Refi, sell, or do nothing?

Question

I have a property in Fort Collins, CO that is cashing flowing but my tax guy and my mortgage guy are telling me to sell. I would qualify for the primary residence tax break because we lived in the home 2 of the last 5 years. So I would potentially be walking away with 120-150k and pay NO taxes. Here are the deets:

Owe: 162k

Worth: approx 320k

Interest rate is 3.75% currently

Mortgage: $998

Rent: $1500 but would like go up this summer

HOA: $40 a month

Full disclosure, I love this townhouse. I am very attached to it and this is certainly impacting my decision. My options are to sell and weight for a downturn, refi and lose cash flow and my interest rate but again have cash for next property, or do nothing. The reasons that I love it are it's location, is has a front and back yard, attached on one side only, backs up to green space, low HOA, and it's a ranch. I can see us moving back there to retire when it's paid off. But I know this is a once in a lifetime opportunity to make a lot of money without paying taxes.  Thoughts?

Patrick Soukup · Answer

Love it @Aimee Lawrence - asking all of the right questions. It is a curious time in Fort Collins right now with all of the inventory coming on. We are still in desperate need of more housing. I would try to do whatever you can to keep this one and see if you can pull out some equity and get another one.

That being said. Lets look at it from a tax perspective. If you DON'T sell and keep it for another 5 years and lose the 2/5 rule you would be on the hook for depreciation recapture and the capital gain. Is the cash flow, current depreciation, principal pay down and appreciation worth keeping it vs. selling it and taking advantage of the tax savings now?

I too have a house that we lived in from 2013 to 2015 with SUBSTANTIAL equity. Bought for $320, currently worth $460, owe $270, getting $2250 in rent. We are keeping this asset as is because we love our interest rate and hope to continue to pay down debt with the rental income. We've invested in other properties since 2015. I always look at that equity though and also the tax savings if we were to sell it. BUT, I love the asset and love the interest rate and like how much principal we pay down each year ($6000/Year). That's why I'm keeping it as is and not doing anything with it.

Positive problem you have Aimee. I guess ultimately it depends on what your goals are and what you feel comfortable doing.  Congrats on your successes!

Brian Garrett · Answer

Sell and re-invest the money into better yielding properties.

$320k property bringing in $1,500 a month is not the highest and best use of capital.

You could be getting a lot better return from that cash elsewhere.

Sam Shueh · Answer

Not sure about Fort Collins, Co, here in more desirable US coast with 2% unemployment sales have been slower and prices are more negotiable since last summer. Same applies to most US cities. For 8 years straight steep appreciation (10-20% per year), 2018 here finished with a +1% price increase in 12 months.  Outside of Google, LinkedIn, Microsoft, Amazn and Facebook homes now take 45 days to sell instead of 1 weekend with endless offers.  More earning reports this week from them will decide how it will be in 2019. With Apple(across the street from here) stop hiring and stop some projects, people are cautious not to commit. Tesla is letting 6% go. It is built in one of the most expensive cities. In high tech often one company starts cutting back you will know the rest will follow. 11th year into an economic growth will run out of stream.

Aimee Lawrence · Answer

@Lynn M. What I mean by that is that Fort Collins is on track to be as expensive as Boulder. The median home price is $400k now and so to own something here and only owe $160 feels safe.

Lynn McGeein · Answer

How long would it take you to collect enough rent, after mortgage and expenses over the years, to make the $120-$150K that you would walk away with tax free right now?  Is it worth the risk to rent it for that time period to then start making more than you could right now?  If the location is somewhere you would not ever be able to find or afford again when you retire, like a waterfront property, private dock that you got in super low and know it will likely triple in value by retirement, then it may be worth the risk to keep it as a rental so you can move back in.  Otherwise, consider problem tenants, evictions, property management, etc., and how long it would take to cash flow that kind of profit, and you'll likely see that your tax guy is right, as once it goes over the 2/5 years, that option is gone.

Aimee Lawrence · Answer

@Brian Garrett I bought the property for 175 but it has appreciated quite a bit in three years. What would you do with the money? If I buy another property here it will not cash flow at all.

Sam Shueh · Answer

Sell.

Why mortgage guy has a vested interest in your property?

Logan Brown · Answer

@Aimee Lawrence, if you’re planning on staying in Fort Collins, or in this area, it does seems to make sense to hold onto it, especially if you’re hoping to move back in once the kids are gone. And with killer deals getting increasingly difficult to come by, based on (as several others have mentioned) our landlocked status, you’ve got enough cashflow to pay down the mortgage. Like Patrick said, all that of course depends on what your goals are. If you’re in it for the long game, here in town, maybe hold onto it. But if you’re headed to greener pastures, so to speak, you’ve got plenty of equity to aim for something free and clear.

Don’t know if that helps, but good luck!

Matt M. · Answer

You are right about FOCO going the way of Boulder. If you would move back into it, then keep it. If not, then I'd move on depending on your long term RE goals.

Aimee Lawrence · Answer

@Patrick Soukup Thank you for your reply. It's nice to get the perspective of an investor here in Fort Collins. I would like to keep it but it's difficult to separate how I feel emotionally about the property and what would be more financially advantageous.

If I pull equity out, as you were saying, I lose the interest rate, the cash flow, and the tax break. I might as well sell in that case.

You know how the market has been here for some time. They always say we are 10 years behind Boulder and if that is true I could make a case for selling or keeping! Thank you again for your input.

Refi, sell, or do nothing?

Most Popular Reply