Pondering sale of 1st rental property for newer properties

[Sammy Brooks]

Hi All,

We recently took a family property and converted into a rental. I am now having some second thoughts, after discussing with a local investor. I'd like to hear some seasoned opinions if possible, since I'm still new to this space.

This is the first property that I've made into a rental. It was built in 1977, lately updated on applicances and roof, but otherwise an older property.

Mortgage and escrow: $858.54.  I refied for 3.99% in Feb 2022.

Rent payment: $1250

Property Management fee: $125

Repair costs since conversion to rental: $2636.48

Mortgage balance left: $141,631.67

Zestimate to value: $201,200

Checked with my CPA and I'm looking at about a $20k tax hit if I were to sell based on the amounts above.

As you can see, my cash flow is not very strong, and I'm considering to sell and find a newer/better placed properry. But I'm not sure if it would be worth it with the closing costs and the tax bill. House is based in NC.  Or should I just hold for the time being?

Thanks in advance!

[Greg Scott]

I'd hold.  Based on my calculations, you are getting about $267 per month in cash flow, but what other benefits do you get?  

1) You have depreciation write-offs that should completely wipe out the $267, but likely will reduce your income taxes further (Depends on your situation.  Talk to your CPA on that.)

2) Each month you (well, really your tenant) is paying down the mortgage.  By my guess it is about $150 per month that your principal is reduced.  This is effectively profit to you but you only see it when you eventually sell.

3) If you could borrow money at 4% and put it in an investment that earns 8% would you?  Of course!  That is free money.  Well, that is exactly what you are doing by borrowing $141K at 4% fixed when inflation is 8%. Over time that $141K becomes easier and easier to pay off while at the same time the (probably not short term) the property will appreciate.

You might do even better if you pay attention to how to maximize returns as a buy & hold investor.  Can you increase rents by upgrading the property further?   Things like adding a wall in a large living room to create another bedroom can be very profitable changes.