Should I sell my investment property or hold on to it?

25 Replies

Hey folks, I am hoping to get some thoughts on if I should I sell my investment property or hold on to it.

I purchased the SFR in January of 2015 for $252.5K. In August 2017, it appraised for $316K. Due to the age, area, and the fact it is a 4 bed/3 bath, I think I can now get $325K+ for it. So I would get $100Kish in cash if do I sell and the gain would be tax free since I lived in it for 2 out of the last 5 years.

I leased the home in January of 2018 for $1,750/month. This is below market and my fault because I did not get the property available in time. When the lease ends, my tenant will be moving out and I could potentially get $2K - $2.1K in rent. However, my current mortgage payment plus HOA dues is $2,015/month, which will be going up slightly next year due to taxes and insurance. So I am looking at possibly a breakeven at best, though I know that won't be the case. Also, the finish out on the home is premium thus not ideal for a rental. If something does get damaged it will be expensive to fix.

I surprisingly struggled to find a qualified tenant. Could have been due to the time I got it to market, but I get the feeling this price point makes for a tough rental. So I will likely have to cover at least one mortgage payment, maybe two, due to the time it will take to prep the home and find a tenant.

Overall, the home currently does not pay for itself, likely won't next year when the lease comes up, I will likely have to cover the mortgage for at least 1 month to get it re-leased, I'll have to pay about $1200 to the agent to lease it, I won't generate true cash flow, and the AC just went out so I am looking at a temporary fix until next year or replacing the whole thing now for about $4,600.

I think I know the answer to this question, but I'd like to get y'alls thoughts.

Thank you!

If you don't cash flow when rent is at a historical high, and mortgage rate at a historical low, when will you?

@Cameron Marmon its hard to let go because you have some attachment to it, but this certainly does not sound like something that is going to be cash flow positive anytime soon. I think the Class A premium assets can be difficult, mostly due to the high rental rates. Those types of renters tend not to stay in a rental for a long time, they would rather buy! 

My advise would be to sell and cash in on that $100K of equity, then go buy 4 properties ($25K down) that do cash flow well. Anyway, now is a good time to be selling.

Good luck!

-Hiron

There are a couple of points astray with this scenario. 1st, your math is a litte off a basis of 252.5 with a current valuation of $325k doesnt get you close to 100k in equity. In fact really nowhere near it when you factor in exit commissions. 2nd, you either haven't ever been cashflowing or recently put yourself in a position not to. While taxes in DFW metroplex are out of control ( I am in Denton County) they arent growing at that insane of a a pace that they should have paced out of a postive cashflow scenario. I cashflow about 400-500/mo on each property we have and we are still aquiring...

@Chris Carlson thank you for your reply. I bought it for $252.5. I don’t owe that much due to my downpayment and 3+ years of payments. Additionally, the taxes have increased about 32% since I purchased the home. I’ll also be losing the homestead exemption for 2018 and onward so the taxes will increase even further and won’t be subject to the maximum 10% increase. 

Would you buy a home for $325,000 to rent out at $2,000? Probably not (even though it seems like everyone that doesn't live here is dying to do it). The problem is finding something to do with the $100,000. I think I need to take @Chris Carlson to lunch sometime to figure out that answer.

@Cameron Marmon

I'd sell it and try to buy something cheaper if you want to be a buy and hold investor. You have to get closer to break even or better.

I often counsel investors here to back into the numbers.  What does the average renter make?  What is 1/3 of that?  Divide by 12 and that's the monthly rent they can pay.   Multiple that by 10x and that's about what you want to pay for a rental....those are ballpark numbers.

I think for the most part your purchase price is way too high or your rent too low.  Chances are the purchase price too high for a rental.   The runup has probably happened now, and my guess will slow in that age and price range.  Vacancy kills your returns....so you want to do everything you can to minimize the down time if you can.

I think there are some other strategies to implement as well. One would be to get the lease on the school year. So it goes vacant in the summer. Either stretch these current tenants out or get the next one to do 15-17 months lease.

There's a few things in your post that cause me pause.....why $1750 in rent in January 2018, but $2100 next year?  Can you get 20% increase in rent?  I hope you can, but that seems optimistic?

What appraisal came in at $316,000?   Did you refinance?

If you bought for $252,500 and can sell for $325,000 - 7%-8% sales costs I would think you'd clear more like $45,000 or so.  That's my quick math.

I'd like to see you buy two or 3 $125,000 that cash flow if you can vs the more expensive single family....or maybe a 4 unit.

