rent or sell renovated house with ADU

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rent or sell renovated house with ADU

Jonathan Santiago
Member since 2021 · 3 posts · 4 votes

Hi all,

I will try to be consise. Western MA. bought a house for 250k in 2020, did substantial renovations including adding full bath from scratch, moving/replacing a 1920s staircase, new flooring, energy efficiency, etc. in 2024 completed a 2 story detached ADU which includes a fully insulated large 2 car garage/shop with half bath, and a custom 2 bed/1ba apartment above (not builder grade, pretty fancy). we have a large corner lot so the ADU feels like its own house with its own driveway and backyard. After the ADU we got a new heloc on the property to have dry powder for future investments and to consolidate various forms of debt we used to build ADU. in the process our property was appraised at $710k. between the original down payment, original home reno, and ADU, we have roughly 180k cash into the whole thing. we want to move within our area and do the same thing over, do a light renovation on a house and build an ADU. to do so we will have to spend more than we did 5 years ago and at a higher rate. in our area rents are surging, home prices still strong (most listings go over ask within 2 weeks, although its starting to soften/slow), there is definite scarcity and i think the long term outlook for ADUs is strong. can't decide between renting the existing property (2 rentals) or selling. we currently Airbnb the ADU which is great for us as we can use the place for family visits, part of the building is a shop for my business which saves on business expenses, and the profit from the airbnb essentially cancels out our mortgage.

we could confidently rent the two dwellings for at least $5500 total against about $2600 combined mortgage/heloc .

pros of renting: generate monthly cash flow which will alleviate increase in monthly outlay as our next property will be more expensive at a higher mortgage rate; continue to build equity in a market defined by increasing scarcity. 

pros of selling/cons of renting: alleviate our somewhat house poor condition (lots of equity in the house), ability to diversify and get some of that money into the stock market, don't have to worry about tenants.  i am worried that because of covid market surge and the value we added to the property that the biggest gains are already embedded, and that ongoing appreciation will be low and perhaps diluted by future maintenance concerns.

am i giving up a valuable asset by selling the house, or is it smart to lock in gains  now and redeploy in a new project?

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James JonesPro Member
Investor · Collierville, TN 38017 · Member since 2017 · 625 posts · 455 votes
10mo
Quote from @Chase Busick:

@Jonathan Santiago this is a great post & very valid concern many people have in their investing journey.

At the end of the day, it comes down to y'alls goals. 

If you sell, you may incur a large capital gain, unless if 1031. If 1031, then may just get into something because have to & may be a little forced. Selling & moving into a new project has a ton of potential, but also a ton of potential risk, energy, time & money spent, etc. With that said it can potentially generate a lot of great potential returns.. Everything depends on so many variables that change on a somewhat regular basis - timing of the year, contractors, availability of good contractors (hopefully personally doing good & not increased costs), availability of inventory (good deals), financing, increased cost of materials/labor, etc. 

In general, I like the LTR strategy as it is the most predictable way to build wealth overtime... They get better over time, the longer you own it (debt costs hopefully stays same, rent stays up with inflation, appreciation, depreciation, loan pay down mostly from tenant, & is a little mini savings account). Selling a great asset is a hard decision. Can look at your IRR, CoC return, ROE, Cap Rate, etc. Maybe can keep & go with the other options in other ways without having to sell the assets & shows that still have a good investment with a good LTV, DSCR & cashflow. The velocity of money is a big consideration if it isn't a good investment or getting a good return. I'd highly recommend chatting with other investors/mentors in your area as well.


Chase made a lot of great points here, and I’ll add one thing from an investor’s perspective:

You've already done all the heavy lifting, bought right, renovated right, added an ADU, and created a property with multiple income streams. That type of asset is extremely hard to replace, especially in today’s higher-rate, higher-cost environment.

If your numbers are strong (and they are), selling just puts you back into a market where you’ll be paying more for the next project and starting the whole renovation cycle over again.

