Sell or Rent - How to Decide? Any help very much appreciated! :)

Sell or Rent - How to Decide? Any help very much appreciated! :)

Property Manager · Orinda, CA · Member since 2016 · 11 posts · 0 votes

Hi everyone, I'm new around here and I would love to get some good advice on this.

I own a home in South Tabor (Portland) that I bought in 2010 for 240k, PITI is $1650.

I haven't put any money into the property to speak of, a few things like paint, new wood fencing, but not much. 

It is a very unique property in close-in Portland in that it has an oversized 2-car detached garage at the back of the property. It is more like a small barn because it is tall and very spacious at about 600 sq ft.

It is located on a very desirable cul-de-sac street with almost zero traffic - super quiet, safe and private. You can walk to Mt. Tabor park and other stuff people like such as cool restaurants etc. in about 15 min or less.

The house itself is a 2-1 with about 1000 ft, built in 1949. 

I inherited a house and have the opportunity to move and sell or rent this house but I am having trouble deciding. 

Looking at Craigslist, rents look very strong in this area with similar homes at about $2,000 plus per month. The location and the potential work/studio or vehicle storage space I believe would add to that number. 

Selling would bring a price of around 400k or higher. It's hard to find comps because a garage of that size is an extremely rare find around here.

If anyone has any tips on how to decide which way to go I would really appreciate it. I don't have much of an emotional attachment to the house even though I've lived in it for 5 years. I might be a little bit reluctant to let it go since it is not easy to find features like this house has. Although if the price was right...

Thank you for reading and I thank you in advance for any advice!

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Portland, OR · Member since 2016 · 18 posts · 14 votes
10y

If it were me I would convert the huge garage into an ADU and rent the main house and ADU. You could probably get $700-$1000/month for the ADU plus the the $2k for the main house. South Tabor will no doubt appreciate much much more in the next 5-10 years and the tenants you will get will be top notch in that area. If you sold for $400k, minus the $230k you owe, minus closing costs you would have roughly $140k to invest in another property (If you didn't do a 1031 exchange then you would have to pay 25%- 40% taxes on that as well, but let's say you did). It's really difficult to find cash flowing properties here in the Portland Metro area. You can also leverage this property to make other investments. I don't think anyone could pay me enough to get rid of that property if I were you.

The only way I would sell would be if you were comfortable investing out of state. In other markets you can probably do quite well with $140k but it's also a lot riskier if you are unfamiliar with the market and generally you won't see nearly as much appreciation. 

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  • Buffalo Grove, IL · Member since 2015 · 31 posts · 1 vote
    10y

    I would probably sell, unless you believe it'll appreciate more. 400k vs $2k rents? With $400k you could put a downpayment on a nice 20-ish unit apartment complex and get $2k+ cash flow, not 2k rents out of it.

  • Property Manager · Orinda, CA · Member since 2016 · 11 posts · 0 votes
    10y

    Thanks for the reply. Sorry if I wasn't clear but the mortgage on the place is at about 230k w/ 400k or maybe higher being the expected sale price..

  • Investor · Vancouver, WA · Member since 2014 · 359 posts · 143 votes
    10y

    Sell and find a better deal.

    Where are you planning to live? Can you use all the proceeds for a new deal or are you buying a new place?

    After  your mortgage, vacancy, maintenance and capex it really wouldn't make you any money.

    Rates are still low so you can get a good interest rate on a better deal.

  • Portland, OR · Member since 2016 · 18 posts · 14 votes
    10y

    If it were me I would convert the huge garage into an ADU and rent the main house and ADU. You could probably get $700-$1000/month for the ADU plus the the $2k for the main house. South Tabor will no doubt appreciate much much more in the next 5-10 years and the tenants you will get will be top notch in that area. If you sold for $400k, minus the $230k you owe, minus closing costs you would have roughly $140k to invest in another property (If you didn't do a 1031 exchange then you would have to pay 25%- 40% taxes on that as well, but let's say you did). It's really difficult to find cash flowing properties here in the Portland Metro area. You can also leverage this property to make other investments. I don't think anyone could pay me enough to get rid of that property if I were you.

