Should I sell or hold on to my one rental? Need help!

Question

I currently have one rental that is 500 miles away in the town where I went to college. I charge $890 for rent and pay $670 on the mortgage. I live near Houston now and would like to start investing in this area. I have had the rental for over 6 years and haven't had any problems with it. After doing some research, I believe I can sell my rental for about $95,000 and I owe $70,000. Should I sell my rental and use the money to invest in the Houston area, where I live, or just hang on to the rental and save my money for another one? Any feedback would be greatly appreciated.

Dave Foster · Answer

@Nicholas Lohr, great thought about the 1031 for @Jeremy Mahan. He's also got 6 years of depreciation recapture he'll want to avoid and can by doing a 1031. But Jeremy needs to figure out exactly what his gain situation is. Equity is not taxable - gain is.

To figure out your gain situation you need to find your adjusted cost basis - this is the purchase price + capital improvements - depreciation. Then you take the difference between your net sale (after all expenses) and the difference is your gain. Once you know that you'll know whether the 1031 is worth pursuing.

Nicholas Lohr · Answer

well if you can find another rental in Houston for a down payment of 25k (amount you have in equity) and it cash flows at least $220 per month (890-670) then why not?

Keep in mind a few things though... you will incur costs associated with selling it and you're going to want to do a 1031 exchange to avoid taxes which which means you have to have the next property you are going to buy identified and ready to go. I assume a 1031 has it's own costs associated with it too.

I think the saying, 'better the devil you know than the devil you don't' might fit here.

First step is to learn the Houston market as well as you can to see if it's worth the trouble.

Thomas S. · Answer

If you have had 6 years of very low expenses and actually produced positive cash flow, no possible way with rent at $890 and mortgage at $670, you have been extremely lucky. Very soon your expenses will increase drastically and you will find the property is a money pit. Additionally when the real estate markets drop you will be upside down on this property's mortgage.

Your good luck will not last for ever and it would be highly advisable you sell before it turns.

Jeremy Mahan · Answer

Dave,

Thanks for the info. I'll have to run some numbers and see if it is worth pursuing. I am very new to this so I wasn't even aware of 1031's. Looks like I need to do some more research before I make any decisions.

Jeremy Mahan · Answer

Nicholas,

Thanks for the advice. I'm not familiar with 1031 exchanges, but if it will save on taxes then I'll learn what I can and go that route. Thanks again!

Should I sell or hold on to my one rental? Need help!

Should I sell or hold on to my one rental? Need help!

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