Should I sell our paid off rental property?

Question

Hi all!

I'm looking for opinions both in favor and against my current decision. I feel that the "sell" option is a better one at this point, but am interested in hearing your thoughts! Here's the situation:

We own a rental property that we used to live in and have rented it out, but the property value in Portland has jumped to nearly double when we purchased it in 2009. Also due to some fortune and hard work, we paid this property off so it does not have a mortgage. Some other facts to consider:

• Purchase price: $250,000
• Estimated current market value: $475,000
• Gross / Net rental amount per year: $24,000 / $14,000 That's about 3% of the property value in expected net income per year... to be re-invested in stock market
• That's about 3% of the property value in expected net income per year... to be re-invested in stock market

• That's about 3% of the property value in expected net income per year... to be re-invested in stock market

If we don't keep it as a rental, we'd use the funds to either:

• Pay down some of our home mortgage
• Purchase a vacation property to airBnB and enjoy when not rented
• Stick it in the market
• Downpayment for apartment building (but, prices are so high in Portland)

Given the low % of income relative to the market value of the property, I feel it's probably a better idea to sell it rather than keep it and take the yearly income and sell after additional appreciation (10 or 20 or 30 years on). But, I don't like the idea of selling it without a solid reason, since it's a great little 2b 1ba that doesn't have a vacancy problem.

Thanks for the help!

Joe Villeneuve · Answer

This isn't even close. Sell. Sell...and, what's the word I'm looking for...oh right, SELL!!!

Follow these steps to why:

1 - Add up the cash flow per year.

2 - Divide $475k by that number...this will tell you how long it would take for the CF (assuming all goes perfect) to equal the profit from a sale.

3 - Take the $475k, and apply it to the down payments to buy new cash flow properties...(how many can you get?)

4 - Would the CF of these new properties be higher than your current CF?...I thought so.

Thomas S. · Answer

Sell it now and do a 1031, using the cash as a minimum DP on the largest apartment building you can purchase.

$450K should get you a 2M property.

Keeping it should not be a consideration based on it's value and minimul return.

Kevin Medina · Answer

Sounds like you have a "Good" problem. Whatever you decide to do is going to be a win-win. One thing I'd suggest is if you decide to sell it, consider doing a 1031 exchange to save yourself from paying tax on those long term capital gains.

Mathew Wray · Answer

Morning Will!

Just a little food for thought as it seems like you’re leaning towards selling. I’d make sure (and I’m sure you’ve already done this) that you’re being conservative with your valuations. The Portland market has changed in the last year and sellers often have inflated ideas of value. Right now over 33% of the properties on the market have had price drops. Good properties that are well-maintained and priced right are still selling fast.

Secondly, a 1031 is a great wealth-builder and I’d be happy to make an introduction to a well-respected intermediary so you can ask specific questions. One thing to think about there is around timing-are all of your other ducks in a row so you can hit the ground running? That 45 day identification window goes quickly so you’ll want to maximize your ability to search for replacement properties.

Best of luck and let us know what you decide!

Mathew

Will French · Answer

You guys rock, thank you for the input! Glad to hear that I'm on the right track with selling, and also appreciate the advice on the 1031.

@Joe Villeneuve - appreciate the quick and dirty calc there, helpful for a newbie :)

Mike Gennaro · Answer

It's a good thing to have a little cash during a downturn. Solid cash flow investments are selling for a premium---at least they are in my local market. If you're liquid at the start of 2019, you'll have much more to choose from soon. If you can take advantage of the capital gains exclusion mentioned above, sell it. If you would have to pay gains, go for the 1031 exchange. I agree with the above that you are not making enough of a return to keep it.

Dave Foster · Answer

@Will French, generally at this time in a mature market there is a migration from appreciation to cash flow. You’ve maximized the appreciation curve. Now is a good time to transition that into better cash flow. The 1031 is the key to doing that without feeling the tax bite. To leverage or not is a balance of risk/reward unique to each property and individual. But there are plenty of 1031 compliant properties and products that could easily double your current return. And by 1031ing you get to make a return on the deferred tax and preserve the underlying asset equity

Mathew Wray · Answer

@Adam Best You are correct in your understanding! *Disclaimer* I'm not a 1031 professional. If you need a referral to someone here in Portland, let me know. That being said, you've got 45 days to identify a replacement property :) In total, you have 180 days to identify and acquire a replacement property. To give a little wiggle room, you can identify up to 3 properties as potential "replacements" so you don't have to put all your eggs in one basket.

As to your other question, taxes and insurance in the Portland Metro can easily eat up 10K and you'll still have vacancies, repairs, CapEx, etc.

Hope that helps!

Mathew

As to your other question, taxes and insurance in the Portland Metro can easily eat up 10K and you'll still have vacancies, repairs, CapEx, etc.

Hope that helps!

Mathew

Adam Best · Answer

@Mathew Wray

Am I understanding it correctly that to move monies from a sale in a 1031 deal needs to be re-allocated or spoken for within 45 days?

@Will French

Pardon me if I'm missing something here as I'm still learning some of this, but If your rental is paid off, where exactly is the $10k going annually? I understand taxes and insurance, but is the rest repair costs?

Basit Siddiqi · Answer

@Will FrenchI agree that you should look to sell it since the monthly rent / fair market value is less than .5% You can likely find better cash-flow properties. Furthermore, it lets you unload some of the appreciation from this massive bull market.Have you lived in the property for 2 out of the last 5 years? If you have, you may be able to exclude the capital gain as a result of the sale. Note; you will not be able to exclude the depreciation recapture from the sale. So there will be some tax.If you haven't lived in the property for 2 out of the last 5 years - I would look to do a 1031 exchange. Please note that if you do a 1031 exchange; you likely will only be able to go with the exit opportunity of putting it down as a downpayment for the apartment building.

Should I sell our paid off rental property?

Should I sell our paid off rental property?

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