Should I sell rental
I purchased a SFH back in 1995 for 220,000. Lived in until 2001. Converted it to a rental in 2002. It's been a rental ever since. Renting for $3650. House is valued close to 1.5 million. Should I sell or keep it as rental?
@Ed Ma what is the reason to sell? If you sell there will be a large capital gains tax due. If you do a 1031 exchange into another investment you can avoid that. So back to the question, What is the motivation to sell?
Good Investing...
Quote from @Joe Homs:
@Ed Ma what is the reason to sell? If you sell there will be a large capital gains tax due. If you do a 1031 exchange into another investment you can avoid that. So back to the question, What is the motivation to sell?
Good Investing...
Thanks Joe. Basically, The rent I am getting for a property valued at 1.5 million seems too low. True, if I sell there will be a big tax hit. Looks like 1031 might be an option. Maybe into a NNN
@Ed Ma Why don't you just pull some money out of this property if your intention is to use it to invest in something else? Living in California, you will lose your very low property tax base if you do a 1031. Just borrow on this asset and go buy something else if that is your goal.
Good Investing...
I thought about doing cash out refi, but my current rate is 3.5%. If I refi, I'd be closer to 7% or higher
@Ed Ma what is the remaining term of the loan? Did you refi within past few years to get the 3.5% rate?
Seems like your biggest issue is rent - what is market rent and what prevents you from achieving that rent? Is your $1.5 M valuation based on comparable condition properties or does it reflect a fully renovated home?
Quote from @Ed Ma:
I purchased a SFH back in 1995 for 220,000. Lived in until 2001. Converted it to a rental in 2002. It's been a rental ever since. Renting for $3650. House is valued close to 1.5 million. Should I sell or keep it as rental?
I only recommend selling when you can invest in something else that produces a greater return or move closer to your goals.
What are your goals? Do you have any? Can you invest the money in something better without paying hundreds of thousands in taxes?
I suspect your best bet is to keep the property and enjoy the wise decision you made in 1995. In another 20 years that home could be paying for your retirement and worth $3 million.
I want to second @Nathan Gesner's advice here -- perhaps only sell if you are relatively confident in your landing spot being an improvement for you.
It's harder to finance good properties right now for obvious reasons, and if you go NNN or DST then you need to be very clear about the costs (upfront and ongoing) that might eat at your returns.
Since you mentioned NNN, I'm guessing that you aren't in love with actively managing property in perpetuity moving forward. There are lots of options for you there via 1031 exchange if you can be confident in what you're looking to replace your investment with and why.
If your rental is in CA, then you'll have the issue of giving up the low property tax base. If you want to 1031 exchange to a property outside of CA, then you'll want to be careful about how the California Franchise Tax Board makes 1031s more difficult (no surprises there) when leaving their jurisdiction.
As a 1031 QI, I'm obviously a fan of 1031 exchanges. But only in the right circumstance. Maybe selling into something with better numbers or lower headaches is the right decision for you, however I want to encourage you to speak with a few different experts along the way so that you can account for all of the important variables.
What is the motivation for selling? Look at the big picture-not just rent, but also how much the home has appreciated. Yes $3650 is not a lot of return on rent on a $1.5M home, but how much has the home appreciated over that same period of time? Compare those numbers.
I sold a rental 7 years ago that I had for a long time and bought 2 new rentals. I'm happy I did as I came out ahead, but what is interesting is the 2 rentals I bought are in very different markets (and different than where I sold). One went up a lot in price, the other didn't. The difference in rent is about $300 with the lower rent being in the less expensive home that has not increased a lot in price, the other was almost double the price and has more than doubled in price (that market is nuts)...so I get a less rent relative to the price of the home, but the increase in the value of the home more than makes up for it.
Quote from @Allan C.:
@Ed Ma what is the remaining term of the loan? Did you refi within past few years to get the 3.5% rate?
Seems like your biggest issue is rent - what is market rent and what prevents you from achieving that rent? Is your $1.5 M valuation based on comparable condition properties or does it reflect a fully renovated home?
Thank you, very good points. Something I need to consider/think about too
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If you decide to keep the home, you could refinance (and lose the 3.5% rate) or get a second position loan - this would allow you to access the equity without affecting your existing mortgage. The downside is that these loans have higher rates and a first position refinance would have, but you have to look at your blended rate to see how they stack up against each other.
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@Ed Ma I would definately sell. Your return on current equity is terrible. You could buy 30+ cash flowing townhomes in this area of KC for that that will generate substantially more than what you are getting right now not to mention paying down debt on the new property and depreciating it to lower your tax basis. You have a lot of good responses here just depends on what YOU want to do.
