Should We Sell a Cash-flowing Rental?

Question

Hi All,

Looking for some advice here. We currently own 3 rentals - 2 single families in the Philly suburbs and a condo in Boston. We bought one of the single-family properties in 2022 right when interest rates started to pick up (ours is 4.375%). It's in a great location on the Main Line (Philadelphia Suburbs). Great schools, walking distance to shops and the train, 15 mins from the city. We did some work updating it and got it rented just a few days after putting it on the market. The property is cash flowing decently, but it's an old home (1920's), and has required more maintenance than our other rentals. And it's a twin. Our current adjoining neighbor is great and maintains her property, but there is always the fear that she'll sell at some point and who knows who the next person would be. Further, we moved out of state and have been self-managing the property from about 6 hours (drive) away - not ideal.

The current lease ends 8/31, and we're weighing our options.

1. We renew the lease with the current tenants as they've been stress-free the past year. (Probably our first choice)

2. They decide not to renew and we put it back on the market - potentially hiring a property manager given the distance - and cutting into our profits. We'd probably just break even, maybe slightly ahead on cash flow in that scenario.

3. Sell it. With the work we've done and the competetiveness of the local market, our realtor thinks we could sell for at least $550K. Accounting for taxes, fees, etc. - both for the purchase and sale - our net profit on the home would be $50K - $60K. Not bad for 1.5 years, but we lose that asset and aren't in a position to 1031 exchange the profit - meaning a rather substantial tax bill.

On the flip side (no pun intended), we bought the house during an equally competitive time and waived inspections. While the house hasn't given us any major challenges, given its age, who knows what could be lurking under the surface. We think we could sell it with waived inspections again and avoid any potential headaches the home might bring down the line. We'd also take some weight off our shoulders by managing a property out-of-state, and we'd get our down payment plus the profit back post-sale, and have about $150K for a future purchase. (We'd probably put it in a short-term CD for now at ~5% as we plan to buy a new home next year).

Our intentions were to buy and hold this house (as was the case with each of our rentals), but life happens and circumstances change. We've really been going back and forth on what to do here - hold and maintain it as a rental one way or another, or sell it for a small profit and to avoid some current and potential future headaches. We'd love to get some advice, thoughts, feedback from the BP experts!

Thanks!

Josh

Bill B. · Answer

You sell for $550k pay $50k in selling costs, make $50k and pay $15k? In taxes?  So you give this uo to make $35k? How long would it take for the property to make $35k in profit? (Not cashflow, profit.)

Ps. If you buy another $550k property at 6.5-7% interest that means paying $10k per year in additional interest over 4.6%. So in 3-4 years you’ve spent $40-50k in selling costs and $15k in taxes and the $35k in “profit” is gone to higher interest rates. All in the process of buying an unknown property in the future instead of the so far trouble free one you already own. Doesn’t seem ideal.

Dave Foster · Answer

Well said @Bill Brandt, @Joshua Arsenault, Nothing will kill your joy (and ruin years of cash flow in an instant) like an undiscovered capital repair expense.  This is one the most frequent reasons for doing a 1031 exchange - to sell a property that is either underperforming or has a large capital repair risk and buy a property that is more predictable.

It sounds like you've established your intent well.  Barring any surprises this should qualify for a 1031 exchange if you choose to go that route.

Alex Olson · Answer

If you have owned it for a year and intended to rent and keep it for awhile it may qualify for a 1031 exchange, especially if you collected rent for a year or so. I would reach out to @Dave Foster who can help.

hope that helps! I am partial to KC but love seeing 1031 exchanges grow wealth!

Caleb Brown · Answer

I'd hold till you can 1031. If you don't like managing hire a local PM, they are worth it. If the maintenance hasn't been crazy then you can hold for a little longer. The tax bill from the proceeds would eat profit up.

Tim Delaney · Answer

List out all the major concerns you have and assign them a value based on likelihood and based on how catastrophic they would be to your goals. Then List out all the benefits and assign a value based on likelihood and how valuable they are to reaching your goals. Maybe seeing those things on paper will help you make the decision that is going to be best for you.

Jon Kelly · Answer

@Joshua Arsenault why did you buy the property in the first place? I assume you had some real estate / passive income related goals.

Seems way too early to cash-out and put it towards a larger primary residence.

Keep the property and keep your real estate investing dream alive

Theresa Harris · Answer

You say the tenants have been hassle free.  While you are 6 hours away, you can call a handyperson to do some repairs meaning you don't have to go there.  I'd renew the lease with the current tenants.  You could also let them know that you are planning on keeping it as long as they are there, but if they are interested in buying it in a year or two, you'd be open to the idea.

Tim Delaney · Answer

@Joshua Arsenault I would only sell if you could walk away with at least 5 years profit (actual profit, not just cash flow). I’m also curious as to why you would sell this single family in Philly, but not your other one? If management from 6 hours away shouldn’t you be asking about selling both?

It almost seemed from your post that you were looking for reasons to sell this one with thoughts about what happens if the neighbor sells her property.

There is always going to be some risk and a headache or two with RE, but I’m guessing you know that already since you have three rentals.

David M. · Answer

@Joshua Arsenault

I guess I'm the dissenting opinion...  Sounds to me like its better to sell.  You don't sound up for the long range management.  You say its costing you more in maintenance than you expected.  'Everybody' always says just hire an inspector, hire a contractor, hire a property manager..  Yet, we post all the time on how its tough to find a good one of anything.  So, just cut bait and move on.

So sounds like you are getting ~10% return over the 1.5yrs, well maybe 1.75yrs.  That's not fantastic but still pretty good given the circumstances.  Of course, if you are sizably leveraged, then your roi will be much higher --- but, I don't know which statistic you use to measure your investing...  Take it and move on to something else.  Do you have any other investments you can tax loss harvest to offset the gain?  If not, I honestly don't believe 7.5k of tax isn't the end of the world.  Of course, if you can time the 1031 (which I think would be really hard in this market), so much the better.  But, you still keep 85cents on the dollar (for federal purposes) of the profit.

While one can consider life to be about dealing with and/or managing "headaches," doesn't mean you need to stick yourself with one.  I gotta think a 1920 house in PHilly would be similar to one here in NJ --- I wouldn't have even touched it.  Your market is probably as hot as mine, so go ahead and sell.  Either catch the "dip" if the market drops or move onto something else in your area that you can continue to self-manage.  Your post is a small laundry list of things you don't like about it.  Sure, I have rationales to assuade, but its not my property to run.

Oh, and are you tenants in a position to buy?  You should ask..  It may be a long shot, but I've sold a good percentage to mine.  Maybe you can close within a year so you get some more cashflow and you can sell without any realtor commissions and save you a good chunk of change.

Should We Sell a Cash-flowing Rental?

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