Renting out my house doesn't meet the 1% rule...sale?

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Renting out my house doesn't meet the 1% rule...sale?

Randy Gaona
Kapolei, HI · Member since 2015 · 19 posts · 5 votes

First time Posting

So I originally bought my first house for $409,000 using my VA loan on Oahu. Took out a 30yr fixed 3.25% rate and have lived in the house 3 out of the last 5 years. I stayed in the house for 3 years and my wife and I decided to move out and rent it out. The house has been rented out since July 2015 but my rent is $2650 - HOA($408) - Property manager(10%) etc. Would like some advice on if If i should continue to rent this property out or put it on the market for sale? I continue to pay out of pocket a little each month for this property. My ultimate goal is cash flow which i'm not currently getting. It also doesn't even come close to the 1% rule i've read about and would be forever in a day before I get to that point it feels like. I know the housing market in Hawaii is good right now and a lot of houses are going for over asking price but I believe with the money I could get out of selling the property i could buy a nice house in Texas where i'm originally from. I would like to hear your thoughts good or bad, Thank you. Property address is 91-1155 Kakala st. #208 Kapolei hi. 96707.

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Greg H.Pro Member
Moderator
Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
9y

I would absolutely sell the property as the profit(except for the tax on the recapture of depreciation) is not subject to capital gains !  

Think about it this way,  if you keep it another year, the property would have to appreciate 15% just for you to break even

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  • Greg H.Pro Member
    Moderator
    Broker/Flipper · Austin, TX · Member since 2013 · 4k+ posts · 4k+ votes
    9y

    I would absolutely sell the property as the profit(except for the tax on the recapture of depreciation) is not subject to capital gains !  

    Think about it this way,  if you keep it another year, the property would have to appreciate 15% just for you to break even

    2Reply
  • Randy Gaona
    OP
    Kapolei, HI · Member since 2015 · 19 posts · 5 votes
    9y

    Thanks for your reply, i was leaning towards that direction but wanted to make sure there wasn't an alternative.  Values in Hawaii go up but i don't think 15% is realistic for my house.  So when you put it that way, I most definitely want to sell and try to re-invest money made in a market not soo pricey as Oahu.

    0Reply
  • Jim Cummings
    Residential Real Estate Broker · College Station, TX · Member since 2013 · 1k+ posts · 969 votes
    9y

    Randy

    Unless you are planning on living in Hawaii long term and moving back into the house as Owner / Occupant - Sell now while you can still get the Owner Tax Break. ($250K Individual / $500K Couple tax Break). 

    0Reply
  • Misa Kataoka
    Realtor · Honolulu, HI · Member since 2015 · 17 posts · 5 votes
    9y

    Aloha Randy,

    Thank you for providing your property address. I did a quick check how's the market at your specific development, Pulewa at Mehana.

    There are 3 sales similar to your property recorded. $418,187 in 2013 (developer sale w/upgrade), $433,000 in 2016 and $440,000 in February 2017. 

    Keep in mind you are at the 5 year mark in a few months, and escrow with financing will take 45 days or more to close. 

    This is not about 1% rule.

    I am a realtor, but in your case, I will rather want you to be serviced by a team who knows and work closely in military community with MRP designation. 

    Why? They also have more leads of buyers with VA. Unless you are brave to do it yourself as FSBO, you should be consultated with local professional. I can refer you a great team with proven result.

    Best of luck!

    0Reply
  • Isi NauPro Member
    Real Estate Broker · Mililani, HI · Member since 2016 · 217 posts · 253 votes
    9y

    Aloha @Randy Gaona

    I'm assuming the property taxes are $100 and that there is an additional association fee of like $50?  Not including repairs and maintenance, are you pretty close to breaking even?

    Prices in Hawaii are projected to appreciate 3-4% annually for the next couple of years.  Not sure how long you're planning on staying in Hawaii (assuming you'll be PCSing), but it may be worth holding on until you leave.  If you're leaving in less than a year, then selling any time is probably fine.

    If you wanted to keep your money in Hawaii, there are better cash flow options here.  You probably have about $100k in equity.  You could find something that nets you about $300-$400 a month.

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  • Misa Kataoka
    Realtor · Honolulu, HI · Member since 2015 · 17 posts · 5 votes
    9y

    Aloha Isi,

    He has a VA loan for less than 5 yrs. Please, read his situation and advise if only worth and applicable.

    His ultimate goal is cash flow. Hawaii real estate is clearly high property price in the nation with low yeild for cash flow. He would rather be smart to use his VA loan with his hometown TX, where he understand the neighborhood and able to hold property for a long haul. TX is also booming and appreciation potential.

