[Philadelphia] Sell or Continue Renting Rental Property?

[John Zent]

Hi all- would like opinions on selling/exit strategy for a property I've owned since 2010 (in Philadelphia's Fairmount/Museum area).

Stats:

- Originally bought the property for around $200k in 2010.
- Current value of the home is somewhere between $325k-$375k.
- Been renting it out the past 3 years for around $2,000/mo. Before that it was my primary residence.
- Mortgage Interest rate is 3.875%.
- Annual expenses (besides interest) are around $4500 for property taxes, $1,000 for insurance, and maintenance/repairs really fluctuates but I budget around $2,500 (it's been less because I DIY a lot, but there's a value to my time).

Current tenants are moving out at the end of this month and I'm seriously considering selling the home, and here's why:

- Biggest factor: My last chance to take the capital gains tax exclusion for primary residences where you've lived there for 2 out of 5 years (I would move back in temporarily between when the tenants move out and until the house sells, to ensure I maintain the 2 out of 5 years).
- Local housing market (Philadelphia city) has moved from "Hot" to "Warm" (source: https://drexel.edu/lindyinstitute/initiatives/reports/) just like much of the country. I'm afraid if I wait until market equilibrium that I might have a harder time selling, because the home is older/outdated and not as nice as many other homes in the area.
- Landlording/owning the property is mostly smooth-sailing, but at occasional times can be aggravating, time-consuming, or stressful.

If I sell this house, I would not immediately buy another property. Just wondering what is considered a good exit strategy/rules of thumb for when to sell an investment property, and what everyone's opinions are for this particular scenario. I've heard of the 1% rule so I would compare that to what the house is currently worth, not what I paid, and it doesn't meet that criteria (but also keeping in mind you can probably only meet the 1% rule in low appreciation areas, which Philadelphia/Art Museum area is not).

Thanks so much for your input!

[Joe P.]

@John Zent, forgive me, but no, your numbers are not above. Some of them are.

Your goal is to make a high return, but we don't know your cash on cash return. We don't know it because you said your mortgage payment is not an expense, but it is. Not considering it an expense is skewing your view and your numbers. You can look at cash flow monthly or yearly, it doesn't matter to me...but what is it? $100 a month? $1200 a year? Your COCR is your rate of return in my eyes because you're interested in your exit strategy. If it's 2% and your money can do better in the stock market, in a different investment, etc., then its time to pull out. But you don't know that information (or haven't led on that you do) and therefor no sound investor could give you advice until we know exactly what is going on at this property.

Here's what I'm gathering:

• Assuming you invested ~25% (20% down and 5% closing) so ~$45,000 on purchase
• Income is $2000 per month
• PITI is ~$1,211 per month (assuming $752 mortgage, $375 for taxes, $84 for insurance)
• You are setting aside $209 per month for maintenance/repairs

You might be cash flowing around $580 per month, or 15% COCR. But sadly, I think its much lower than that:

• You aren't budgeting for capital expenditures -- you should. A new roof will be 5-10k in the city, a new oven is $500, a new boiler is $4000...your maintenance budget is blown if you're basing it off of that.
• You aren't budgeting for vacancies (pay yourself to deal with loss of income and finding/vetting new tenants)
• You aren't budgeting the utility bills, and you likely pay for at least water
• You aren't budgeting for city costs like license renewals
• You aren't budgeting for your time, potentially, by even having a line item for "management" where you can pay yourself some money for your time.

So, if your goal is the highest rate of return, go through the motion of finding out what that is and report back to us. If its 10%, and you're happy with 10%, great. You can add in expenses for property management if you want to make it more passive, and then see where your return lands. I fear you haven't gone through the exercise (or haven't led on that you have) and not doing so puts you in the dark.

The 1% rule is a bunch of nonsense at this stage, and no one cares if you're hitting it or not. If the property cash flows, meets your needs, and is helping you do what you want to do, then au salute.

If you'd like some help putting the numbers down, feel free to reach out. The BP calculator is excellent, but all in all, I suggest you put down the numbers as-is; its too difficult to make a decision without having all the facts on the table.