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If the money were sitting in the bank, you'd make double the income without tenant headaches. If you can't stand being a California landlord sell. Like being a landlord? Sell and buy 10 places in a better state.
You should definitely sell! (assuming you haven't refinanced a ton and have a large mortgage balance) - I'm assuming you have over $1 million in equity, even at a 4% cash on cash return, you would NETTING $3,333/mo. You bump that to an 8%, you should be NETTING a $6,666/mo. That's Only cash flow. The principal paydown would be much larger, the appreciation and tax write offs would be better even with a weaker market because $1,000,000 down could buy a $4,000,000 property. In a market where you can reach the 1% rule, that's $40k/month rent vs $3,600. You just need to get to know your new market intimately so that you know what a good deal looks like. Fly out there, drive the streets, meet with potential team members, talk with local investors, etc. - Not to mention you'll avoid the headaches of California Tenant friendly laws!
Yes, loan balance is about 118k @3.5% and property taxes are low due to Prop13. I'm just worried if I sell it will be a huge tax hit. The 1031 seems like an option.
I'd also have to find a property outside of CA too.
Quote from @Ed Ma:
Yes, loan balance is about 118k @3.5% and property taxes are low due to Prop13. I'm just worried if I sell it will be a huge tax hit. The 1031 seems like an option.
I'd also have to find a property outside of CA too.
Ed, your top priorities for a potential replacement property sound like
1. Cash flow
2. Less or no management
?
Are there areas that you're intuitively attracted to? Or does geography not matter to you?
@Sean Ross Yes, if outside of CA minimal management. And yes cash flow needs to be better. Anything, except on the East coast
@Ed Ma There is a lot of great advice here. I appreciate the insights on the 1031 exchange method. However, it's important to note that it functions as a deferral, meaning the taxes owed will be carried over to the next property. Therefore, if you choose to sell the subsequent property later on, you will ultimately be responsible for paying the taxes.
I would retain ownership of the property, continuing to generate rental income, while leveraging a second position loan to acquire additional investment properties. Subsequently, employing the 1031 exchange strategy once the 27.5-year tax benefit deduction period has elapsed.
- As I am not a finance expert, I urge you to conduct thorough due diligence in verifying this information.
Quote from @Ed Ma:
@Sean Ross Yes, if outside of CA minimal management. And yes cash flow needs to be better. Anything, except on the East coast
@Ed Ma, I'll send you a PM. First step is to see what options you have to land on. Once you have something to compare against, it'll be much easier for you to determine if 1031 exchange is worthwhile.
Your return on a real estate investment is Cashflow and Appreciation.
It appears that your cash-flow is negative if you assume the current FMV.
The question on whether to keep or sell it is what your required rate of return and what is the appreciation rate on the property?
if the cash on cash return is -2% and your required rate of return is 8%.
The property would need to appreciate by 10% to consider keeping it.
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1. Keep the property and 3.5% rate lock, and refinance out the capital using a HELOC or other item. Pros: You save on sales fees etc, and don't pay capital gains.
Cons: The unproductive asset still remains.
2. Sell the asset and reinvest into a more productive asset.
Pros: You can diversify the $$ into two assets of $750K each.
Cons: You need to pay sales fees, and also cap gains unless you 1031/reverse 1031.
Personally, I like option #1 (I know a lot of agents will push you to #2 as that's how they make commission), but it helps in keeping an asset and using that capital to buy something more productive. That's how we kept on doing it - pulling out capital from existing assets to buy more assets. You benefit from the appreciation of the exisitng assets, and keep compounding wealth
Just to add another thing to your list. You can also do a Deferred Sales Trust, again all depends on what you are planning to do with the proceeds of the sale.
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Real Estate Agent California (#02217494)
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Quote from @Ed Ma:Ed, congratulations!! This is an awesome problem to have. Shows what buying in CA and waiting 30 years does :)
I purchased a SFH back in 1995 for 220,000. Lived in until 2001. Converted it to a rental in 2002. It's been a rental ever since. Renting for $3650. House is valued close to 1.5 million. Should I sell or keep it as rental?
With $1.5mil invested at a 6 cap which is very achievable, it would be producing more than double ($7,500 NET monthly).
Obviously hassle factor comes into play with selling, doing a 1031 exchange, finding replacement property, etc., but from a pure math standpoint in my mind selling definitely makes sense.
But I can think of multiple turnkey assets in Reno, NV off the off the top of my head that would produce this.
Whatever you decide, best of luck to you! Congratulations again.
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