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  • Isi NauPro Member
    Real Estate Broker · Mililani, HI · Member since 2016 · 217 posts · 253 votes
    9y

    @Misa Kataoka 

    I'm not sure we've had the pleasure of meeting.  Your comments seem a little strong, for us being strangers and from Hawaii, but not a problem.  I'll address them as best I can:

    I did read his situation, not sure why owning the home with a VA for 5 years is a factor, cash flow can be had in any market, I provided advice on both keeping the home and selling (depending on his goals and living situation), I am not familiar with the market in Texas (its a big place and a blanket statement of it's "booming" seems guru-ish), being from a certain place does not automatically make you adept at investing there (Hawaii is no exception).

    As for the comps, pulling properties from 2016?  That's a pretty tough sell.  But from 2013?  That's unheard of.  Valuating his property is unique.  He has 2 bedrooms, but the square footage is close to the 3 bedroom units.  Also, only one 2 bedroom has sold there in 6 months.

    1Reply
  • Misa Kataoka
    Realtor · Honolulu, HI · Member since 2015 · 17 posts · 5 votes
    9y

    My apology if you feel my comments are a bit strong. I didn't mean in any way personally.

    You are investor and experienced in real estate and confident your suggestion. Hope he would take pros and cons.

    Thanks for reaching out to me.

    1Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    Sell asap. The numbers do not lie. This property can not/will not  never have true positive cash flow.

    2Reply
  • Andrew Olmstead
    Kapolei, HI · Member since 2014 · 42 posts · 18 votes
    9y

    If you are happy with the property manager would you mind sharing who it is?  Thank you

    0Reply
  • Randy Gaona
    OP
    Kapolei, HI · Member since 2015 · 19 posts · 5 votes
    9y

    First I would like to thank all of your inputs. I've been lucky enough to be in hawaii for almost 10 years now and add another 3 years as i just got orders again to stay. My wife and I just bought another house in 2015 in the Kahiwelo development in kapolei and we used her VA loan to pay for that one, and i paid for fees etc out of pocket so it wasn't in the loan. That house cost 719K 30 year fixed rate at 3.6%. So we've both used our VA loan each and don't want to use it again as the percentage goes up for the VA funding fee unless of course you can put more money down to lower it. One of the main reasons I was looking at selling is i noticed that a lot of houses for rent in the neighborhood were around 2300 a month and I charge 2650 a month(I allow pets). With my wife and I having a baby on the way I don't want to have to pay out of pocket. I would like to avoid paying for capital gains tax also if i can. I do not plan on moving back into that house as we now live in a single family home. I do however want to continue to live in Hawaii as long as I can as I been here a total of 10 years. I would eventually like try to be an investor but I have a long ways to go. So for now I figure my money would go a lot further investing in a house in Texas, rather than Hawaii.

    3Reply
  • Randy Gaona
    OP
    Kapolei, HI · Member since 2015 · 19 posts · 5 votes
    9y

    @Andrew Olmstead

    my property manager is Neal Fineman and Associates. Hawaii Real Estate Broker RB-20229.  I can pm you more information if you like.

    0Reply
  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    9y
    Rent to value ratio is .5% which is pretty poor. Include the HOA by subtracting off rents. If you are keeping it just know you are keeping it for appreciation and good luck if there is a correction.
    0Reply
  • Randy Gaona
    OP
    Kapolei, HI · Member since 2015 · 19 posts · 5 votes
    9y

    @Lane Kawaoka

    I agree, I bought my first house with no real intention on getting into real estate. I figured I'd live there forever, but here i am. I currently have a renter in the house, they're on a month to month lease currently because he's about to be separated from the military. Once I can find what the comps are in the neighborhood I can get a better idea of the price i want. I don't have access to MLS but i did not see on other websites 2/2 houses in my neighborhood selling recently.

    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    I would've said keep, except for 2 things: 1)$408/mo HOA fee. 2)You can sell tax free (up to $500k of gains). 1+2=sell, otherwise, I'd of said hold. Just sell and pocket the profits for now ... no need to 1031 or anything fancy like that. If/when you redeploy the profits, forget about the 1% rule ... some of my most profitable deals have been "0.75%" deals and some of my least profitable ones have been "2%" deals, so it is not a metric worth following IMO. Also, stay local ... you give up too much control going to the mainland ... unless, of course, you are moving back to TX or something ... then move there and invest away as a local there by all means. Places like HI cash flow very well in the long term because the rent increases are far larger than other parts of the country but most other expenses do not scale as such ... they are tough in the short term, though, which is why you need to find something you can force some appreciation on (a good idea in any market but much more feasible to pull off when you're local).

