Should I sell my duplex?

Question

Alright, I thought I would throw this to the group to see thoughts.

I bought my first investment property in March of 2020 (crazy timing) for $229,000/$69 sq ft in Nashville TN. Extremely hot market. It is a duplex and half was in terrible condition. I used hard money to reconstruct unit A and unit B was in good condition (still needed work but not as much). I refinanced (not a cash out refi) for $270,000.

Now, with forced appreciation and natural appreciation it’s likely to sell upwards of $600,000.

I have rented unit A for $1860 a month gross ($1704 minus PM) . The PMTI is currently at $1793. I also live in part of unit B. I also Airbnb a private room at about $1200 net. I did not intend on living in unit B but with covid then breast cancer it provided me a almost free space to live (I didn’t Airbnb during cancer treatments). So yes, this house is cash flowing well. I’m not including CapEx and on going maintenance at the moment. And I have the permit to fully Airbnb at likely $2500-3000 monthly on top of Unit A tenants.

This all sounds great, but the property still needs a lot of work. The backyard needs to be excavated, I need to install ductless or central in unit B. New toilets. To make it Airbnb worthy in my competitive market a bathroom likely needs to be rehabbed. Honestly to really make it great would be more than I’m willing to fork over for one property. Also, I’m watching the foundation. When I purchased it I had to install new footers and gut both bathrooms out, new joist etc. There was a 4in slope in a span of 8 feet in the front room. At that time I didn’t have $20-30 grand to just put Into the foundation. I did what I need to make it safe for tenants and would watch it for the next couple years.

I work contract jobs and banks hate no traditional work. It’s extremely difficult to get a heloc (trust me I’ve tried). Even the cash out refi has been excessively difficult and ultimately shut down. because of covid then breast cancer my last two years of tax returns are all jacked up, so the banks aren’t keen on me. My strategy was always buy and hold and this is my first investment. I rental arbitrage another monthly Airbnb in my market too. I could use the money to take some time off and travel and buy another property. I don’t want to be short sighted but also see the market is still a sellers market and investment properties are hit in Nashville.  I started investing to create time freedom. Since cancer I see time even more valuable and the house has created more stress.

Curious on what you may do? Hold or sell?

Dev Conboy · Answer

I'm in a very similar situation, and have considered it greatly. The more I think about it, the more I'm considering how I can make $3000 a month profit holding it. I won't find this deal in Nashville again. I'm locked in at a 3% interest rate for 30 years. I'm not sure about your interest rate, but that's a huge factor to why I'm keeping my duplex in east. It still needs similar work, but a ductless might cost you 3 months profit. I'm thinking long term. This area still has a lot of appreciation to go, there are new announcements weekly of amazing projects coming to east. It will continue to appreciate while still cash flowing, and I will not find this deal again. My advice would be to rent it all out and give yourself a vacation... mull it over and see what you think in the next few months. Don't forget about selling fees and capital gains tax. It's easy to blow through cash but hard to find and build an asset like you have. This asset will help you qualify for your next one. Find some private money and go do it again in a different, cheaper and cash flow oriented market when you come back. Build this cashflow long term to support your lifestyle. Real estate is a long game.

Travis Timmons · Answer

If you're asking the question, it feels like you are leaning toward selling. Given the details above and the read that I get from you, I'd sell if it were in your position. You likely know SO much more now than you did when you started. This gives you the ability to hit the reset button with a pile of cash. Would you rather have this property and the accompanying cash flow OR a pile of cash, the ability to go live in Europe for a month, and a fresh start with more money and knowledge than the last time around? Clearly, that is a leading question. Take some time off, travel, and then come back to invest your gains to match your desires and lifestyle.

Because of covid and breast cancer your last two years of tax returns are jacked up? I'd venture to guess that you've had a stressful couple of years of life as well. Selling allows you to do something awesome after a uniquely strange, crazy, and hard period of life. I'd opt for that. There are loads of conversations and factors that go into this, but it sounds like a lower stress life and happiness should outweigh tax planning and market conditions.

See how Italy feels in the late summer/early fall...I bet it's better than Nashville (even though Nashville is great).

