hold or sell and reinvest

Real Estate Deal Analysis & Advice
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hold or sell and reinvest

Gene D.
Rental Property Investor · Boca Raton, FL · Member since 2015 · 75 posts · 25 votes

Hello everyone, thanks for taking the time to read this.

I have a condo that currently can sell for ~ $700k, originally purchased for ~$500k, 30 yr fixed at 4.625, currently rented for $2,800.  All other monthly expenses ~$500 (tenant pays,water, heat, etc, property is tax abated for the next 10 years, with annual taxes  currently projected at ~8k).

While nobody has a crystal ball, I suspect it may keep going up by about 5% per year, a pretty popular area in Brooklyn, NY.

I lived there myself for the first 3 years and have rented it for the past 18 months, the current tenant moving out, rental demand is very strong, getting someone else should be no problem or can provide vacant if decided to sell.  Costs me zero to have a realtor screen and bring in a tenant, as the renter takes care of the fees in my part of NY.  The building also has a mgt co available for small repairs, very reasonable fees.

I moved to Florida and am currently looking at investment opportunities in Palm Beach, Dade and Broward counties, there seem to be options out there for a higher return on both flip and buy and hold.

I'd love to hear any thoughts on the correct move or to connect with someone that has local FL area knowledge.

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Neal Collins
Developer · Portland, OR · Member since 2014 · 732 posts · 490 votes
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I'm not advocating either way because it depends if you're end game is appreciation or cash flow, but something to seriously consider is the tax free profit of up to $250,000 if single or $500,000 if married on a property you've lived in two of the last five years. That's a lot of spare change not having to go to the government if you sell now...
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  • Jeremiah H.
    Investor · Tavares, FL · Member since 2015 · 110 posts · 24 votes
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    Returns are much better in Florida in my experience. I give advice based of what I would do. I would sell that property and reinvest that money in Florida. I'm in Central Florida and getting 1% monthly rent back on your purchase price isn't hard to find and with any work higher returns than 1% are readily available as well. You're currently getting .56%

    I'd rather own my properties in my immediate area, especially when returns are much better.

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  • Neal Collins
    Developer · Portland, OR · Member since 2014 · 732 posts · 490 votes
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    I'm not advocating either way because it depends if you're end game is appreciation or cash flow, but something to seriously consider is the tax free profit of up to $250,000 if single or $500,000 if married on a property you've lived in two of the last five years. That's a lot of spare change not having to go to the government if you sell now...
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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
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    I'd sell, too.  That section 121 exclusion is just too sweet!  Ask many a long-distance landlord with horror stories if they wished they'd done things differently.  Sell, sell, sell!

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  • Account Closed
    Real Estate Agent · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
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    It is hard to give up the appreciation in NY and you might never be able to get back in The cost of entry in Florida is so much lower that you can easily cash  out some investment money for Florida. If you want to sell in a year or 2 that that will still be an option

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  • Kevin Mizuno
    Investor · Honolulu, HI · Member since 2015 · 10 posts · 3 votes
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    I would definitely look at the $250,000 capital gain benefit of selling now.  If you sell later you will have to pay taxes on the gain.  Not sure where the market will go with the raising of interest rates and inflation so that is where the uncertainty you need to take a chance. 

    I do agree with the previous poster as I like to invest where I can check on my properties.  

    1Reply
  • Gene D.
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    Rental Property Investor · Boca Raton, FL · Member since 2015 · 75 posts · 25 votes
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    @Jeremiah Hilliard

    Thanks for the comment. That's in line with my thoughts as well. Assuming I can pull out about $300k from NY, I can get anywhere from 2 to 10 quality properties down in FL, with a rent roll of about $10k. What net income should one aim for in your opinion within that equation? I'm also not confident about the FL potential appreciation in the market, as I think NY is likely to outperform both short and long-term. Plus, there is no added headache involved with dealing with added tenants.

