General Landlording & Rental Properties

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Ben Mosh
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Should I Keep or Sell my Rental Property

Ben Mosh
Posted Jan 15 2022, 14:28

Hello everyone -

I'm hoping to get some general input on what I should do with one of my rental properties (eg, do you think the amount of equity I have would perform better in a different investment). Also, what calculator(s) do you all recommend for analyzing current investment performance (rather then analyzing new investments). Some details on the property:

Location - Condo in Orange County, California

Current Value (based on zillow) - $520K

Current principal on loan - $100K

Monthly Rent - $2,800

Current Monthly Income (before factoring in maintenance and vacancy) - $1150

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Michelle Foy
  • Real Estate Agent
  • Oklahoma City
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Michelle Foy
  • Real Estate Agent
  • Oklahoma City
Replied Jan 17 2022, 20:42

I personally don't 1031 because I can continue to cash out refi every few years and consolidate the loans....especially at these low rates. Leverage is my motto. I sit down and look at ALL the options. Fannie/Freddie requirements (time spent jumping through hoops) vs additional interest rate on consolidated commercial cash-out refi. You won't ever see me pay capital gains or stressing myself out on a 1031 exchange. Unless I have a problem property or it becomes outside of a comfort zone I am holding. I just pulled out 215K on 3 properties bought less than 7 years ago to reinvest and it increased my payment by $100/mo total on a 20-year amortization. Now I can buy another 750k in investments for $1200 a year. 

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Joe Villeneuve
  • Plymouth, MI
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Joe Villeneuve
  • Plymouth, MI
Replied Jan 18 2022, 15:18
Originally posted by @Khoa Ha:

@Joe Villeneuve

Yes COR is using your equity as collateral but it is not much different than selling and taking the money out. For COR one does not need o pay any capital gain tax whereas selling will be hit with capital gain tax unless it is replace by another property with a 1031 exchange. With the record low interest rate we still experiencing, in my opinion I think it better to COR. However, the OP said he don't want to take care of it anymore because of high maintenance then selling for him is probably a better choice.

Khoa

Selling it doesn't charge you interest on its use. Refi does. Where there is no difference is between buying with a loan and a DP upfront, or doing a refi at the end. In either case, you have equity and a loan. If you do a cash out because you are refinancing more than the cash you put in, then your cash flow goes down. Either way, you're paying for the money you are getting out after you refi. If it was your money you were getting out, you wouldn't have to pay for it.

No CAP GAins when you do a 1031. Based on the amount of equity built up, I assume the property has been owned for at least 5 years. If the remaining debt is only $100k, I'm assuming the original price, plus rehab costs, etc... add up to over $250k, which means right now the CGT would most likely be in the 15% bracket...even with depreciation. Wait much longer and the 20% bracket looms its ugly head.

Interest rate doesn't matter whether it's high or low as an alternative to sell since there is NO interest when you sell. Can't get much lower than that.

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Khoa Ha
  • Real Estate Broker
  • Garden Grove, CA
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Khoa Ha
  • Real Estate Broker
  • Garden Grove, CA
Replied Jan 18 2022, 15:44
Joe, If you look at my answer again I never said cash out refi is better than using the 1031 exchange if that what he plan to you. However, his original question did not bring up that he was looking to do the 1031. Thats why when he ask sell or keep the rental I said if he sell he will get hit with the capital gain. If he keep and need the money to invest somewhere else he can do a cash out refi. Since the interest rate is still low I think it better than selling the property straight up. Again, I did not know his intention was to buy another property after selling this one when he first post the question.


Originally posted by @Joe Villeneuve:
Originally posted by @Khoa Ha:

@Joe Villeneuve

Yes COR is using your equity as collateral but it is not much different than selling and taking the money out. For COR one does not need o pay any capital gain tax whereas selling will be hit with capital gain tax unless it is replace by another property with a 1031 exchange. With the record low interest rate we still experiencing, in my opinion I think it better to COR. However, the OP said he don't want to take care of it anymore because of high maintenance then selling for him is probably a better choice.

