Should I sell or keep after tenant moves out?

16 Replies

Hi BP community -

I'm speaking with tenants later today who presumably will want to move out of the property by the end of the month, purely based on the tone of their text message. They had expressed in the past that they would eventually move to a larger home. They were good tenants, so it's a bummer. My wife and I are due in 6 weeks and so I'll need to make a decision quickly on how to move forward before things get really out-of-hand.

This was my first out-of-state investment property and I purchased it less than 2 years ago (Dec 2017). I didn't hire a PM because I wanted to know the ins and outs of being a landlord and what I'd actually be paying for. Luckily for me, I found decent tenants and never had to consider a PM to this point. My other properties do have a PM though, for what it's worth, so I definitely do see the value of having one.  

The property is in Raleigh, so the appreciation has been decent, which is why the decision is a bit hard for me. The cap rate is low though; thus, cash flow is minimal. Purchased at 187,500 and renting at $1280, but market rate is $1350+.

Should I:
1) sell the property and try and 1031 it, which will allow me to stick to my new MF strategy?
2) hire a PM to continue to rent it out and continue to see how much it'll appreciate? 
3) just sell it without an exchange and just pay the taxes?
4) consider something else?

I would consider selling it if it no longer fits into your strategy. Whats the property worth today? If you only have two years of equity, you may just break even with the given appreciation. 

I like the hiring a PM option and sitting on it for the next 20 years. But I could see why you would sell it if there was a better return out there.

@Latimer Luis I’m glad you had an great experience with your tenants. I’m a property manager located in Raleigh, NC. I also help our clients review their investment properties to see if they want to sell at the end of a vacancy or to continue to rent. Normally, you will earn more money on the sale of the home when it is not leased. This will attract potential investors plus the owner occupants. If you would like me to analyze your property to see what it could sell for, I can certainly help. Feel free to DM on BP 

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If you calculate your return as a cash on cash return based on the amount of equity you have sitting in that property, the rent rate you were getting for the value is pretty mediocre even with the increased rate to current market value. I would definitely sell and 1031 exchange into a better return. It’s really important in a market like this that you have a strong return because it’s possible to dip anytime.

As long as the property is cash flowing I would hold onto it.  I would also consider raising rents if market rate is higher than what you are currently charging.

If you do decide to unload the property I would heavily weigh towards a 1030 exchange.  Especially if you plan on reinvesting in MF.

I would do option 1 or 2, whichever you think is the best for you.  Having owned it for only two years, you won't have paid down your mortgage that much and as others said, you are lucky to break even after realtor's fees.

As you know once you have a paying tenant your still paying a PM for little work, then they want to charge when they do have to do something.

I would see if you can find a local investor or realtor that you could hire just to help coordinate any repairs and show property to to get a new paying tenant. 

@Latimer Luis There are four ways landlords make money. Appreciation, Equity, Cash Flow, Tax Management. You essentially hit on all of them. Since different investors have different goals, resources, and timelines, they weigh the importance of the four categories differently than each other. My personal feeling is the Cash Flow is king, and the rest of the issues are junior considerations unless there's something that's a large outlier that needs heavy consideration. A 1031 Exchange does put time pressures on you, and that needs to be considered, too. 

There's transaction costs that are sometimes overlooked when people are making these decisions (closing costs, selling fees, TIME). 

I live in Raleigh. None of my rentals are in Raleigh--they are all in other counties (most are connecting counties), where the cap rates are much stronger. So, not knowing where your property is within Raleigh...makes it much tougher to make a recommendation. My first thought would be to sell or exchange because you can do much better from a cash flow stance. However....given your personal life situation, and possibly having a big appreciation potential...maybe this isn't the right time to sell. #TalkingOutOfBothSidesOfMyMouth

We have property in Raleigh, and our PM, Wilson Property Mgmt, charges 8%, no tenant placement fee, only a $150 annual administrative fee for up to 10 properties, inclusive, and we can choose to do the turnovers or more expensive repairs ourselves or they'll provide estimates and do it for us.  We've used them for years, after doing much research following our first year with a bad manager, so worth looking into if you're considering keeping it.  We get at least one letter and phone call a week from someone wanting to purchase our property there, so selling should not be a problem unless it needs updates.  Also, Zillow is making offers in Raleigh now, may be worth checking out as they'll likely work with you on timing for a 1031, and I'd love to know how close to market they actually offer, so please post it if you contact them for a price:)

@Adam Schneider I chose Raleigh because I was considering moving there at the time and thought I’d plant a seed. Its in NE Raleigh by the Triangle Town Center. Yes you hit on a lot of the points. I do think cash flow is important, but maybe timing isn’t right.

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Originally posted by @Matt M. :

@Latimer Luis

Congrats on the baby!

Not judging, but what were your deciding factor(s) on spending $187k on a house that only rents for $1280/1350?

I jumped on it because it was a nice home in a convenient location. We were thinking that if we were to move to Raleigh, we were going to live in the home for a couple of years and then reap the tax benefits after selling. It wasn't about the numbers for this particular house, haha.

@Latimer Luis You bought the property with the motive of perhaps moving there-so you underwrote it with that in mind. Now unfortunately the property is not cash flowing and with a PM it will CF less. If it were me I would sell it now regardless. Who knows where the market will be in the future, and even if it holds every month is costing you compared to what you can buy with CF in mind. All the best! And congrats!!

I would sell it, if I were in your shoes.  Really hard to cashflow with those numbers.  

I don't understand why everyone is talking about 1031 exchange - there don't seem to be any capital gains to defer????  What am I missing