To Rent or to Sell???

Question

Hello All, I'm new to BP and amazed by the abundance of knowledge and willingness to help others.  This community is truly amazing.

I’ve been in my first home and primary residence for 5 yrs and currently in a dilemma as to what to do with the property.  In spring I’m going to be moving into my girlfriend’s house and trying to weigh my options as to sell or rent it when I move.  I really want to get into REI and start generating passive income but not sure if I should cash out and look for multi-famliy units, or learn the landloarding process with my existing property (hopefully in a good tenant/family environment).

The house is in a desirable/affluent Milwaukee suburb with almost no rentals available. It’s a 3Br/1.5ba, 3 car garage, 1.5+ acre property that I’ve renovated almost top to bottom. Looking at the few other rentals available I think I can rent it for about $2k/month.  Current expenses (mortgage/prop tax/ garbage/sewer/ insurance)) are under $1300/mo.  I know I'll have to add a bit for insurance and maybe lawn maintenance/snow removal if I don't do it myself or have tenant responsible.

Housing market has significantly gone up and my $200k investment (w/reno) can be sold for $260-270k.  This would give me some tax-free money to go after other properties (probably multi-fam).  My dilemma is that if I rent it out for more than 3 yrs I’ll get hit with capital gains tax wiping out all potential cashflow profits.

I’m looking for strategy ideas because this currently barely meets the 1% rule based on investment, but is more if you look at market value.

Should I rent it for 2.5 years, leverage my $100k equity and borrow against it to get other properties? Or should I take the cash and find options that will yield more cashflow and avoid the risk of $20k+ capital gains tax?

Any input is greatly appreciated!

Chris

William Newman · Answer

Good morning Chris,

Welcome to BP!!!

As I read through your post and came across your worries of capital gains, you will be able to avoid this with a 1031 exchange. Please consult with a qualified real estate CPA in regards to accomplishing this matter, as I am no expert. A really quick overview is provided below:

Thanks to IRC Section 1031, a properly structured 1031 exchange allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes. IRC Section 1031 (a)(1) states:

I believe that you could go in either direction really, it all depends on how soon you want to jump into the landlord game. Furthermore, you could always enlist the services of a great property management company. In my opinion, both options have great benefits. Passive income is always a plus, and you will gather experience in management at the same time. On the other hand, having the capital to invest in a larger multi-family right away from the sale of your primary residence will provide even more leverage (if the multi is brought properly), and still provide an opportunity to manage more doors if your heart desires.

Hopefully this was helpful!

Happy investing,

William S. Newman

Bryan O. · Answer

Account Closed so you have a cash flowing property that you have renovated to your standards in a mostly owner-occupied appreciating neighborhood that you know the status and demographics of and you are wondering if you should consider selling it for ~$36k profit ($260k - 9% - $200k) so you can use the proceeds to buy a cheaper property in a lower class neighborhood with unknown conditions and a low likelihood of appreciation that might be able to generate $10 more per month ($36k doesn't buy much).

I'll have to think about that one and get back to you...

;)

Daniel Hanson · Answer

Thanks, @Tim S  - appreciate the heads-up!  Obviously my memory is not so good on that particular regulation.

Thomas S. · Answer

My opinion is that primary residences, SFHs, do not make for good rental properties. With a value of $270 K and rent at $2000 it will not cash flow.

The money, if sold, could generate far greater returns in a multi, or several, with far less risk.

Keep in mind I dislike the slim margins, tenant damage and general under utilisation of money invested on SFHs if your intent is to generate maximum passive income. SFHs are not purpose built as rentals and perform poorly as rentals.

PS. Real estate is not a passive income investment.

Bob E. · Answer

I would hold it and put the extra $700 a month on the mortgage, at least for a while.

With 1.5 acres can you build a second house on the property?  Not sure what the building costs would be but a second house rented at 2k per month could really move the needle.

Michael Henry · Answer

Chris,

If you could actually able to get give or take 2K per mo in rents I would not be in a rush to sell that particular piece of property either (not off the table but no rush). I would be curious to know if you didn't mind answering is the property of your SO comparable in terms of location and value?

Thanks,

MH

Daniel Hanson · Answer

Hi Chris,

I was in a similar situation in 2014 with a primary residence that we were ready to move out of.  We chose to keep it and rent it out for a high cashflow.  A few months before we moved out and started the new house process, we refinanced out to a low 30 year rate, and got a HELOC on the property

to make available for short turn investments.  We plan to sell the old residence in less than 5 years to take advantage of the homeowners' capital gains exclusion.

To Rent or to Sell???

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