    1Reply
  • Jeshua Patrick
    Rental Property Investor · Charlotte, NC · Member since 2017 · 298 posts · 232 votes
    9y
    I'm no expert but it looks like the upside may be more in favor of selling for tax reasons; however, there may be ways around that. A consultation with a good tax and/or RE attorney in your area would probably be worth your money.
    0Reply
  • Mary White
    Rental Property Investor · Klamath Falls, OR · Member since 2016 · 146 posts · 213 votes
    9y

    I know of an excellent realtor team (military husband and wife) that I can refer you too. Please let me know. Also, My family was forced to hold onto a home when work forced a move and the market fell in 2007. We struggled for years paying extra to the mortgage and could not sell it at all while the capital gains benefits were still there. We held it for 10 years and just sold it after it was cash flowing $500/ month and the Oregon market had finally rebounded. I deeply regretted not selling it in 2007 and putting our money into a better investment. My advice is definitely to sell, but to do so once your family has a clear picture of what your long term goals are. Please let me know if you want the contact information or send me yours and I will pass it along to my military realtor in Hawaii.

    0Reply
  • Randy Gaona
    OP
    Kapolei, HI · Member since 2015 · 19 posts · 5 votes
    9y

    @David Faulkner

    The housing market is going up still, and pretty fast compared to other parts of the country IMO.  However, the rentals in the area are dipping and I think most of the island is that way.  If i didn't have my first baby on the way i would hold onto the house and keep renting it.  It's made me a decent profit for 5 years so going to take it and run.

    @Mary White 

    So in the past 48hrs i already have a couple that are willing to buy my condo at my full asking and i haven't actually put it on the market.  I just mentioned how much i was going to put it up for and turned out it was what they were looking for.  They took a look at the house and we are beginning the process at this time.  This will be my first time actually selling a property so hopefully it all goes well.  I appreciate the offer on the Realtor but I am currently working with someone now.

    Hopefully if everything goes well, by late summer or fall next year i can take my money and invest in my next rental.  Until then i'll keep saving up till something catches my eye.

    0Reply
  • Max T.
    Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes
    9y
    Sounds like you know what to do. Cash out!
    1Reply
  • Royce Talbo
    Investor · Kaneohe, HI · Member since 2012 · 218 posts · 104 votes
    9y

    @Randy Gaona Seems like you made up your mind, but before you do, think about what exactly your property manager does for you and is it worth the $265(10% of rent) you pay him a month.  I am assuming probably not as this is a newer home with an association.  If you cut him out, will you now break even or cashflow a little?  If yes everything you need to know about landlording is here on BP and just get familiar with the landlord tenant handbook and go with your gut and you are good to go.  Hawaii will appreciate and cashflow better than any other place in the long run.  Ultimately its up to you want you want to do, good luck.

    2Reply
  • Neal Martin
    Investor · Kihei, HI · Member since 2015 · 18 posts · 1 vote
    9y

    Randy,

    I'm not a CPA, but I'm pretty sure you're good selling it before July 2018 if you don't want to pay capital gain tax. If you're planning on re-investing it, it doesn't matter too much with 1031. If you're going to sell anyway it's probably better to do it before July 2018 (2 of the 5 years primary residence).

    0Reply
  • Randy Gaona
    OP
    Kapolei, HI · Member since 2015 · 19 posts · 5 votes
    9y

    @Royce Talbo

    I originally didn't want a property manager but I had to get one.  Long story short, newly weds moved in, wife was completely clueless on how living on your own worked and called all the time due to husband being gone.  2K fridge broke due to her changing the settings, fixing garbage disposal because she threw chicken bones in it.. hot mess.  Just one thing after another. So hot mess, so I got a property manager and they ended up divorcing. 

    @Neal Martin

    Currently in Escrow with the house or should be here soon.  Will pay off debt and hopefully I can start to do some other type of real estate.  I.E crowdfunding, wholesaling or maybe an investor.  Need to do more research on all this but going to go a different way.

    0Reply
  • Randy Gaona
    OP
    Kapolei, HI · Member since 2015 · 19 posts · 5 votes
    9y

    @David Bain

    I appreciate your offer but already in escrow on this house.  Didn't even make it to market and received full asking. I don't think the price was low either.  Market here is definitely different that's for sure.

    0Reply
  • David Bain
    Agent · Honolulu, HI · Member since 2017 · 97 posts · 48 votes
    9y

    Absolutely brother.  If you know any other veterans who need help either please send them my way.  I love nothing more than helping other veterans in their real estate endeavors.  I am glad it worked out for you my man.  

    1Reply
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