    I'm also contemplating hiring a local turnkey operator to try and pull off a couple of foreclosure flips. How is your local market in terms of these opportunities? Any insights or suggestions welcome and appreciated.

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  • Gene D.
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    Rental Property Investor · Boca Raton, FL · Member since 2015 · 75 posts · 25 votes
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    @Neal Collins

    Very good point, I thought about it as well. From the brief chat I had with my tax preparer, my understanding is that the profit wouldn’t be completely tax free, as I’ve already started depreciating the property on my 2014 tax returns, same will apply to 2015. My understanding is that a prorated portion of the net profit will still be taxed.

    Assuming property was purchased Sept 2010 and is sold Sept 2015. I resided there from purchase date until tenant moved in on March 1, 2014 and will move out on Aug 31, 2015. Total 60 months of ownership, and 18 months as investment. Approximately 30% of the profit therefore is taxable.

    Am I understating this correctly or are you saying that it’s just as simple as “if you live there for 2 of 5 years it’s totally tax free”?

    Thanks

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  • Gene D.
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    Rental Property Investor · Boca Raton, FL · Member since 2015 · 75 posts · 25 votes
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    @Steve Vaughan

    Can you shine a light on my assumptions outlined above in the response to @Neal Collins regarding section 121 exclusion?

    I would also agree that there are advantages to being local, howeve, having lived in the unit myself previously I've buillt close relationships with neighbors and they can always let me know if anything is going on, there is also a maintenance guy on site and the management co keeping an eye on things, proximity to the property is not a concern in this case...unless you can suggest something I am not aware of as pary of my consideration.

    Thank you

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  • Jeff T.
    Rental Property Investor · Culver City, CA · Member since 2014 · 222 posts · 79 votes
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    @Gene D., I agree with @Neal Collinsin that it depends on what your end game is.  I own property in Los Angeles and Florida.  If you want to hold something long term, then places with jobs and nowhere to build will tend to be better.

    There may be places like that in Florida, too, but Brooklyn is something that you know will be worth more in 20 years.

    Places in Florida have a good future also, but depending on where you are it'll go up and down.

    So I would look at what you can get in Florida, taking into account all costs first.  Then determine what your goals are, and see what better fits your goals.

    1Reply
  • Gene D.
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    Rental Property Investor · Boca Raton, FL · Member since 2015 · 75 posts · 25 votes
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    @Kevin Mizuno

    Thanks Kevin.  To avoid being redundant, please have a look at my reply to @Steve Vaughan and @Neal Collins.

    Any input much appreciated.

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  • Vincent Crane
    Realtor · Atlanta, GA · Member since 2015 · 693 posts · 357 votes
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    Do not sell that apt in Brooklyn, it's only going to keep going up. When it's worth $1.5M in 15-20 years you'll wish you still had it. Since it appreciated so much though, you do have the option of doing a cash-out refinance or HELOC and taking some of the equity out of that condo to purchase another investment property.

    2Reply
  • Gene D.
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    Rental Property Investor · Boca Raton, FL · Member since 2015 · 75 posts · 25 votes
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    @Steven Picker

    Very true, I did think about potential appreciation in NY.  Having geographical diversification is another benefit.  When you say: "cost of entry in Florida is so much lower that you can easily cash out some investment money for Florida", are you suggesting to get the property appraised and pull the equity and use that as my investment capital for FL?  If I understand you correctly, can you expand a bit on the mechanics involved?

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  • Gene D.
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    Rental Property Investor · Boca Raton, FL · Member since 2015 · 75 posts · 25 votes
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    @Jeff T.

    My endgame is strictly ROI in the short term and passive income longterm. I've spoken with multiple agents around me and the general consensus is that you can still flip things with ~15% gain within 4 months. If I can put 3 of those deals together in a year, that is potentially a very good way to go. Obviously there is the added risk, and I still have my day job. Ultimately I'd like to have enough passive income to not have to rely on my job, but in order to do that I have to put together enough capital to purchase more units. The path of least resistance seems through a couple of flips to move in that direction.

