Should I sell or hold?

Question

I'm at a bit of a crossroads, and figured I'd ask for some advice/feedback...

I've got 2 x single family rentals in Jacksonville, FL, and I'm trying to decide if I should sell one of them and reinvest in a cheaper cash-flow oriented market or continue to hold. I currently live in Annapolis, MD, and have considered house hacking but the price to rent ratio here for long term rentals just doesn't seem to work. There is also some local legislation in place that places restrictions on STRs for non-local area residents (I'm expecting to move in 2 years due to the military). For that reason, buying locally here and living in the property to house hack when I know I'll be moving in a couple years doesn't seem like the best path. My liquidity isn't great right now either, so that is why I'm considering selling.

The property in Jacksonville, FL: 3 bed/2.5 bath townhome in a community with a relaxed and cheap HOA (45$ a month, but no leases shorter than 6 months aka no STR). I brought it in Sept 2019 with a VA loan for 335,000 and it has appreciated roughly 100k to around 435,000. I lived there for 2 out of the last 5 years so I could sell without any capital gains tax. There is a tenant in the property at $2300 a month and the lease ends in December 2023.

Pros of the property:

- Great zip code, 32224, near the beach with a lot of demand

- Jacksonville/Jax Beach has seen a lot of population growth

- Great schools, low crime

- 2.375% Fixed 30 Year interest rate

- Good shape from a maintenance perspective

Cons of the property:

- Net negative true cash flow. Currently renting for $2300, but my expenses for property management (12%, pretty high) and PITI comes out to around $2200. This leaves $100 for vacancy, capex, and maintenance, which is no where near enough to cover all those. So really probably losing a couple hundred a month over the long term. I believe there may be some room to raise rents with the next lease, however, to closer to $2400.

- Flood zone, but no history of flooding since the property was built in 1996. But again, higher expenses for flood insurance costs, etc

- ROE is nonexistent. There is roughly $315k left on the loan bringing the LTV to around %73, so there really isn't much room to take money out via a HELOC to invest any way

- Can't STR due to HOA (no leases < 6 months)

Am I getting impatient, or should I attempt to exit and take home around $75,000 without capital gains tax (living in property for 2 out of the last 5 years and then listing as a rental)? Ideally I would like to reinvest the property in a cheaper cash flow market (possibly in the Midwest, ie. Cleveland etc.).

Thank you for your time and feedback!

Joe Villeneuve · Answer

Sell it. Negative CF and tons of equity. Convert the equity to cash, reinvest in a property that has positive CF.

Alexander Murillo · Answer

@Kevin Autran not cashflowing, so yep sell it like everyone has said. Use the VA loan again if you can and househack.

That $100k of equity is doing nothing for you. You can find a nice 2-4 unit that will cashflow (maybe expect some work to be done) in a different market since you're already thinking about it. I did the same and ended up buying in Ohio.

Andrew Freed · Answer

@Kevin Autran - If it is negatively cash flowing, sell before your tax free exemption runs out. Take the funds and reinvest it into some cash flowing multis. Try to find a way to use that VA loan again since that is the best house hacking loan product there is. Maybe you can do a rent by the room scenario in a SFH rather than a STR. Try to get your living expense as close to zero and reinvest the funds into some cash flowing multis in a close market or out of state. That's probably what I would do.

Joe C. · Answer

I would hang on to it. And, I live in this zip code--a great one.

Find a way to self manage (12%) to get positive on cash flow. Find a good handyman and get some trades lined up. Work the phones, email and web apps to stay on top of the property. A nicer property should manage easily if you screen tenants aggressively.

With a rock bottom interest rate like that and current inflation/appreciation, you can make good money just covering costs initially. Then later, refi out some cash when rates come down to finance another cash flowing property.

Let me know if I can help/discuss.

Gregory Nelis · Answer

You sound like you want to sell. There are no emotions in business just numbers. The property doesnt cashflow, but is in a desirable location. If you had the 100k currently in equity in cash, would you purchase this property? If no, that is a sign.

Alan Asriants · Answer

Solid points all around. The flood part concerns me a bit. And exactly, since you put no money in, you can't really expect crazy returns. I would keep looking at different markets, see what makes more sense for you and once you know the market, then you could go with selling. otherwise its just 75k sitting in the bank doing nothing.

Kevin Autran · Answer

1. Unfortunately I can't really pull out any cash on this due to the already high LTV.
2. They are paying down the principal, which is definitely big and with a 2.375% rate, it's hard to beat. Overall I think there is still a small ROI considering I put basically no cash down to buy this property.
3. I do think the area will appreciate. My concern is the flood zone for this property. It is basically on the water and I've seen storm surge get very close to the house before. No flood claims since the place was built in 1997, but still with rising sea levels could be an issue.. Plus I pay basically $5400 a year in insurance.
4. That has been my biggest hesitation to selling, since I bought the place is 2020, the initial rent was 2000 and now it's going for 2300. Obviously this was a COVID and inflation fueled run, but still... Just hope I'm not being impatient.

I can exit and turn the ~$5000 I put into this property into $75,000-100,000 of tax free gain, or hold out and hope for further appreciation on both the rent and fair market value.

Either way I will have until the end of the lease term to consider, but I'm leaning towards cashing out and putting the equity to use with more cash flowing rentals.

Alan Asriants · Answer

It seems like the true problem here is the cash flow since your appreciation is so high. If youre going to do a Multi-fam investment, you will need about 20% down min, unless you do VA or FHA house hack again. at 25%+ you get a better interest rate. In my area of Philly I do see deals that cash flow about 8-11% CoC on some turn key properties but they are going for about $400-450k. So you would need about $150k all in to make it work. Some cash flow a couple hundred bucks with an FHA/VA option too.
This would give you much better cash flow and your equity would be similar to your FL property (@25% down)
That being said, just account for expenses when selling and buying.
1. Can you pull out enough money from that property and use it on something I mentioned above?
2. If your tenant is covering your mortgage and you barley have any of your own money in the property, you are still winning because they are paying down your principal.
3. Do you believe that this area will continue to appreciate? Most markets do long term.
4. Rents historically always go up. Maybe you're not cash flowing today but in 5 years you will be in a better position with more equity in the deal.
5. I would analyze other markets that you are comfortable with first. Run those numbers, and see what you prefer more. If there are options that make more sense for you than your current property by all means pursue it.
Feel free to reach out anytime.

Minna Reid · Answer

Another vote for selling. I highly doubt you will see a rent increase, likely the opposite at the end of your lease terms. They've built a ton of luxury apartment complexes over the last couple years here and there has been a ton of SFH purchases to investors - little guys and the institutionals, so there is a lot more rental inventory than before. Those high rental prices of the last few years are simply unsustainable here. I see those coming down.

Kevin Autran · Answer

Thanks for the response Andrew. That's what I was thinking as well, and I think I just needed to hear it from someone else.

I'm definitely looking to get into multis. That's a great point about the possibly looking into a rent by the room scenario as well for a househack. Also have Baltimore and Philly near by, which are more reasonably priced but would need to do some more research on those markets.

Should I sell or hold?

Should I sell or hold?

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