Should I sell my STR?

Question

We purchased a home on an island in September 2020, put about 30k down and about $60k to furnish and do the backyard, new flooring and paint.  A year later, we purchased another home on the island, moved into it, and converted the previous home into a vacation rental.  A comp just a few houses away closed for $880,000 2 months ago.  Our net profit with self-management is between $30-50k (we have not completed a full year).

Purchase Price:  $385,000

Loan Remaining $355,000

Estimated selling price $900,000

When do you decide to sell?  The island we live on is making huge improvements, like a new 5 star resort is being built (which has never been done here) and improvements are being made by the city. At the same time, it seems a recession may be looming, and we're thinking maybe it makes more sense to "buy low, sell high," not "buy lowest, and sell highest."

Need advice from someone with experience!

Alex Olson · Answer

@Lynzie Mackey It really depends on your mindset and what you want to do next. Do you enjoy the daily grind of the airbnb world or do you want to own more units and cash flow more but with a bit less control? With an estimated $400,000 in equity you could buy $1,600,000 in Kansas City and cash flow around $30-$40,000 per year as an out of state investor. With a five year business plan you could get an average annual return of around 25% (assuming you sold after year 5).

Jocelyn Kaufman · Answer

Awesome, it sounds like you have done an amazing job with this property. I do not know much about Florida but I could bet your equity will continue to grow, especially with all the improvements it seems the island is making. I think it is also important to note that island living is becoming more and more popular with people wanting to be secluded.

One thing to keep in mind is if you do sell you would have to pay taxes on the gains.

If you want to sell and use a 1031 exchange to purchase a bigger property or multiple properties you could defer the tax losses and then I think it would be worth looking into. However, if you sell and pay the taxes I feel like you will kick yourself in 5-10 years for doing that.

I don't have a crystal ball but I think you are in a unique situation being on an island and I don't see your value going down.

I sold a duplex about a year ago and had to pay heavy taxes. I regret that decision because it cost me. If I could do it over again, I would have held onto the duplex and only sold it if I had a better property to 1031 exchange for. (Meaning you defer the taxes)

I did end up using this method later on another duplex and 1031'd the duplex into a 10 plex. Using this strategy I have been able to build my portfolio to 49 rental units.

I hope this helps!

-Jocelyn :)

Mike Dymski · Answer

Move back into the old house, live in it for 2 of prior 5 years, sell, and take the section 121 tax free gain on the sale of a primary residence.  If you want to keep a rental there, you can then buy an identical house on the island for $900k, your tax basis will be $900k (instead of ~$450k), and you won't ever have to pay tax on that appreciation.

Jocelyn Kaufman · Answer

@Lynzie Mackey I like to have one picked out before selling. In this market, it is super easy to sell and hard to buy. I would start looking around and see if anything would be worth switching to.

If I remember right for the 1031 exchange the property(s) you buy have to be of greater value than the one you are selling. Then what's also cool with 1031 is if you do not have to use all of the money on the two or three properties you buy you can get it as cash. Keep in mind this is still taxed but if you need cash that may be a good option.

30-50k seems like a good cash flow for a single property so make sure you really look into the properties you would be trading for.

Have you thought of doing a cash out refi and using that money to buy another place?

Brian G. · Answer

@Jocelyn Kaufman very cool. Must of been scary going from the duplex to the 10 unit! How many properties is the 49 units comprised of?

Andrew Syrios · Answer

I wouldn't sell unless you had something better to do with the money. With inflation the way it is, now's not a good time to hold cash plus you'll have a big tax hit unless you 1031 the gains into another property. If you want to pull some equity out, it might be worth refinancing. Rates have gone up recently but are still low by historical standards and, in my judgement, will likely keep going up for the forseeable future.

Brian G. · Answer

@Lynzie Mackey so you could realize about 8 years of STR gains by selling or cash out refi and continue to hold while buying another property. What a great decision. Do what aligns best with your goals. Congrats!

Joe Hammel · Answer

@Lynzie Mackey

I don’t sell, i refinance. If you have lots of equity, just refinance and pull your equity out so you can buy more but still keep what you have. It’s the best of both worlds.

Mike D'Arrigo · Answer

@Lynzie Mackey If your cash flow is $30K-$50K per year and they are building a new 5 star resort, it seems to like you would be killing the goose that lays the golden eggs, Inflation is running at around 7% annually, everything is going up in price. I'm not sure why you think there is a looming recession.

Cole Simpson · Answer

@Lynzie Mackey I can just tell you my thought process. I was selling a STR that I bought originally as a primary a few years ago because I am within my window to not pay capital gains tax. We will see an AT LEAST 187% return on our money (62% a year). And we can take the capital and reinvest it to get 10x our current cash flow from the rental. It was a hard decision because I believe in the area and I like the house, but it has a lot of deferred maintenance and I am confident I can make a higher cash flow return with our money. Hope this helps!

Should I sell my STR?

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