I have a good problem with an old VA loan property and to much equity.
Current situation: Tenet is about to move out and I am questioning whether to rent again or sell. I originally bought with no money down and the property is 14 years old and in good condition, but has a lot of upcoming expected maintenance due to its age( ie furnace, roof, washers, dryers, kitchen appliances, etc) I have been told that I can possibly sell under IRS Bulletin 523 and avoid capital gains taxes but have not done my own research on that yet. The property is located in WA state which has legislation on the floor introducing rent control and changes to eviction laws.
Money facts: As a rental the property cashflows $310 after mortgage, escrow and managment, small repairs planned or unplanned negate all the cash flow.
If I sold it I could expect between $140-150000 after taxes and expenses. Which ironically is the remaining principle on my primary residence which will likely be a rental in a few years and is in TN a potentially more landlord friendly state.
External influences: My wife and I are pursuing FI mainly through real estate. We are both moderately paid professionals but foresee upcoming changes in our careers in 1-3 years.
Options that I see:
Option A: Continue to rent making minimal cash flow with small increases of rent over time, keeping the equity in the property to be used later, with high potential for increased equity.
Option B: Sell the property in WA and use the proceeds to live mortgage free for a few years saving more in living expenses then the property cash flows. Then in a few years have a rental that is owned out right and cash flowing between 800-1100 a month.
Option C: Open to suggestions or other trains of thought.
What is your advice?
One thing you left out. What your goals are. Define your end goal and work backwards to create a plan that makes sense for achieving that goal.
If you have been in the home more than a year or two you should be able to avoid Cap Gains.
Another factor to throw in is that properties are selling for very high prices in most areas. This means you can probably get great returns on your rental, but is also means you are going to pay that much more for the next property. You would have to run the math to see what "makes sense" for you, but $310 cashflow does not sound like "minimal" to me, especially with your loan getting paid down for free. Ideally you would have been setting CapEx $$ aside when you acquired the property so the hit will be minimal.
My guess is by posting this and the concern over repairs and potentially changing laws, you have a good idea of what you want to do. If your numbers are correct the $140,000 you would net on a sale is 37 years of $310 per month cash flow. A cash flowing $310 per month property is a good thing; I wonder what getting 37 years of cash flow would do for your FI journey. Paying off a primary residence and turning it into a rental, pay 1/2 of your current home off and refi to the lower mortgage and use the other $70K to buy another investment where you want, keep the rental if you want - the good news there are a lot of good options.
Your goal is FI - the rental obviously helped you get there. But many ways to FI through real estate besides owning a rental in Washington.
What to do is always a very personal decision, and I agree with @Karl McGarvey in that you have to start with your goals. Grounding in your goal of FI and then evaluating what path gets you there fastest for the life of freedom you want is a great situation to be in.
You noted your primary home was in TN - I am south of Nashville and I am in Knoxville and Gatlinburg regularly with some properties there. PM me if you would like to meet up and talk about future opportunities.
Your cash flow numbers exclude major expenses like vacancy, repairs, and cap ex. If estimates for those are added in, the return on equity for this property is much lower than you think. If this is an appreciation play, ok, but if you want cash flow this one is not doing it.
Ben Leybovich has written some helpful material on running accurate numbers for expenses.