Khoa

Selling it doesn't charge you interest on its use. Refi does. Where there is no difference is between buying with a loan and a DP upfront, or doing a refi at the end. In either case, you have equity and a loan. If you do a cash out because you are refinancing more than the cash you put in, then your cash flow goes down. Either way, you're paying for the money you are getting out after you refi. If it was your money you were getting out, you wouldn't have to pay for it.

No CAP GAins when you do a 1031. Based on the amount of equity built up, I assume the property has been owned for at least 5 years. If the remaining debt is only $100k, I'm assuming the original price, plus rehab costs, etc... add up to over $250k, which means right now the CGT would most likely be in the 15% bracket...even with depreciation. Wait much longer and the 20% bracket looms its ugly head.

Interest rate doesn't matter whether it's high or low as an alternative to sell since there is NO interest when you sell. Can't get much lower than that.

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Joe Villeneuve
  • Plymouth, MI
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Joe Villeneuve
  • Plymouth, MI
Replied Jan 18 2022, 19:08
Originally posted by @Khoa Ha:
Joe, If you look at my answer again I never said cash out refi is better than using the 1031 exchange if that what he plan to you. However, his original question did not bring up that he was looking to do the 1031. Thats why when he ask sell or keep the rental I said if he sell he will get hit with the capital gain. If he keep and need the money to invest somewhere else he can do a cash out refi. Since the interest rate is still low I think it better than selling the property straight up. Again, I did not know his intention was to buy another property after selling this one when he first post the question.


Originally posted by @Joe Villeneuve:
Originally posted by @Khoa Ha:

@Joe Villeneuve

Yes COR is using your equity as collateral but it is not much different than selling and taking the money out. For COR one does not need o pay any capital gain tax whereas selling will be hit with capital gain tax unless it is replace by another property with a 1031 exchange. With the record low interest rate we still experiencing, in my opinion I think it better to COR. However, the OP said he don't want to take care of it anymore because of high maintenance then selling for him is probably a better choice.

Khoa

Selling it doesn't charge you interest on its use. Refi does. Where there is no difference is between buying with a loan and a DP upfront, or doing a refi at the end. In either case, you have equity and a loan. If you do a cash out because you are refinancing more than the cash you put in, then your cash flow goes down. Either way, you're paying for the money you are getting out after you refi. If it was your money you were getting out, you wouldn't have to pay for it.

No CAP GAins when you do a 1031. Based on the amount of equity built up, I assume the property has been owned for at least 5 years. If the remaining debt is only $100k, I'm assuming the original price, plus rehab costs, etc... add up to over $250k, which means right now the CGT would most likely be in the 15% bracket...even with depreciation. Wait much longer and the 20% bracket looms its ugly head.

Interest rate doesn't matter whether it's high or low as an alternative to sell since there is NO interest when you sell. Can't get much lower than that.

I understood what your wrote.  My answers are still the same.  Read them again and assume I know what you said and see how they still apply to what you said.  If you are still unclear how, PM me.  It's sometimes hard to go into too much detail here without writing the novel needed to completely cover those details.

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Susan Chagalian
  • Lender
  • Porter Ranch, CA
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Susan Chagalian
  • Lender
  • Porter Ranch, CA
Replied Jan 19 2022, 17:18

So, I looked at some properties in Orange County, 2-4 units, to be exact.    If you sell the condo and use the proceeds for a 25% down as an investment or 20% down as a primary residence (3-4 units) you can still get great financing which will help with the cash flow.  The average rent for a 2 bedroom is around $2900+ in SoCal and the average rent for a 3 or 4 bedroom is $4000 +.  Now, if you could find a value add opportunity and not only upgrade the units but maybe also add ADUs?  I found properties ranging from $900,000+ to $1,400,000 approx.  