Wayne Woodson · Answer

@Charlene Fetzer I personally would keep it, but that's just my option if I were in your situation. If you ever do decide to sell that duplex let me know. I can pay all cash and close quickly.

Luka Milicevic · Answer

@Charlene Fetzer

A couple of other points I want to mention that haven't really been mentioned....

We are still in the hottest sellers market of all time. Buying a house in the Nashville market is HARD!!! I am putting in offers almost daily and the competition is still absolutely brutal. We have very little supply. Interest rate hikes have stabilized prices, but the supply issue is no where close to being resolved.

The duplex you're in now, you mentioned a 600k+ price. Is that if it's completely renovated? If so, to get that price you are going to have to do the renovation anyway.

It sounds like it needs some foundation work based on your post? Given that, you will have to disclose that information to a prospective buyer. SOmething like that will scare retail buyers away as they don't want to take on major renovations.

Given the market climate, if you are trying to buy a house right now with a home sale contingency then your offer is going to go straight to the bottom of the stack of other offers. You would have to either do a bridge loan, sell your house and rent while you find something new/do a temp occupancy on your existing home.

The other point to consider.....tax implications. I can't advise you on taxes, but.... you might want to consider the implications of selling something that qualifies as a primary personal residence, and something that does not.

With the information that I have, I would lean more towards holding and doing the renovations. Yes, it will be expensive and stressful but buying another house, selling your existing one and then having to move will be too....

Nicholas L. · Answer

@Charlene Fetzer selling or holding is a very personal decision, so I am not going to give you any advice on that.  I wish you the best of luck in whatever you decide.

With that said, if you're looking to refinance to unlock some more of the equity, you could look into DSCR loans.  They will pull your credit and still require a substantial amount of documentation, but they don't have DTI / employment requirements the way conventional loans do.  I just did one at 75% LTV and a 6.5% interest rate, and I was very happy with the whole process.

Again, good luck.

Travis Timmons · Answer

One more note...all of that happiness and lifestyle stuff is great, but it'd make you REALLY happy if you could 1031 that into a lower stress/hassle property and not pay the tax bill. I'm somehow really invested in this decision now. You'll have to provide an update here when you make a decision.

Travis Timmons · Answer

There's more to these decisions than numbers. One of my favorite recent reads was The Psychology of Money by Morgan Housel. A message in it that resonated with me is that finance is as much dopamine, serotonin, and cortisol as it ROI and calculation. If an investment adds or alleviates stress to your life, there is a value/cost to that. Obviously, all factors have to be considered, but that is one of them that gets ignored often. Bottom line is that you have options and options are good.

Charlene Fetzer · Answer

@Travis Timmons it’s very true. Not to get too deep into health issues but I do believe chronic stress and pressure weighed in on my personal situation. I have learned to let go of anything that isn’t serving me. The property gives so many options it’s nice to have an out if I need it. I will definitely think long and hard before making a more permanent decision and I’ll report back!

Charlene Fetzer · Answer

@Nicholas L. Thanks this is something I wasn’t considering but good to know and helpful! Thanks for the luck :)

Charlene Fetzer · Answer

@Dev Conboy Ah! A local fellow investor! Nice to meet ya!

Yes, I completely agree. Having cash flowing assets in Nashville are hard to come by. I do think about how hard it was for me to find the right purchase and then how hard it could be again. (I mean $69/sq ft!) I don’t love the idea of owning a bunch of houses I do think I’d prefer large multifamily investments and I’ve been to a conference or two looking into that avenue. I didn’t mention my lot is 2.35 acres and zone R10. Which means some developer (or me) could theoretically place 10 homes on this lot. My plan was to hold to a million originally. I also live off Briley 10 minutes north of the city. So my area hasn’t become developed yet like East. In 10 years it will likely be nutso. The city has no where to go but up eventually and I’m already seeing changes. I have lived in the home so I will skirt around some cap gains, but not all. Let’s say I clear 300k and throw it into the S&P at 8% return that would be $2400 monthly also. This is why it’s a hard choice.

I do appreciate your insight. You know the market well and see the growth first hand. I like the idea of a good vacation. To net 3000 I will have to completely move out and either find a home to buy or get a place to rent in the meantime which reduces the profitability I suppose, depending on how you look at it.

Should I sell my duplex?

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