I am struggling with a decision regarding whether or not I should hold or sell a rental property.
Here are the details:
Seattle area (Renton)
Condo - built in 1979, the complex itself is in decent shape, but showing its age. No special assessments or indications of anything significant upcoming.
Purchased in 2011 for $46k (foreclosure)
Current value: $200k + (comparable units, in great condition - mine is NOT in great condition)
Current mortgage: $27.5k @ $75/month
Property Taxes: $163/month
Total Monthly expense: $595/month
Total income: $305/month
I own two units in the complex, and plan to hold one of them long term for both the rental income and, potentially, a place for my son to live a few years from now (If you are familiar with the real estate market in the Seattle area, you know how hard it is for young people to find a reasonably priced place to live. I'd like to save him that pain). Between the two of the rental units, it's a pretty decent monthly income. I purchased the other unit for a very similar price, but charge $1000/month, as it's in better shape than the other.
I have long term tenants in both units (5 years, and 4 years). The rent on both units is significantly below market rate. Upgraded units in the same complex are getting between $1300 and $1500/month at the high end. I could not charge this currently - the units both need a remodel.
The unit I am considering selling is not in great shape. It was low end and very dated when I rented it out to the current tenant, and has seen significant wear and tear in the 5 years they've been there. It doesn't look great. (Explains the current rent I'm charging below market rate). It would need a complete remodel before I would consider renting it out to another tenant or selling it.
I worry a bit about a market correction here in Seattle, and at 4x appreciation, I wonder if it wouldn't be best to take the money and run on one of the units.
I don't have plans at the moment to purchase another rental property here in Seattle (I think you'd be crazy to do that right now) or anywhere else, though I guess I would consider it if I could get into a small complex of some sort in a reasonably priced and growing area of the country. The only current plans for the money would be to pay off the mortgage on the rental units ($55k total, between the two) and pay off my own house. So I'd take the hit on capital gains and be pretty happy about being free of one rental responsibility and the mortgage on my house. At the same time, I feel like I could really put that money to use, and help ensure a better retirement. See my conundrum?
I did a remodel on one of them when I first bought it - did everything myself - Home Depot quality materials - and did it for about $6k. I don't have the time or energy to do this myself this time around, so figure it would cost me $20k to have someone do it for me.
I'm almost 50, and plan to retire in about 10 years. I manage both these units myself.
I would love some feedback from the community - what would you do?
- Remodel and re-rent at a higher rate?
- Remodel and sell - pay off the mortgages on both units and my personal house?
- Remodel and sell - invest in a multi-plex of some sort somewhere less expensive in the country. (I don't have an objection to buying somewhere remote and utilizing a property management company)
- Hold steady - don't do anything. Keep collecting rent?
Thanks in advance for the feedback - what a great community!
Personally, I would sell the condo and use a 1031 exchange on a larger multi-family (in a market with solid return where you're cash-flowing nicely) so you don't have to pay taxes on the condo sale.
As far as a remodel or not, that depends on if it's worth doing. Do some research to see how much return you can get for a remodel (if spending 20K on a remodel means you selling the property for 200K instead of 150K then that would be a good decision).
Thanks for the recommendation Karl!
I get the feeling the 1031 is the smartest financial move, but I'm not sure how much time and energy I'll have to put into it, particularly since I don't personally believe the Seattle area is a great place to invest in any longer. I believe it's now due for a correction in the next year or two, and the high entry costs are a barrier as well. I think there are better opportunities elsewhere, but I'm not sure how much time and energy I can sink into exploring those options.
I probably should have stated this was my least preferred option in my original post.
@Tom Starlin I'm in agreement with @Karl B. I'd 1031 into a multi-family. In terms of the correction coming up to your market, review the historical facts about the previous correction in this market and see if you can locate a trend. If the trend is downward, then sell now. Alternatively keep the condo and renovate it to max out on the rent. If you want to retire in 10 years, you'd want to have the steady income coming in to you.