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Tony Kim
  • Rental Property Investor
  • Los Angeles
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Tony Kim
  • Rental Property Investor
  • Los Angeles
Replied Jan 20 2022, 10:13
Originally posted by @Susan Chagalian:

So, I looked at some properties in Orange County, 2-4 units, to be exact.    If you sell the condo and use the proceeds for a 25% down as an investment or 20% down as a primary residence (3-4 units) you can still get great financing which will help with the cash flow.  The average rent for a 2 bedroom is around $2900+ in SoCal and the average rent for a 3 or 4 bedroom is $4000 +.  Now, if you could find a value add opportunity and not only upgrade the units but maybe also add ADUs?  I found properties ranging from $900,000+ to $1,400,000 approx.  

There is nothing in OC that will cash-flow at 25% down unless we are talking about an extreme value-add. And even that would require a well experienced person with systems in place to turn properties around efficiently. For an inexperienced person, this could lead to disaster. Adding ADU's properly is a 200K+ proposition that currently will take about a year in SoCal.

If you can prove me wrong and know of a place that will provide positive cash flow, please let me know... I'm all set to pull the trigger on my next property.

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Susan Chagalian
  • Lender
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Susan Chagalian
  • Lender
  • Porter Ranch, CA
Replied Jan 20 2022, 14:07
Originally posted by @Tony Kim:
Originally posted by @Susan Chagalian:

So, I looked at some properties in Orange County, 2-4 units, to be exact.    If you sell the condo and use the proceeds for a 25% down as an investment or 20% down as a primary residence (3-4 units) you can still get great financing which will help with the cash flow.  The average rent for a 2 bedroom is around $2900+ in SoCal and the average rent for a 3 or 4 bedroom is $4000 +.  Now, if you could find a value add opportunity and not only upgrade the units but maybe also add ADUs?  I found properties ranging from $900,000+ to $1,400,000 approx.  

There is nothing in OC that will cash-flow at 25% down unless we are talking about an extreme value-add. And even that would require a well experienced person with systems in place to turn properties around efficiently. For an inexperienced person, this could lead to disaster. Adding ADU's properly is a 200K+ proposition that currently will take about a year in SoCal.

If you can prove me wrong and know of a place that will provide positive cash flow, please let me know... I'm all set to pull the trigger on my next property.

The keyword in my post is "help" with the cash flow.   I agree with you about the properties in SoCal, but using the equity the gentleman has in his current condo and buying multiple units, I feel,  may benefit him more than what he has right now.   I understand that there are many other factors to consider before buying a property.  And as far as cash flow is concerned an investor needs to be in 35-40% range equity position to have cash flow in CA or have a long-term goal for appreciation.   I was looking at (online) some 1-4 unit properties in Kansas City this morning and there are some interesting deals there that will cash flow nicely.  And this is with just a 20 or 25% down payment or even less if it is a primary home.  It is difficult to get that in CA but people still buy investment properties here.  It is an interesting subject that has different ways of looking at it?

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Tony Kim
  • Rental Property Investor
  • Los Angeles
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Tony Kim
  • Rental Property Investor
  • Los Angeles
Replied Jan 20 2022, 15:51
Originally posted by @Susan Chagalian:
Originally posted by @Tony Kim:
Originally posted by @Susan Chagalian:

So, I looked at some properties in Orange County, 2-4 units, to be exact.    If you sell the condo and use the proceeds for a 25% down as an investment or 20% down as a primary residence (3-4 units) you can still get great financing which will help with the cash flow.  The average rent for a 2 bedroom is around $2900+ in SoCal and the average rent for a 3 or 4 bedroom is $4000 +.  Now, if you could find a value add opportunity and not only upgrade the units but maybe also add ADUs?  I found properties ranging from $900,000+ to $1,400,000 approx.  

There is nothing in OC that will cash-flow at 25% down unless we are talking about an extreme value-add. And even that would require a well experienced person with systems in place to turn properties around efficiently. For an inexperienced person, this could lead to disaster. Adding ADU's properly is a 200K+ proposition that currently will take about a year in SoCal.

If you can prove me wrong and know of a place that will provide positive cash flow, please let me know... I'm all set to pull the trigger on my next property.