    Where in FL are you investing?  Any insights on that market or anything else outlined above much appreciated.

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  • Gene D.
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    Rental Property Investor · Boca Raton, FL · Member since 2015 · 75 posts · 25 votes
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    @Vincent Crane

    Great suggestion, I've been considering this as well vs just getting hard financing.  Any thoughts on pros vs cons?

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  • Neal Collins
    Developer · Portland, OR · Member since 2014 · 732 posts · 490 votes
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    Your accountant would be the one to ask about taxes and so I want to caution you as to the validity of what I'm about to say. You do qualify to up to $250,000 of tax free gains as an owner occupied person. If your accountant is saying you have to pay taxes on the recaptured depreciation then I really don't think it's going to be that much since an assets "lifetime" is 27.5 years and you depreciated it for two or three years. 

    My vote would be to hold on to the place and pull equity out as needed. There is nothing passive about flipping in Florida. Like someone said, Brooklyn isn't going anywhere, but Florida...between hurricanes, politics, and potential economic downturns, well the same doesn't hold true. 

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  • Allan Glass
    Investor/Developer · Los Angeles, CA · Member since 2010 · 107 posts · 92 votes
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    Everyone is so eager to move on to the next thing...  I don't understand why someone would sell an appreciating asset, that has positive cash flow unless they had to. It doesn't seem like you have to @Gene D.

    1) consider leveraging your assets to buy more 

    2) if you must sell, 1031 exchange to defer all taxes on sale. 

    BTW, Gene you have it backwards, you buy for income in the short term for wealth or ROI in the long term. For a more detailed explanation visit one of @ben leybovich posts.

    I'll leave you with a quote from my first real estate professor, on the first day of class in my freshman year. It has always stuck with me. 

    "Anyone who buys any piece of cash flowing real estate, anywhere, at any price, and holds it for 30 years will build wealth. That is real estate investing. The rest is speculation..."

    Best of luck to all of you!

    A

    2Reply
  • Gene D.
    OP
    Rental Property Investor · Boca Raton, FL · Member since 2015 · 75 posts · 25 votes
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    @Neal Collins

    Thanks for the opinion, I'll definitely look into the specifics tax implications involved.  I'm certainly not worried if it's 27.5 (depreciating life of unit) divided by 1.5 (years as investment property)...my concern is if 30% of the profit is taxable due to owner occupied 3.5 yrs vs renter occupied 1.5 yrs calculations outlined in my prior message to you...just wondering if someone knows the correct rule that will be applied by the irs.

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  • Phil Hong
    Investor · Torrance, CA · Member since 2013 · 35 posts · 8 votes
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    @Gene D.

    The rule is you must have designated the property as your primary residence for 2 out of the past 5 years to qualify for the exclusion. It looks like you still have some time left to decide if you want to sell. Here is the official language from the IRS:

    To exclude gain, a taxpayer must both own and use the home as a principal residence for two of the five years before the sale. The ownership and use periods need not be concurrent. The two years may consist of 24 full months or 730 days. Short absences, such as for a summer vacation, count as periods of use, but longer breaks, such as a one-year sabbatical, do not. The taxpayer also must not have excluded gain on another home sold during the two years before the current sale.

    http://www.irs.gov/uac/IRS-Issues-Home-Sale-Exclus...

    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
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    @Gene D. Because of the 5 year look back on sec 121 you have roughly another 18 months to decide if you want to take advantage of the primary residence exclusion.  You will have to recoup any depreciation but you'll get the 250/500k gain tax free.  

    If you don't want to make a decision prior to that then a 1031 exchange would still be available to you if you want to move that property to Florida.  

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  • Jeremiah H.
    Investor · Tavares, FL · Member since 2015 · 110 posts · 24 votes
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    Originally posted by @Allan Glass:

    Everyone is so eager to move on to the next thing...  I don't understand why someone would sell an appreciating asset, that has positive cash flow unless they had to. It doesn't seem like you have to @Gene D.