I agree, sell both and reinvest in something better. Your rents are 1/2 what they need to be for a property of that value. Far below a acceptable amount for a property worth 200K. Positive cash flow....no possible way long term.
Based on the opportunity value of your equity your properties do not have true positive cash flow. You are losing money every month.
Opportunity value at 10% on 100K is worth $833/month. If both units are of similar value you have $345K in equity. That is a s**t load of negative cash flow.
@Tom Starlin your statement, "I could not charge this currently - the units both need a remodel." How do you know this with absolute certainty? Seems like you're bringing you own personal opinion about rent as opposed to letting the fair market decide. Quite frankly, I would look into that since it seems to be the basis of the reason for your "problem."
Also, I would caution anyone from attempting to invest in something "better." What is better? Is better for me different than for you? Most definitely. I think it's very dangerous to chase returns & to seek out the very highest ROI possible without considering risk. If what you have gets you to where you'd like to be, why risk the change? And regarding change, what is the interest rate on your rental(s)? It doesn't make sense to pay off those if the rates are low enough.
It might help realizing too that you're in a market that shows no sign of slowing down.
@Tom Starlin From an strict investment perspective, these properties are dogs and all stars at the same time. From a NOI position they're underperforming - especially considering the low amount of leverage offering little of tenant principle pay down. But from an appreciation perspective they've been outstanding.
So you've got to look in your crystal ball and decide if crappy cash flow is worth any potential appreciation. If the market can run you won't find a better return. If it's topped then getting out yesterday is the call.
But there's an added element in your desire for your son. Have you talked to him about it to verify that he'll be interested or located in the area? The same cash put somewhere else reaps the same benefit.
So here's another thought for you - Since cash flow is going to not really be a factor on these and since you have decided to hold on to one. Go ahead and destroy the cash flow completely on the one you plan to hold. Break even on it rental wise. Let the tenant pay down the principle slowly. Refi it and take the cash and use it to pay the note off on the other one and supplement those funds in a 1031 on the sale of the other one. Now you're not hampered by debt unless you want to be. And you have more cash to go an buy a solid cash flowing investment or two.
Thank you all very much for your perspectives - it is much appreciated!
From your purchase price, you have a lot of flexibility. I agree with @Patrick Britton the caution of investing in something "better", especially since you seem to have good handle of the properties.
One comment I was looking to find is: What objective are you looking to accomplish? And perhaps the true nature of your question is that you are not sure yourself.
With that being said, I also have (had) two condos in Renton (98055) and in a very similar situation as you. I recently sold one (Acquired 2014 for $93k / Improved $35k over the course of 4 years. $25k of which in preparation for sale / Sold June 2018 $233k)
Will sell the other condo once the tenant's lease expired,
The reasons I sold were:
1.) I was using the appreciation to pay down leverage I used to acquire small multi-family in Tac.
2.) I was tired of dealing with the HOA.
3.) Many of the condos in secondary / tertiary markets are now just starting to recover from 2008 and push to new price highs, but their capital reserves have not (especially in older buildings) I would go back and review the reserve study of your condo and see how well/poorly they are capitalized. If they are at 20% or less, I'd be very tempted to sell. In my two condos, they are under 25% which is why I made the decision to sell.
Hi Son-Hsiung Riu,
First off, congratulations on your recent transaction!
Great suggestion on reviewing the reserve study. Thank you.
I went back through the studies from the last several years, and noticed a trend.
At the peak 5 years ago, the reserve was funded at 56%. The last study was in early 2017, and is sitting at 27%.
The HOA board has decided to forego the study for this year, and plans one for 2019.
Should this be raising some red flags with me?
These condos are over 40 years old.
Reserve studies are expensive so the fact that they are foregoing the study until 2019 is ok in my opinion.
The move from 56% to 27% sounds reasonable as I'm guessing paid for a larger project, but you'll want to pay attention to what the study says needs to be addressed and if the condo will have a shortfall.
The funny thing with reserve studies is that any project that at peak reaches 70% is actually considered well-capitalized. I'd challenge anyone to find a reserve study of an age established condo that is 100% capitalized.