It seems like every house I come across has that ratio - Selling for $250k, rents for $1700, etc etc. @Account Closed Can we make it a group lunch I need to learn these ways as well!!! Lol. 

@Cameron Marmon I am in a similar situation with a condo I used to live in but is now a rental. This is the last year to sell for tax-free gain. Mine actually does cash flow a little bit, but the ROE (return on equity) is pretty low. I bought it for $110k in 2012, it's worth somewhere around $200-220k now. Rents for $1650 (which doesn't seem like too bad of a ratio, but you have to add in the $350/mo HOA payment). I decided to sell this summer because I have other things I can invest the money in and get a higher return. It was a tough decision as I have emotional attachment to it, and just really like the area. I think it will appreciate well over the years. But even factoring all that in, it is the absolute worst performer in my portfolio in terms of ROE.

I think the real question is - if you sell it, what are you going to do with the money? Since you are effectively making a negative return on your $100k of equity, I would assume it wouldn't be hard to beat that with other rental properties or even stocks/bonds in the long term. You can still find 1% rule buy and hold properties that would break even cashflow-wise, but the tenants would be paying down the mortgage and you would have the benefit of future appreciation.

@Cameron Marmon ,

If I were in your shoes, I'd either sell it, or refinance it down so the payment is under $1500/mo... because if you keep it as-is, your best situation is +$85/mo,  and 1 maintenance call and you've lost all your profits.       If you keep it as is, you're just paying $300/mo for someone else to live there, not worth it IMO. 

you can make 100K now

OR

you can lose money for the long indefinite future

Even if you refi this to make cash flow, you'll then have a lousy return on equity.

selling is the only real choice here. it's got equity and it's a lousy rental.

Hey @Bruce Lynn . Thank you for your reply. I answered your questions below. I appreciate your feedback.

There's a few things in your post that cause me pause.....why $1750 in rent in January 2018, but $2100 next year? 

Unfortunately, I did not have the property ready in time to catch families moving for school. During the process, I was getting interest from people at $2,000 to $2,100, but they had to be in sooner than it would be ready. By the time the place was ready, school had started and the best I could get was $1,750. I am speculating at $2,100-$2,000. lt may be tough due to the timing the lease ends, January 2018.

What appraisal came in at $316,000? Did you refinance?

I requested for the PMI to be removed which required a new appraisal.

If you bought for $252,500 and can sell for $325,000 - 7%-8% sales costs I would think you'd clear more like $45,000 or so. That's my quick math.

I only owe about $208,000.

I'd like to see you buy two or 3 $125,000 that cash flow if you can vs the more expensive single family....or maybe a 4 unit.

I totally agree. I think that may be the best strategy.

Hey @Robert Steele . I was hoping you would chime in. I actually saw a previous post of yours where you mentioned you have sold a few of your properties, which made me start to consider selling.

Why did you rent it out to begin with? This has been my plan since I was a teenager. Buy a house, live in it for a little while, buy another home, rent the previous....My Dad's friend did it and owned almost a whole street. So it has just been a long time goal of mine. Obviously, his situation and timing was different than mine. It is not working for me haha.

Is this your only rental? Yes sir. This is my only rental.

Do you need the equity? I do not necessarily need the equity, but it is holding me back from making further RE investments at the moment. If I sold, I can be in a better position to buy 2-3 properties or make some alternative short term investment. The more I think about this sitituaion the less it makes any sense, especially with the AC going out on me. Add in the risk of the high-end finish out getting damaged, the cost and time of re-leasing, etc.

Do you need the cash flow? Fortunately, my salary supports me fine. However, if I do not get someone in the place almost immediately after my current tenant moves out then it will be a tough time as I will have to cover 2 mortgages.

SELL SELL SELL! Anytime you have any one of the following 

Break even cash flow at best / run up of appreciation which is not sustainable / $5000 in expenditures not counting rental loss's while rehabbing

and you can do any one of the following;

Create 100k in tax free gains / reinvest with 3-4 SFR with your equity which will spread your risk / create + cash flow with 3 /4 SFR

It is time to SELL SELL SELL!

@Cameron Marmon We bought our primary residence with the intention of it eventually becoming a rental. This meant buying something well-below our means, needed fixing up, and was more in-line with the house your typical renter is looking for (<$200k). From day one we calculated what we could rent it for vs. the mortgage payment/costs and only bought a house that would cash flow. That would be my recommendation going forward! And yes it's humbling living in a 40 yr old "rental" when all of your friends are building beautiful new homes :) but it will be worth it!

