rent or sell renovated house with ADU

[Jonathan Santiago]

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?

[James Jones]

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.