Sell SFH or continue to rent it out?

Question

We have two properties are building a third.

1) First home is a single-family that we are fortunate to own free and clear. It is 9 years old and estimated to sell for $550,000. Our long-term renters have just said they are moving to another state and will vacate by July. If we re-rent this home, we would list for $2,800 or $2,900 (current long-term renters are at $2,600).

2) Second home is a townhome we currently live in, but have rented out as of June 15th. We built it in 2020 and with a mortgage payment of $1,800 and renters paying $2,950 from June 15, after expenses, will cashflow enough to cover the HELOC we took out to purchase the third home ....

3) Third home is a single-family home being built and closing date is September 30. We are stretching ourselves with this one, given the higher interest rate and sale price of $505,550. Both of us are on the mortgage as of now ..... and from what I understand, I am forfeiting any 1st time homebuyer credit by doing this, but we felt it was worth it as we plan to live in this home for a few years and it felt right.

Question: What would you do with the paid-off single family home worth $550,000? We have it ready to rent again, but wonder if we should sell, buy a fixer upper and start a STR given the age of the home (9 years) and potential for major upkeep bills? We live in an area of universities, wineries, and historical significance, so STR appear to be strong still in this area. We always did plan to sell the house once it reached 10 years, as we prefer to have newer properties with minimal upkeep/repairs.

From what we understand, we cannot do a 1031 exchange, as we need to take some of the money from the sale and put it toward the third home we are building as well as then invest in that STR.

Basically, we would love the extra cushion of putting more down on the new third home that we will live in.

And we're thinking if we can get a STR up and running quickly, we will replace that rental income we were getting before.

Does this make sense? What would you do?

KiKi Wood · Answer

Hi! From what I understand, I think selling would be the best option in your situation, but you could always try a different route for a short period to see if it works out, before selling! I may be biased, but I feel that STR is the way to go! If the home is already furnished, it would not take a lot of time to get it started! STR is a great way to make good money from a rental, and it almost always cash flows more than a LTR. If you are looking for something that is a little lower-maintenance, then MTR is a good "middle-ground", where the leases are a little longer than STR, and you will not have to invest as much in changing decor or furniture!

January Johnson · Answer

My personal strategy is to never sell a property I own but only to continue to rent them out. The fact that you own it free and clear is super great, and a 9-year-old property is not that old. I would keep the asset and do a cashout refi.

Chad McMahan · Answer

1) Does keeping the SFH help you accomplish your goals (Identify your crystal clear goals/needs, if you're not sure)?2) If it does not accomplish your goals- can it be altered in a reasonable and affordable way so that it accomplishes your goals?3) If not, sell it.

Mason Liu · Answer

So just to clarify, the proceeds of the first home sale will go towards both the third home (new construction) as well as a 4th property that will be a fixer upper (and therefore require renovation budget) that will be a STR?Based off your verbiage that you are "stretching ourselves" with the third property, I'm assuming that your current income and cash flow combined may be an issue if you hold all 3 or 4 properties. If that's the case, I think selling wouldn't be a bad move since the proceeds are going into new properties, one of which potentially will cash flow more and hence have a higher return potential.

Sabine French · Answer

Agreed with @KiKi, especially re: MTRs which (loose rule of thumb) tend to bring in approx two times what you are getting for your LTR and generally are not constrained by the rules put in place for STRs (which can, loosely, be expected to bring in at least 4x what you are getting for LTR per month, but require more work and have to abide by the STR rules and regs in the community.)

Susan Dootson · Answer

Thank you all so much ... much food for thought! After the initial excitement of selling seeming like the perfect option, we are going back to thinking about our long-term goals and if doing a cash-out refi would enable us to keep the house AND invest in a different market with a STR. Thanks again! This was my first post, and I'm so glad to have found this community!

Melanie Thomas · Answer

Based on the information you provided, it seems like you have a few options regarding the paid-off single-family home worth $550,000. Here are some considerations and suggestions: Re-rent the Home: Since the property is in a desirable location and you have had success with long-term renters, re-renting the home could be a viable option. You mentioned that you could potentially list it for $2,800 or $2,900, which indicates a favorable rental market. However, keep in mind the potential costs and responsibilities associated with property management, including upkeep and repairs.Sell and Invest in a Fixer-Upper or Short-Term Rental (STR): If you prefer newer properties with minimal upkeep and repairs, selling the home and reinvesting in a fixer-upper or starting an STR could be a good option. Given the area's universities, wineries, and historical significance, a STR may have strong potential. However, ensure you thoroughly research local regulations, competition, and the demand for short-term rentals in your specific area.Consider Financial Priorities: Assess your financial priorities and goals. If putting more money down on the third home and having an extra cushion is essential for you, selling the paid-off single-family home may help you achieve that. It's important to weigh the potential benefits of investing in the third home against the potential income and growth opportunities of a fixer-upper or STR.Consult Professionals: It's advisable to consult with a real estate agent, financial advisor, or property management expert who can provide personalized advice based on your specific circumstances, local market dynamics, and financial goals. They can assist you in evaluating the potential returns, risks, and feasibility of different options, taking into account your overall investment strategy. Ultimately, the decision should align with your long-term goals, risk tolerance, and personal preferences. Weigh the potential benefits and drawbacks of each option and consider seeking professional advice to make an informed decision.

Susan Dootson · Answer

Thank you! I really appreciate your reply .... you're correct -- yes -- proceeds of first home sale will go towards both third home (new construction) and the 4th fixer upper or at least a property that we can buy with cash from the proceeds of the first home sale. You're right -- current income and cash flow are an issue, so good to know that we're on the right track of this not being a bad move. I did more research today and on top of the numbers working out, it just feels like the right time to be doing this. Thanks again!