    The only way I would sell would be if you were comfortable investing out of state. In other markets you can probably do quite well with $140k but it's also a lot riskier if you are unfamiliar with the market and generally you won't see nearly as much appreciation. 

  • Property Manager · Orinda, CA · Member since 2016 · 11 posts · 0 votes
    10y

    Thank you. Yes I can put the proceeds towards a new deal. 

  • Property Manager · Orinda, CA · Member since 2016 · 11 posts · 0 votes
    10y

    Thank you Amanda, I guess the part I'm wondering about is whether it is risky to hold it or if the potential appreciation looks good....comes down to bubble or no bubble?

    Also have no idea about the ins and outs of ADUs so I definitely need to look into that.

    Thanks for the help!

  • Wholesaler · Marietta, GA · Member since 2013 · 106 posts · 20 votes
    10y

    You're getting a lot of nice feedback!  If $400k is at the top of the market I would sell.  Our market is at it's peak here in Atlanta, so it's a great time to be a seller.  Cash flow is nice, but tenants can be difficult in a single family.   I like the suggestion to use your profit to invest in a multi unit that would cash flow better.  Then again, I don't know how Portland at all.  Best wishes to you!

  • Portland, OR · Member since 2016 · 19 posts · 9 votes
    10y

    Hi @Account Closed! 

    I am in Portland too. I would be tempted to keep it since you owe so little relative to the prices here, though I am curious to see what more seasoned investors say. Do you own the other property free and clear, or is there a mortgage on that as well?

    I would be tempted to keep it because of where the markets and rent are going.

  • Property Manager · Orinda, CA · Member since 2016 · 11 posts · 0 votes
    10y

    @Stephanie Sherman the other property is not free and clear but it's got a pretty low monthly payment, at least a lot lower than I'm used to.

  • Investor · Portland, OR · Member since 2016 · 47 posts · 36 votes
    10y

    Take out a line of credit, Demo the garage and put in a real nice ADU for about 125k, that would fetch close to 2,000 a month.

    There's lots of information out there about ADU's. Last summer I went on an ADU tour where you can meet the homeowners and contractors who have built them. I'd think they would have it again? Here's a spot to start. At the very least, its worth looking into.

    https://accessorydwellings.org/

  • Portland, OR · Member since 2008 · 123 posts · 73 votes
    10y

    @Account Closed I was immediately thinking ADU as well when you described the large garage in back. @Derrick Aragon (not sure why it won't tag him) is a BP member in Portland who's apparently done a lot of ADU builds, so he may be able to help answer some of your questions.

  • Portland, OR · Member since 2016 · 18 posts · 14 votes
    10y

    Also, full disclosure, I'm no expert but my husband and I are in a pretty similar situation so I've thought a lot about it and have done some research. We're in SE Portland (Woodstock/Brentwood-Darlington, so not quite as nice as South Tabor but up and coming) and owe $250k on a house and neighborhood that has seen crazy appreciation. We believe our house could sell for somewhere around $400-$425k. When we saw how much our house had appreciated our first thought was maybe we should sell. The problem with that is that then we would have to buy another house in this crazy market, which you don't seem to have that issue which is nice, but it sounds like you would be looking to buy another property at least. We also have a full unfinished basement that for $60-$70k could be converted to an ADU and rented for $900/month. City of Portland is really encouraging people to build ADUs because it's an easy way to increase housing availability/density and maintain neighborhood character. So for the next 2 years (at least, they have extended this waiver a couple times) the city is waiving system development charges for ADUs. This saves somewhere between $8k and $12k in city fees. We are currently in the process of taking out a home equity line of credit which we are going to use to invest as essentially a silent partner in flipping some houses. The profit we make from flipping houses we will invest in building out our ADU. Once that is complete we may look to move to a bigger house and turn our current house into a full rental, renting out the house for around $2k and the ADU for $900-$1k which should cash flow $400-$500/month for us and continue to see decent appreciation.

