Should I sell my rental or keep?

Question

Hi guys,

first timer on this website. I just recently signed up a few weeks ago. I am currently debating on whether to sell my rental property in beaverton oregon (formally my first primary home) or to keep it rented out. A little background on my situation. We bought the home back in 2016 for $355k and now currently owe only $308k. Since moving out in 2019. We have had the same renter since day 1 till now. We are currently only profiting $200 after property manager takes their 8%. The current house estimate is about $610k. Would you sell it and take the 200k+ profit to possibly put into some other rental(s) or keep renting out with the current tenants. Their lease isnt up until february 2023 so i still got time to decide. Tenants have been awesome. We have only had to replace the washer and dryer but besides that all has been smooth with both parties. Just trying to make the best choice on which situation to go about.

Jimmy Lin · Answer

@Irvin Nguyen

Sell! Sell! Sell!

Using the dates in your original post: Purchased in 2016 and moved out in 2019.  You also used it as a primary residence before renting.  This means you qualify for the capital gains tax exemption (since you lived there 2 out of the last 5 years). If you wait until 2023, you would fall out of the 2 out of 5 range.

You are able to gain 250k or 500k (married) tax free. And the $200 cash flow is very bad indeed.  Sell it, use the tax advantage and invest in higher cap properties.

You dont even need to worry about 1031 - since this was a primary residence!!!

Cory Carlson · Answer

The answer to this question lies in the mathematics. Hard to advise what to do with your "capital/equity" without knowing where are you today. This means running current scenarios, refinance, sell/exchange/reinvest and comparing all the strategies. The 4 major return metrics would come into play and be compared.

1) Pre-tax cashflow

2) After-tax cashflow (after effective tax rate, depreciation and interest expense deductions)

3) After-tax cashflow + Pay down (same as #2 but adds principle pay down)

4) Total Return (After-tax cashflow + Principle Pay Down + Appreciation-X%)

First, lets see how the property is performing today. I would guess given the equity position raising faster then the NOI, you are on the downhill side of the yield curve. This is where option 1, quantifying the returns following a refinance comes into play. See what the projected returns would be with different leverage positions (80%, 75%, 70% LTV). The pulled proceeds could be used for reinvestment. Depending how much that is would depend on what second property to advise. Ideally enough for 2-4 units, otherwise a great candidate for a syndication/pooled fund as a minority owner. The second option would be to sell while you still qualify for the section 121 exclusion, take your funds and reinvest. 9/10 in the Oregon market and with the portfolio's I advise on, option 2 is the plan. The reality is repositioning in single family homes with todays current prices is setting investors up for in the best case, break even cashflow. Buying/holding and hoping is not a real estate strategy. Most of the analysis are pointing in the sell and reinvest your capital/equity into a higher yielding multifamily property. Here you can manipulate the NOI and shoot for forced appreciation and acquire higher asset value.

Irvin Nguyen · Answer

Hey @JD Martin,

Yea, I refinanced in 2020 when the rate were low so I went from a 5% to a 2.99%. I always had a PM because I wanted a hands free approach and knew nothing of being a landlord. Plus when moving out, I wanted to find a tenant soon to avoid paying double mortgage. At the time of setting the price, the PM recommended the price that they set i guess based off the houses in that area etc. But since all new housing has been built there also, the avg rent price has gone up so much setting mines in the lower end of the median range. With only being able to raise it 10% MAX, I would be playing catch up pretty much. I went with what the PM said would be a good price and never questioned going higher (i am at fault for that, should have shot high first i think) they make their profits regardless of what I set so I assumed they wanted the most bang for their buck so I thought what they set was high.

Joe Norman · Answer

Since this was formally your primary residence I would 100% sell it while still within the IRS's "2-in-5" rule in order to avoid capital gains taxes.

Irvin Nguyen · Answer

@Malcomb Stapel I agree, I think selling it would be the best route for me to maximize profits and gain potentially a higher cash flow.

Malcomb Stapel · Answer

@Irvin Nguyen So assuming your current cashflow stayed the same and never increased, you would be looking at about 254 years of cashflow to make what you would if you sold it in the current market?

Greg Scott · Answer

Below are some more general thoughts for you.  Personally I would sell, and first try to sell it to my tenant.  I'd offer them a discount off of ARV because you would not need an agent and you would have zero unrented holding costs.

Reasons to keep:

- If you might ever want to live in that house again

- Because you will pay significant capital gains

- If you have friends / family in the area and want to be able to travel there as a business expense

- With interest rates rising, it may be harder to sell in February or there may be more pricing pressure

Reasons to sell:

- $200/mo on $300K in equity is a terrible return.  You can do better if that money was deployed differently.

- With interest rates rising, it may be push us into a recession so it would be smarter to sell now

Irvin Nguyen · Answer

Hey @Zac Lindquist congrats on the triplex! and yes dude that would be awesome if I could pick your brain or maybe even chat over a coffee or something? I live in beaverton/ tigard area. Dont really have an agent set in stone yet because I feel the last one I worked with isnt really on the same path that  I wanna take. no offense to him. I just wanna have someone who has the same experience so i can go to for advice etc also

Should I sell my rental or keep?

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