The keyword in my post is "help" with the cash flow.   I agree with you about the properties in SoCal, but using the equity the gentleman has in his current condo and buying multiple units, I feel,  may benefit him more than what he has right now.   I understand that there are many other factors to consider before buying a property.  And as far as cash flow is concerned an investor needs to be in 35-40% range equity position to have cash flow in CA or have a long-term goal for appreciation.   I was looking at (online) some 1-4 unit properties in Kansas City this morning and there are some interesting deals there that will cash flow nicely.  And this is with just a 20 or 25% down payment or even less if it is a primary home.  It is difficult to get that in CA but people still buy investment properties here.  It is an interesting subject that has different ways of looking at it?

I was just going by what you said....which was 25% down on a multi-unit in OC. I'd say that whatever perceived better use of equity that might be obtained from selling the condo and buying a mult-unit in the same area, such as OC, would largely be negated by the increase in property taxes (Prop 13). I invest for appreciation also, but I would never recommend anyone to invest in a property that pencils negative. 

I sold one of my prime condos a few years ago and did a like-kind exchange for a 4 unit property in South LA. It cash flows very well and has also appreciated. But that's South LA...and it was also a few years ago. A lot has changed in the past few years....there is very little even in South LA that will cash flow, unless you're talking about much larger commercial properties where you won't have to compete against every Mom and Pop investor. So the though of cash-flowing in OC is pretty much out of the question. 

I'm still a believer in investing in LA, but not at 25% down. I've done the Mid-west thing also, just be prepared for some numbers that vary wildly from what's expected. 

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David M Trapani
  • Rental Property Investor
  • Franklin, TN
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David M Trapani
  • Rental Property Investor
  • Franklin, TN
Replied Jan 21 2022, 09:48

Condos can be great stepping stones. I try not to hold them for too long. Rules may change, dues may go up, HOA's tend to be drawn into litigation either with builder / developers or disgruntled homeowners or both. Unable to sell a condo to a conventional finance buyer when the complex in litigation - which means owners may be "stuck" absent a cash buyer. If you really like it check into cash-out refi. Get tax-free funds for reserves & funds for new acquisitions. Otherwise look into 1031 tax-free exchange. With that level of equity should be able to acquire (not necessarily in LA area - too expensive) a small multi-family property or move onto NNN or QSR's using commercial or credit Union financing. Best wishes & good luck!

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Peter Morgan
  • Rental Property Investor
  • West Des Moines, IA
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Peter Morgan
  • Rental Property Investor
  • West Des Moines, IA
Replied Jan 21 2022, 11:29

@Eric D.

Very interesting perspective on selling home and investing in growth stocks. I am in a similar situation as the OP but I have a duplex and believe I will have a hard time managing once I move OOS for my job. I like the idea of investing tax free dollars in growth stocks but Isn't it too risky to invest in growth stocks in this market and picking the right ones will be big challenge.

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Arun V.
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Arun V.
  • Investor
  • Fremont, CA
Replied Jan 21 2022, 13:01

Hypothetically, if the condo was bought 5 years back for 250k , selling at 520k would give you about 345K in pocket.  Because cap gain tax of could be almost 40k and depreciation recapture could add another 5k. Net available would be 520 - 100 (mortgage) - 40 (cap gain) - 5 (dep recap) - 30 (selling expenses) = 345K

You could easily find other investments where you could invest 350k and earn more that 12K per year or 3%?. But what is the risk involved in those investments? if this home continues to grow and the other investment falls, you just paid 75k in costs and taxes to take a drop your net assets by 25%. 

Selling makes sense only if you no longer want to be a landlord or if the other investment is very likely to return better IRR

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Peter Morgan
  • Rental Property Investor
  • West Des Moines, IA
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Peter Morgan
  • Rental Property Investor
  • West Des Moines, IA
Replied Jan 21 2022, 19:21

@Arun V.

If OP doesn't have to pay capital gains tax or has to pay only half it probably is a sweet deal especially since in this market with rising interest rates it probably is a good idea to exit as the price may plateau sooner or later but great point 👌nevertheless and very interested to hear @Joe Villeneuve comments on this.