The question I always ask is:
Will my next purchase outperform what I already have?
If the answer is no, I keep the asset.

Long-term rentals with strong cash flow are wealth builders. You’ve built a winner, make it work for you.

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  • Chase Busick
    Realtor · Oklahoma City · Member since 2020 · 258 posts · 139 votes
    10mo

    @Jonathan Santiago this is a great post & very valid concern many people have in their investing journey.

    At the end of the day, it comes down to y'alls goals. 

    If you sell, you may incur a large capital gain, unless if 1031. If 1031, then may just get into something because have to & may be a little forced. Selling & moving into a new project has a ton of potential, but also a ton of potential risk, energy, time & money spent, etc. With that said it can potentially generate a lot of great potential returns.. Everything depends on so many variables that change on a somewhat regular basis - timing of the year, contractors, availability of good contractors (hopefully personally doing good & not increased costs), availability of inventory (good deals), financing, increased cost of materials/labor, etc. 

    In general, I like the LTR strategy as it is the most predictable way to build wealth overtime... They get better over time, the longer you own it (debt costs hopefully stays same, rent stays up with inflation, appreciation, depreciation, loan pay down mostly from tenant, & is a little mini savings account). Selling a great asset is a hard decision. Can look at your IRR, CoC return, ROE, Cap Rate, etc. Maybe can keep & go with the other options in other ways without having to sell the assets & shows that still have a good investment with a good LTV, DSCR & cashflow. The velocity of money is a big consideration if it isn't a good investment or getting a good return. I'd highly recommend chatting with other investors/mentors in your area as well.

    0Reply
    • James JonesPro Member
      Investor · Collierville, TN 38017 · Member since 2017 · 625 posts · 455 votes
      10mo
      Quote from @Chase Busick:

      @Jonathan Santiago this is a great post & very valid concern many people have in their investing journey.

      At the end of the day, it comes down to y'alls goals. 

      If you sell, you may incur a large capital gain, unless if 1031. If 1031, then may just get into something because have to & may be a little forced. Selling & moving into a new project has a ton of potential, but also a ton of potential risk, energy, time & money spent, etc. With that said it can potentially generate a lot of great potential returns.. Everything depends on so many variables that change on a somewhat regular basis - timing of the year, contractors, availability of good contractors (hopefully personally doing good & not increased costs), availability of inventory (good deals), financing, increased cost of materials/labor, etc. 

      In general, I like the LTR strategy as it is the most predictable way to build wealth overtime... They get better over time, the longer you own it (debt costs hopefully stays same, rent stays up with inflation, appreciation, depreciation, loan pay down mostly from tenant, & is a little mini savings account). Selling a great asset is a hard decision. Can look at your IRR, CoC return, ROE, Cap Rate, etc. Maybe can keep & go with the other options in other ways without having to sell the assets & shows that still have a good investment with a good LTV, DSCR & cashflow. The velocity of money is a big consideration if it isn't a good investment or getting a good return. I'd highly recommend chatting with other investors/mentors in your area as well.


      Chase made a lot of great points here, and I’ll add one thing from an investor’s perspective:

      You've already done all the heavy lifting, bought right, renovated right, added an ADU, and created a property with multiple income streams. That type of asset is extremely hard to replace, especially in today’s higher-rate, higher-cost environment.

      If your numbers are strong (and they are), selling just puts you back into a market where you’ll be paying more for the next project and starting the whole renovation cycle over again.

      The question I always ask is:
      Will my next purchase outperform what I already have?
      If the answer is no, I keep the asset.

      Long-term rentals with strong cash flow are wealth builders. You’ve built a winner, make it work for you.

      2Reply
  • James JonesPro Member
    Investor · Collierville, TN 38017 · Member since 2017 · 625 posts · 455 votes
    10mo

    Jonathan, you’ve built a seriously strong asset here. A renovated main house + a high-quality detached ADU on its own driveway is exactly the type of property that stays in demand long-term, which is why your numbers look the way they do.