    I understand the concern about a bubble but from what I've read the population dynamics alone don't seem to support the idea of a bubble here, but who knows. An experienced investor told me the market stabilizes at 6 months of housing inventory and right now we're at 1.5 months. Good Luck, I'm always up for talking ADUs so if you ever want to meet up for coffee let me know.  

  • Investor · Portland, OR · Member since 2016 · 47 posts · 36 votes
    10y

    I also don't know why I said take out a line of credit.  With the rates as low as they are now.  Just do a cashout refi.  Especially since its owner occupied.  125k at 4% interest for 30 years raises your PI by $600.  The rent you will receive will more than cover your increase.

  • Portland, OR · Member since 2016 · 19 posts · 9 votes
    10y

    I'm glad you asked this situation because I'm in a similar situation too but got very different answers on my thread! I own a home in Cully that I owe 190k on but should be worth 335k. When I asked on another thread if I should use a cash-out refi to turn my garage into an ADU (the quotes I'm getting for the attached garage is around 60k), the responses I got were to take that money and invest into a multi-family residence instead. Maybe they were less familiar with the popularity of ADUs in PDX?

  • Mike NussPro Member
    Real Estate Entrepreneur · Portland, OR · Member since 2014 · 451 posts · 328 votes
    10y

    @Account Closed I highly recommend listening to the local Portland input. Managing an ADU and a SFR in Portland is vastly different than an out of state multi family with class "c" tenants.

    BP is famous for people saying "sell, take the money and throw it into a cash flowing asset". However, is an extra 4% gain per year, on 150K (6K per year) really worth the loss of control? Perspective matters so it's wise to keep that in mind when getting online advice.  

    Cara (and Stephanie and Amanda for that matter),  I can think of 20 people right now that would love to be in your shoes, which speaks volumes to the asset(s) you have. I feel I should point out though, and please don't take this the wrong way, but you're not an investor yet. You purchased a home, in a great area, in what could possibly be the best buying season that area has ever seen. You're 10K into a house purchase that has resulted in ~$150K of equity. 

    That's awesome and speaks volume about the beauty of leveraging real estate. Assessing all of your resources, especially experience and time, is crucial to making the best decision for you. You have some great tools and pieces right now and those tools can be leveraged to help grow your portfolio. Taking incremental steps, with expandability and upside (which is exactly what you're looking at doing) is a great way to build a portfolio. Lumping down free cash (appreciation), on a "cash flowing asset", for an extra 6-10K per year of taxable income, doesn't make much sense to me.  Especially when 1-2% in appreciation gains will beat that extra cashflow, without the income tax. 

  • Mike NussPro Member
    Real Estate Entrepreneur · Portland, OR · Member since 2014 · 451 posts · 328 votes
    10y

    As for converting garages to ADU's. The existing structure itself matters. Typically though, you'll probably find tearing down and building new is a better use of land. The higher the land value, the more sense it makes to build new.

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Account Closed  if you have owner occupied it.. I would sell it and take your TAX FREE  profit then shop around PDX and buy something else ... since your moving to another owner occ that I think you said you inherited.

    lock in the gain now thereby saving 50k or so in tax.

    buy a nicer bigger rental type property.. you can now buy a small  multi in pdx or close in. cash flow will be greater.

    that's one school of thought.

    I know personally the tax free sale of my personal resi's over the years have netted me far more than cash flow would ever have. by probably 20X...

  • Investor · Castaic, CA · Member since 2015 · 78 posts · 16 votes
    10y

    jay, regarding the personal residence tax free advantage.. How long did you have to claim the home as your personal residence (I'd it two years?)and what do you need to show that it is? I have a duplex (added ADU-- yes PDX is very accommodating) in SE PDX that appreciated nicely and is getting great rental income. I pulled out cash from that to buy another investment property in California that is considered a vacation home, but I am also renting out for short-term vacation rental when we're not using it. We're thinking of pulling out more cash from PDX investment to build a second unit at the vacation property in California. Not sure if that's the best strategy of if we eventually claim the home in PDX as primary residence down the road and turn our primary residence in California into a rental? Getting closer to retirement so we don't know what best strategy is save money in taxes.