    He doesn't have to sell it but he can earn much better returns on his money if he reinvest it into a better market. By the same logic if you're earning 1% in a CD, we'd all move that money to a better source of income. The CD still earns interest but it's not optimized. 

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  • Larry Turowski
    Flipper/Rehabber · Rochester, NY · Member since 2014 · 1k+ posts · 1k+ votes
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    @Gene D. You said that you are strictly looking for ROI. So we need to know what your ROI would be by holding.

    You said you could pull about $300K from the NY property, so I'll take that as your equity position and assume you have a $400K mortgage.

    With a 30yr loan at 4.65% our mortgage payments should be about $2063, of which $1,550 is interest and $513 is principal.  Renting out at $2,800/mo, minus your $500/mo expenses, you are cash flowing $2,800 - $500 - $2,063 = $237/mo.  Together with your principal payments of $513, you are grossing $750/mo.  Yearly, that is $9,000.

    You also assume 5% annual appreciation.  0.05 * $700K = $35K/yr.

    So your initial total gross yearly ROI on your $300K of equity is $9,000 + $35,000 = $44,000. That's a 13.2% ROI.

    It sounds like you can much better flipping in FL.  Keep in mind holding is more passive, flipping is much more active.  Also, you are somewhat speculating on the appreciation in NY and flipping margins in FL.

    1Reply
  • Allan Glass
    Investor/Developer · Los Angeles, CA · Member since 2010 · 107 posts · 92 votes
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    Hi @jeremiah 

    @Jeremiah H.

    Instead of writing a long explanation, i'll refer you to Ben's post on the subject, he did a great job of conveying the point I'm trying to make

    http://www.biggerpockets.com/renewsblog/2015/07/21...

    2Reply
  • Gene D.
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    Rental Property Investor · Boca Raton, FL · Member since 2015 · 75 posts · 25 votes
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    @Allan Glass

    Thanks for the response.  Cute quote from your professor, though much like investing in growth vs value stocks, there is no one correct answer.

    "I don't understand why someone would sell an appreciating asset" - answer is opportunity cost.  $300k equity earning less than potentially available elsewhere.

    "1) consider leveraging your assets to buy more" - I am, hence the questions on the BP board:), would love to hear any advice you may have on how to optimize this process.

    "2) if you must sell, 1031 exchange to defer all taxes on sale." -  My understanding is that it has to be an equal or higher value property, which I would be looking to get multiple lower priced units instead, there are multiple other constraints as well.

    "BTW, Gene you have it backwards, you buy for income in the short term for wealth or ROI in the long term. For a more detailed explanation visit one of @ben leybovich posts. " - I'm afraid this point is comparable to a debate about the chicken and the egg:)).

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  • Gene D.
    OP
    Rental Property Investor · Boca Raton, FL · Member since 2015 · 75 posts · 25 votes
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    @Phil Hong

    Thank you, straight to the point!

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  • Jeremiah H.
    Investor · Tavares, FL · Member since 2015 · 110 posts · 24 votes
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    Originally posted by @Allan Glass:

    Hi @jeremiah 

    @Jeremiah H.

    Instead of writing a long explanation, i'll refer you to Ben's post on the subject, he did a great job of conveying the point I'm trying to make

    http://www.biggerpockets.com/renewsblog/2015/07/21...

    Great article! I read it a few times to try and comprehend how that article solidifies the original poster keeping the NY property. I'm missing the boat and you are much more experienced than myself so I don't doubt you're correct but when you get a chance would you mind explaining it? 

    I can't get my head around why his IRR would be better with the NY property involved, especially factoring in long distance land lording aspect.

    Also, your original statement of "I don't understand why someone would sell an appreciating asset, that has positive cash flow unless they had to" is something I can't seem to grasp. When most of us sell a property it isn't because we had to, it's because we were seeking a better return elsewhere. I'm sure you've sold many properties that you didn't have to, right? 

    Please don't take my questions as doubting you, I'm trying to learn

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