Should I sell my rental property

Question

I have a rental property and the tenant is moving out soon. I am trying to decide if it is better to sell it right now since the price has gone up.

Monthly Rent: $1600

HOA: $313/month

Taxes: $4180

Potential Sale Price: $276000

Not even accounting for maintenance this seems to be just 4% returns. Do you think it is better to just sell?

Dave Foster · Answer

@Will Yang, The capital gain exclusion for your primary residence is a 5 year look back from the day you sell. If you can demonstrate that you lived there for 2 years out of the 5 year period prior to sale then you can the the first $250/$500K in profit tax free. So if you've rented it for less than three years prior to the sale you're good. If it crosses that 3 year mark before you can sell it then you're not eligible.

At that point you'd want to do a 1031 exchange where you sell your investment property and buy investment property and get to defer all tax. Not as sweet as tax free but still a great way to leverage your portfolio growth.

At that point you'd want to do a 1031 exchange where you sell your investment property and buy investment property and get to defer all tax.  Not as sweet as tax free but still a great way to leverage your portfolio growth.

Account Closed · Answer

Depending on how much equity you have in the property (you didn't say what you owe on it), it might be worth doing a 1031 exchange into a rental property WITHOUT an astronomical HOA fee (mine for my SFHs are only around $20 per month!) and in a location where you can still meet the 1% rule (meaning if the value of the property is $276K, you would want to get $2760 per month in gross rent). I hear that you can't meet the 1% rule in Austin anymore, but possibly still can in Houston. I can't meet the 1% rule where I live, so I invest out-of-state so I can cash-flow.

If you sell it and don't buy another like-kind property, you will want to consider the tax effects when you are calculating what you will walk away with.

Good luck!

Will Yang · Answer

Thanks for the feedback. I think I am going to sell an try to pick up a more investment properties.

Aaron Gordy · Answer

@will

@Will Yang, @David Foster. The most important thing to consider is the tax implications. If it is indeed true that you have rented it for 3 years and lived in it for the previous two years then you are in that narrow gap of tax free capital gains. You can always do a tax deferred exchange like a 1031 but you won't be able to access that gain without paying taxes. I would sell the property and go on a vacation as a reward..haha. Then I would put that money back to work into other investment properties with 20% down to 25% down and buy two properties that has better cash flow without that crazy high hoa. My two cents.

Thomas S. · Answer

I would sell now. Your rent to value is to low making this a negative cash flow property. Take the money and run.

Leslie Pappas · Answer

Hi @Will Yang, if you’re an accredited investor there is an investment product called a DST (Delaware Statutory Trust) that might be beneficial for you to learn about if you decide to perform a 1031 exchange. From my experience DSTs have helped real estate investors eliminate the day-to-day hassles of property management, allowing for more free time to do the things that are more important.

All the details of rent collection, leasing, maintenance, repairs and bookkeeping are handled by national class, professional property managers. The DST real estate providers (sponsors), who possess the special expertise in managing commercial real estate, perform the functions of overall asset manager and investor relations management.  DSTs offer potential cash flow, tax shelter and appreciation. Loans are non-recourse.

Ralph R. · Answer

@Will Yang

you havn't given enough info to do a full analysis, and I bet enough thought into all your options. you told what you owe but what did you Pay?  you have to take out closing costs when you sell, and for that I generally allow 8% to cover commission and fees.  you probably are exempt from CG if you have lived there 2 of the last 5 years.

I just got a quote today for a 25yr commercial (portfolio) loan  if you refinance at 5.325% for 25 years the P&I payment will be $784 month.  You can beat that with a 30 year conventional loan if you want.  Plug that payment number into the calculator here on BP and see how that affects your cash flow.  the only bad thing I see is that darn HOA, but it depends on how much of the maintenance and cap ex that takes out of the equation.

good luck

RR

Will Yang · Answer

I have also only rented out the place for 3 years and lived there full time before for several years. Is it t true that I can take the capital gains exclusion since it has been less than 3 years?

I may also consider the 1031, thanks for directing me to it!

Will Yang · Answer

130k on mortgage about 12yrs remaining at 2.75 rate.

I don't need the money right now but I feel I could do better in the market or buy a cheaper property with better returns.

This is my only rental.

Should I sell my rental property

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