  • Portland, OR · Member since 2016 · 40 posts · 11 votes
    10y

    California can be a difficult market for buying a vacation rental. Prices in desirable destinations can be too high to see a good cap rate. The company I work for filters through a lot of data to locate good markets for buying vacation rentals. Hit me up offline if you're want to get more info about good timing and locations for vacation rentals in the west.

  • Property Manager · Orinda, CA · Member since 2016 · 11 posts · 0 votes
    10y

    Thank you all so much for the help. I've learned a lot and wow this forum is just awesome. @Amanda Coleman thank you for the info about your property and your plans, it gives me a lot to think about. We could do coffee sometime for sure.

    @Jay Hinrichs you make a very good point and I thank you so much for the help.

  • Lender · Sherman Oaks, CA · Member since 2014 · 68 posts · 80 votes
    10y

    I bought in Palm Springs 2 years ago.  It rents by the week and I do very well.  Still good deals in the desert.  

  • Lacey, WA · Member since 2015 · 49 posts · 4 votes
    10y

    @Account Closed Portland is a hot market and you will not go wrong in a rental in that market (imo) I would talk to a real estate agent that does investments in the area and take their advice. Portland is a growing community and worth the time investment to be sure you make the right decision. 

  • Portland, OR · Member since 2016 · 18 posts · 14 votes
    10y

    Some great information on this thread and of course everyone has different advice. I tend to lean towards @Mike Nuss line of thought because he's right, I'm not yet an investor. We got lucky in the purchase of our house and the appreciation we've seen, though we did buy the house with the intent of putting in an ADU. We are now working on taking that luck and turning it into an investment, however not yet knowing all the ropes and having little experience in investing I feel much more comfortable investing here in Portland in assets that I can see and understand. I have no doubt that someone like @Jay Hinrichs can take a lump sum and invest it and crush it on the returns and probably  beat the cash flow + appreciation we would get on our current house but I'm not Jay. And couldn't you take out the equity in your house and make that investment anyway without losing the asset? Isn't that the point of leveraging? If you sell the asset you get a lump sum and save $50k in taxes but if you keep the asset and leverage it you still get to use the equity to make another investment while still reaping the benefit of cash flow + appreciation + debt paydown (your renters are paying down the mortgage. Cash flow is always seen as the golden ticket but debt paydown for long term wealth seems to be just as important) Good discussion everyone. 

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Amanda Coleman  your correct.. my thought is if you turn it into a rental you lose forever your 500k tax free gain... and with a market that has peaked somewhat the next home you buy will not see the same gains in the same time frame..

    so that's all just a thought.. since no one had mentioned it.. also you can rent it for a year or two without losing your right to this tax free gain ( check with your CPA)

  • Mike NussPro Member
    Real Estate Entrepreneur · Portland, OR · Member since 2014 · 451 posts · 328 votes
    10y

    Those are wise and humble comments @Amanda Coleman. Give yourself more credit. You didn't get lucky, you made one smart decision with forethought. Now you get to magnify that decision by making another good decision. Investing where you are comfortable is a solid way to insure the second decision is on par with your first. 

    Jay is absolutely right that selling and taking tax free gains is a great spring board. The problem is, most people without a lot of time to hunt for real estate, will lose their advantage when it comes time to buy another asset. It sounds a little backwards to the retail world (which probably means it's good advice), but looking for your next purchase, before you sell your existing asset, is a good way to compensate for that higher potential opportunity cost. You can rent your existing home for 3 years before you sell it and still avoid cap gains. 

    Seems you have multiple incremental steps that can all be relatively easy and get you closer to your goals. 1) build an adu, 2) fill the adu, 3) buy a new owner occ, 4) rent out the existing, 5) look for another investment purchase (I suggest a great off market deal) 6) get it in escrow subject to selling existing investment property 7) sell existing 8) Use gains from selling #1 to buy #3 (which should be bigger and have more cash flow). Looks like you have some work to do :)

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