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Joe Villeneuve
  • Plymouth, MI
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Joe Villeneuve
  • Plymouth, MI
Replied Jan 21 2022, 19:31
Originally posted by @Arun V.:

Hypothetically, if the condo was bought 5 years back for 250k , selling at 520k would give you about 345K in pocket.  Because cap gain tax of could be almost 40k and depreciation recapture could add another 5k. Net available would be 520 - 100 (mortgage) - 40 (cap gain) - 5 (dep recap) - 30 (selling expenses) = 345K

You could easily find other investments where you could invest 350k and earn more that 12K per year or 3%?. But what is the risk involved in those investments? if this home continues to grow and the other investment falls, you just paid 75k in costs and taxes to take a drop your net assets by 25%. 

Selling makes sense only if you no longer want to be a landlord or if the other investment is very likely to return better IRR

@Peter Morgan 

 $345k, at 20% DP, = $1.725M.  Where's the 25% drop you speak of?

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Peter Morgan
  • Rental Property Investor
  • West Des Moines, IA
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Peter Morgan
  • Rental Property Investor
  • West Des Moines, IA
Replied Jan 21 2022, 21:00

@Joe Villeneuve

Great point 👌 the gain can potentially propel the OP to a next level investment but what is your take on the risk involved.Forvexanple say the next level investment ends up non performing while the sold property continues to grow in value. How can one cultivate that acumen to spot that next level investment that can grow  big while doing a full-time W-2 job?

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Joe Villeneuve
  • Plymouth, MI
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Joe Villeneuve
  • Plymouth, MI
Replied Jan 22 2022, 07:27
Originally posted by @Peter Morgan:

@Joe Villeneuve

Great point 👌 the gain can potentially propel the OP to a next level investment but what is your take on the risk involved.Forvexanple say the next level investment ends up non performing while the sold property continues to grow in value. How can one cultivate that acumen to spot that next level investment that can grow  big while doing a full-time W-2 job?

Debt is risk to the owner on your own home, because of what's at risk...their HOME.  Debt is risk to the lender on your own home, because of what they have at risk...their MONEY.  When does the risk end, in either case? ANSWER: When the debt is gone.

Debt on an investment property is risk to the REI because of what they have at risk...their down payment. Debt is risk to the lender on an investment property because of what they have at risk...the loan. When does the risk end...either case? ANSWERS: for the lender, when the debt is paid back, for the REI, when they recover their DP from the Cash Flow. So, the lower the DP, the lower the risk, and the faster they eliminate that risk.

Learning how to analyze markets is the answer.

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Sam Silverman
  • Tampa, FL
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Sam Silverman
  • Tampa, FL
Replied Jan 22 2022, 08:14

With $400k+ of equity, I would look to invest passively into fractional ownership of larger multifamily projects. 

In terms of cash flow, achieving 4-5% year one, scaling much quicker is doable, all the while your principal balance is aggressively growing during the reposition of the property. 

Your return on equity is slowly dying while remaining tied up in this property. An alternative would also be to get a line of credit or cash or refinance to then reinvest that capital.

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Todd Atkinson
  • Rental Property Investor
  • Indianapolis, IN
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Todd Atkinson
  • Rental Property Investor
  • Indianapolis, IN
Replied Jan 22 2022, 08:20

Josh - I'm intrigued by your short-term rental comment.  In that area, what is the typical ST rental profile (sq ft,#bed, bath, daily/weekly rate)?   What about Mojave area?  

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Sam Silverman
  • Tampa, FL
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Sam Silverman
  • Tampa, FL
Replied Jan 22 2022, 08:33

With $400k+ of equity, I would look to invest passively into fractional ownership of larger multifamily projects. 

In terms of cash flow, achieving 4-5% year one, scaling much quicker is doable, all the while your principal balance is aggressively growing during the reposition of the property. 

Your return on equity is slowly dying while remaining tied up in this property. An alternative would also be to get a line of credit or cash or refinance to then reinvest that capital.

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Joshua Hee
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Joshua Hee
Replied Jan 22 2022, 08:59

@ Ben Mosh

Here's an idea - leverage that equity and 1031 exchange into a multi-fam or several SFH to AirbnB.