    A few thoughts from an investor perspective:

    1. Your cash flow is extremely solid

    $5,500/month in rent against ~$2,600 all-in mortgage/HELOC is outstanding.
    That’s roughly $3,000/month in pure spread before tax benefits. It’s very hard to replace that kind of return in today’s higher-rate environment.

    2. You’re sitting on an appreciating, scarce asset

    Western MA + a renovated property + a new ADU + limited inventory = continued long-term demand.
    Even if appreciation slows, properties like yours with multiple income streams tend to outperform average market trends.

    3. Selling resets the game at a more expensive level

    If you sell, the next house you buy will:

    • Cost more than your original one

    • Have a higher interest rate

    • Require new renovation capital

    • Not have an ADU out of the box

    You’d be giving up a known winner to jump into a less predictable future project at a higher price point.

    4. Your concerns are valid, but manageable

    Maintenance, tenant issues, “having too much equity,” etc. are real.
    But these aren’t reasons to sell; they’re reasons to put the right systems in place.

    Equity is not a problem.
    Equity is a lever. If you ever want to pull capital out, you can refinance or get a larger line.

    Here’s the bottom line:

    Unless you must sell to qualify for the next property, you’ll almost always be better off keeping a cash-flowing asset that pays for itself and continues to appreciate.

    You’ve already done the hard part, acquiring, renovating, and creating multiple units. Now you’re in the “collect the rewards” phase.

    If it were me, I’d keep it, enjoy the strong cash flow, and use that income to fuel the next project.

    0Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    10mo

    @Jonathan Santiago,

    This is a great position to be in and you have done an impressive job adding value. From a tax perspective, the choice to sell or rent really depends on two key areas. First is how the gain will be taxed. Second is the long term tax benefits you would be giving up or gaining based on the path you choose.

    If you sell the property and have lived in it for at least two of the last five years, you may qualify for the Section 121 home sale exclusion. This allows up to 500,000 of gain to be tax free for married couples. That can make selling more attractive because it lets you lock in gains without paying capital gains tax. If the ADU was used partly for business or rental, a portion may not qualify, but most of the main home usually does.

    If you decide to sell the property after converting it fully to a rental, you also have the option to defer taxes with a 1031 exchange. A 1031 lets you sell the property and reinvest the gain into another investment property without paying tax today. This can be helpful if your plan is to move into a new project and continue building in your area.

    If you keep the property as a rental, you get long term tax benefits. You get depreciation on both the house and the ADU. You also get the ability to offset rental income with expenses and potentially use cost segregation to accelerate deductions. Keeping it as a rental can create very low taxable income while the property continues to appreciate. Since you already have strong cash flow potential, the tax efficiency is a major advantage.

    Your concern about giving up an appreciating asset is valid, but so is the benefit of freeing up equity tax free if you qualify under Section 121. That is something investors rarely want to waste. Once the property becomes a rental for good, you eventually lose the ability to use Section 121 on the full gain unless you move back in for another two years. You can best of both worlds by selling the house to yourself in a privately held corporation.

    So from a tax lens, the decision comes down to whether you want the immediate tax free exit, the 1031 exchange route, or the long term depreciation and cash flow from keeping it as a rental.

    Good luck and happy to connect.

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    0Reply
  • Chase Busick
    Realtor · Oklahoma City · Member since 2020 · 258 posts · 139 votes
    9mo

    I agree with @James Jones again on the follow comment to my post. 

    Having to sell an asset because you have to or want to in order to move into the next is meh. It works best to keep long term, but know the itch to want to move on & makes it a bigger decision. If you are afraid of missing the wave & asset value deflating/depreciating - selling right around now will add on top of that. On market inventory, at least for Oklahoma City is rising slowly but we are not yet in a full buyer's market.

    Can always possibly use the equity & get a line of credit from a bank to access the untapped value. Or go to the bank or commercial mortgage broker (I can chat about more options for this) & the equity/LTV's/DSCR will still help in future deals.

    0Reply
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