Should I sell a rental and get one closer?

Question

Hi all,

I'm sure there'll be a lot more information needed in order to get an answer...but hopefully this will get things started.

We have a rental property (that was our residence until 2008) in Honey Brook, PA-it's about an hour from our current location. We are at about $100+ cash flow on the place...barely break even without any big issues.

I'm considering selling it and picking up a multifamily unit closer to us (Hershey) with better cash flow. We have about 65k in equity in the place.

I'm trying to figure out how to make the decision.

Any input? Thanks!

Dave

David Krulac · Answer

Welcome @Dave Hyatt

I like to have rentals close by.  I believe that nobody will manage your properties as well as you.  I worked at a management company for a number of years so I do have first hand knowledge.  As the owner you can go the extra mile to get places rented up and satisfy renter's needs and repairs quicker.

That being said, I also think that each investor should review their portfolio holdings yearly and jettison the under performing properties and acquire better properties.  If you continually do this process your portfolio will be better and stronger as time goes on.

One thing that you should consider is an IRS Section 1032 tax free exchange.  this will permit you to get your equity out of the property that you already own and transfer it to a better property closer to your new location.  There are rigid rules that must be strictly complied with, but as long as you follow the rules you save (actually defer) paying the Federal income tax owed on the property sale.

Welcome to central PA, a great place to invest.

Mike H. · Answer

The other thing I would add is how much of a haircut do you think that property is currently at? i.e. Given the price of homes is steadily increasing in most areas, do you see any appreciation over the next 2 years? Significant appreciation over the next 5?

I've got some houses a little further out than I'd like too and in a county I do not want to be in because of the landlording laws. But right now, if I were to sell, I think i'd be netting about 15 to 20k in profits when its all said and done. Not bad but not enough to buy in the area I like and put down my 30% of purchase plus rehab.

But I think if I wait another 2 and half more years, the market in those areas should free up enough to get these houses to sell for what I really want to make (30 to 40k).  A couple are actually very close now. A couple of the other ones aren't even close.

If you've got 65k in equity and you're only making $100 a month before vacancy and repairs, thats just not a good deal there. And I understand that it wasn't intended to be a rental so thats why that is. But at this point, since you do have some equity, I would sell and buy something closer to you that will surely cash flow a lot better.

You should be able to maintain that equity amount as well even if you pay the taxes. 15% of 65k is roughly 10k.  If you can be all in (purch plus rehab) on a 150k house (I'm guessing thats about the price range you're in now based on your PITI) for 120k and put down the 40k or so from your sale, you'll be looking at having roughly 70k in equity.

So even after paying taxes, you'll essentially just be moving your equity from one house to another. But you'll have much better cash flow on the new house and it can be a lot closer.

To me, thats the goal. I just want to move my equity out of the houses in one area and into houses in one that is a nicer and closer area with far better landlord laws.

In your case, given the equity that you have and the lack of any cash flow in the house, I would definitely sell it and buy something much closer. You should easily be able to maintain your equity if you buy the new one right - even after paying the capital gains tax.......

Steven Hamilton II · Answer

I will second what @David Krulac  is saying. A 1031 exchange would be perfect in your situation. Do you have a gain or a loss on the property after taking into account depreciation?

Dave Hyatt · Answer

Hi all! Thanks for the replies and clarifying questions...I'll try to hit them all @Brett Russell & @Jerry W. The mortgage, taxes and insurance =1230, HOA of 120/mo, sewerage 30/mo. Rent is 1450, so without ANY considerations it's about 100 in the black. The place has had very little in the way of maintenance problems thus far (2005 build), but I see that on the horizon. I've also not increased the rent in 4 years. Our tenant is great and the market here has been pretty soft,  but I'm hopeful the spring will warm up.

The depreciation does help at tax time (about 2k) and we are building some equity in the place (250/month). I don't want to get dinged for taxes when I sell, I've thought of the 1031 option, but understood that requires you to go bigger on your next purchase and I'd like to go smaller/cheaper.

I guess my other option is to increase the rent and if the current won't go for it, to either sell or try to relist it for #s that make more sense for either rent or sale.

Brock Siebert · Answer

Dave,

I am looking into buying my first property in the very near future. I know there are tons of success stories of owning properties that are no where near where people live, but I will sleep easier knowing I can see my investment property in a less than 20 min drive, but I live in a very densely populated area. Good luck in whatever your choice is. I would look more into keeping the unit and buying the new one if you can swing it.

Jerry W. · Answer

Hey @Dave Hyatt , welcome to BP.  You are right we don't have enough information to give you good advice.  How much is your mortgage payment, your taxes and insurance, and your rent income?  It would also help to know your current value of your rental and your current loan amount.  A lot of people mean different things when they say cash flow.  Here we figure one half of the rent should be used to cover expenses like taxes, insurance, vacancies, and maintenance and repair, then your mortgage payment needs to come out of the other half, what is left over is cash flow.  Is that your definition?  If not we need the figures.

Brett Russell · Answer

@Dave Hyatt , if your definition of "cash flow" is rent minus mortgage payment and you aren't budgeting for vacancy, maintenance and capital expenditures and, therefore, any of those things would make the property a negative cash flow, I would definitely consider selling since you have equity.  If you were underwater, you'd have no choice.

Dave Savage · Answer

If you can get more cash flow with something easier to manage it should be a fairly straightforward decision.

But if you have a solid property manager with your original house and are still positive cash flow, maybe you consider refinancing it and pulling equity out to purchase another property closer to you to increase your leverage if you can maintain some cash reserves.

Should I sell a rental and get one closer?

Most Popular Reply