  Which is why we have keep it.  It's a rare 3 bedroom 3 full bathroom.  Our concerns is things are starting to Crap out, also it needs an update we have not updated the kitchen or bathrooms in 20 years. So to get the full rent in the area I do feel like it needs an update.  Which we would do to sell it.

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