@Cameron Marmon I cannot really say definitively whether you should hold or sell but I can give you some points to consider.

The first rental is the toughest because if you have a vacancy  then 100% of your portfolio is vacant. If you have a bad tenant then 100% of your tenants are bad. It seems to level out at about 4. So I understand your angst. But you have to just stick it out.

Given a roughly 5% cap rate for a class A/B property in DFW you should net $1,350 after fixed non mortgage costs like taxes, insurance, HOA. Based on my own $300K+ rentals I think $2,000 to $2,200 is very doable.

I know some people consider appreciation just the icing on the cake but you need to also consider appreciation as a part of your overall return on investment. Some times in the market you get wads of cash flow and no appreciation and other times it is the opposite, like now. You need to combine the two. Think of it like stocks. Some pay dividends and some growth.

If you have a well paying career job and you are relatively far away from retirement then you don't need to worry about cash flow today. I know a lot of investors consider cash flow the holy grail and won't consider holding a property that doesn't cash flow but you don't need the cash flow today, you need it in the future. Concentrate on good properties in great neighborhoods. Particularly newer homes. That way, a couple of decades from now when you retire you will have fine properties that have not only appreciated a lot more because of the neighborhood demand but more importantly cash flow handsomely and that are only 20 years old (as apposed to 50 and costing you a lot of maintenance that you cannot afford). For more on this school of thought you should check out @Erion Shehaj Investing Architect blog.

I wouldn't worry so much about tenants trashing your fine house. Those class of tenants usually take good care of the property. But I would worry about how it will make you feel. Renting out your old home is kind of like having your ex girlfriend around along with the new guy she is sleeping with.

You should definitely consider taking advantage of the tax break on selling your old home. I'm not 100% sure but I believe you can still be taxed on this sale indirectly by the AMT.

Managing higher end rentals yourself is easier than lower end. I would not take the equity out and buy three $125K properties. The cash flow numbers for these class C/D properties always look great on paper but they never pan out. They won't appreciate as fast. They will incur more wear and tear. They will have more vacancies.

I look forward to hearing about your final decision and the reasoning behind it.

Hey @Cameron Marmon

Great discussion. I wanted to add a couple of points that will hopefully make your decision easier: 

  1. The gain on a property that's been a primary residence for only part of the time during the last 5 years is NOT completely tax-free. That was the old rule. Currently, they prorate the amount of the gain between the time it was primary and the time it was held as an investment. The part of the gain allocated to investment is taxable. I just went through this with one of my properties last year so you might want to consult with your CPA. You can still 1031 the taxable portion of the gain and defer it into the future. 
  2. Excluding selling fees, your property has been growing in value at about 6.18% per year (Compounded annual growth rate). If we assume you paid 20% down when you purchased, that translates to a 31% annual return on your investment.  The negative cash flow you're experiencing due to below market rent is offset by the fact that most of that negative cash flow goes toward paying down principal. One of the important questions you have to ask yourself is: How likely is it that the annual growth rate of 6.18% will continue to happen in the future? Is the market poised for more growth or has it topped out? Crystal ball type questions, I know. :-)
  3. When it's a good time to sell, it's usually a bad time to buy. So the analysis boils down to this: What's the real return you're currently earning on your equity (the amount you'd net after sale) including principal paydown and appreciation and can you do better than that by pulling the equity out and purchasing multiple other properties? Notice, I said nothing about cash flow since that's doesn't seem to be your primary focus now. 

This is the exact dilemma that I have right now. I have purchased 8 SFR from Aug 2014 to June 2015. Cash flow started off pretty good actually. Most of the properties are located in Northern Collin County (Plano, Allen, McKinney, 160K-200K) and two are located in Cedar Hill (120K - 150K). While properties appreciate pretty good over the past few years, cash flow keeps dropping pretty dramatically. Property tax and insurance are just getting more and more expensive and rent is either constant or increase in ~2-3% rate. I am using 15 years fixed loan so cash flow is even lower (enough to cover all the mortgage, cost for sure). I think I have two choices, either getting rent to payoff the properties slowly and speculate the appreciation, sell now and invest elsewhere with better cash flow. Tough choices...

Have you considered selling it on owner finance?  That will give you a monthly payment and you will no longer have to maintain the property, pay the taxes and insurance, etc.

Personally, I will always do owner finance instead of landlording.