Do I sell and make 285k or hold long term??

Question

Hey guys. I have a dilemma… I own a three family house in newark nj and currently cash flowing about $1800 a month. I owe 280k on it however I just got an offer for 600k. I still have about 25 years on the Mortgage. I bought the house about 5 years ago. Never thought I be selling this fast. I’m having second thoughts between selling or keeping. If I hood for about 10 years I would have made the 285k in rental just about. The problem is I don’t know what do to with the profit after selling , if I do see.  I wanted to get into other businesses or real estate but everything is so expensive.. anyone have an advice or recommendations. Any input would surely help

Bill B. · Answer

If you can’t replace it with something better. You’re not really making $285k. You’re going to owe about $15k in depreciation recapture and $45k (or more) in capital gains plus state income tax of $15k?  So you’re going to pay $75k in taxes to pocket $210k and give up $25k/year in income. So short of a 1031, into another/better property. do you have a replacement investment you “know” will return more than 12%?

And you do have to “know” it will, because you’re paying $75k to invest in it. How long will it take just to make up that $75k at zero percent?  Don’t forget you could probably do a cash out refi for $480k or a second mortgage and put $200k in your pocket tax free and keep the $25k/year income.

Maybe use that $200k to buy another $800k property with 25% down?

Taylor L. · Answer

If someone offered you 285k now or 285k 10 years from now, which would you accept? I know my answer. Not knowing what to reinvest it in is definitely tough, but comparing scenarios you have 10 years to figure it out!

The above comparison does ignore potential appreciation over the next 10 years, however. There are also taxes to consider, which will take a chunk out of that.

I'd consider a refinance and look to acquire more.

Bill B. · Answer

1) So don’t do the cash out refi just do a second mortgage or a heloc. Then $100k at 5% would only be a $540 payment and $120 of that goes towards principle day 1. So it only costs you $420/mo.

2) you don’t have to evict to raise rents. You should be raising rents every year. 5-8% give or take in an average year. 20-30% over the last 2 insane years years. Otherwise you’re probably losing more than the payment on that $100k every month. In the last 2 years my smallest rent increase was $300/mo. You’ve got a triplex so if you only raised rent $200/mo each it would make the payment on you taking $100k out tax free.

Theresa Harris · Answer

Unless you can invest the money and get a better return, I'd keep it.  The only exception might be if it is going to be hard to sell in a 'normal' market, but easy in a hot market.  I'd also talk to a realtor just to get an estimate on market value.  You don't have to sell it with them.

Natalie Schanne · Answer

@Anthony Liguori - 1. Is your 600k offer from a legitimate buyer or was it unsolicited from someone calling or texting you? Do you know if that person will actually buy your property or if it is a wholesaler? (Like the wholesalers who get properties under contract for a high price and will cancel if they can’t find anyone who will pay an even higher price).

2. Do you have the ability to cash out refi or get a line of credit (local banks) on your existing property so you can buy another property while still holding onto this one?

3. Where would you put the money if you sold? Do you have another investment vehicle which will yield more or the same?

4. Your market rents are probably low. Consider raising them. In my area all rents went up 20% year over year. The 1 bedroom apts for 1000 are now 1200.

Basit Siddiqi · Answer

The issue with selling is the following - If you buy a new property - you will likely have a higher interest rateIt is the top of the market now, you will likely sell high and buy high.If you can find some deals, i think it would make sense.The other issue is if you sell and keep the proceeds in cash, you may lose value via inflation.It does give you the opportunity to invest in a couple of different properties though.Best of luck!

Shawn Mcenteer · Answer

@Anthony Liguori with the rental control laws and legal ramifications the city of Newark puts on landlords I would take the offer and purchase else where in Essex County.  Newark does not make investing easy, especially long term regarding removing tenants and raising rents.  In terms of the how much we have raised rents in the past few years across our rental properties it is jaw dropping.

Brad S. · Answer

@Brad Sand

I forgot to mention an example of trading a marginally performing and less desirable property for a better potential. I took advantage of a good market to exchange a property I didn’t want anymore, for one in a high growth, great potential market. And as a result, my cashflow increased, my property issues decreased, and the new property happened to increase conservatively over 50% in a little over a year!

Brad S. · Answer

@Ryan Short

Anthony, my vote is for this -what Ryan said.

Trading a marginal asset into a better situated one. A C class property to a B.

But, that also depends on your specific situation and goals. Do you need the money to do other things-potential investments, businesses , etc., do you need the current cashflow, can you reasonably unlock equity using a refinance or heloc, in order to use for the other opportunities, is your property in an area that you see good future potential still, etc.  As I have read in other posts and have experienced myself - Usually, long term appreciation growth of a good asset will far outpace cashflow, but if that doesn’t align with your immediate needs and goals, it doesn’t matter.

Try not to get to caught up with the objectivity of the #’s alone. Just because a property gets a great % return, doesn’t mean it is a great investment for you and your goals.  My first 2 rentals produced high cashflow annual returns - the 1st one was 45% coc, and the 2nd was 30%coc. Forward to 18 years later, when I was finally able to sell them for just about what I paid for them, and was happy to dispose of them. They ended up being more liabilities and anchors, holding me back from greater potential. And, contrary to popular opinion, rents don’t necessarily always go up over time, at least in less desirable areas.

And to illustrate how holding a good property can be hugely beneficial: I sold a few good properties 7-8 years ago, to get through turbulent times, even though I didn’t want to. Today, Rents have about doubled and values have much more than doubled, with me missing out on $700k+ of appreciation.

Ryan Short · Answer

@Anthony Liguori I have almost the identical e situation with my property I bought 6 years ago. I purchased my property for $345k did a cash out refi and pulled $100k. Now I have a loan of $410k, I am selling for $770k. I anticipate I will pay about $70-$80k in closing cost fees, agent fees, and about $50k to capital gains. I am deciding to sell and use the funds to pay off a private lender for another property I own and using the rest of the funds to purchase another property. In my scenario I am selling my property that is in a C class area and purchasing a property in a B class area with similar ROI. I do not want to wait another 5-10 years to get out of a lower class property when the market shifts.

Do I sell and make 285k or hold long term??

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