Should I sell my old investment

Question

Hey folks, I own a single family investment property. I was built in 1983 and when I bought it in 2016 it was renovated (new roof, foundation beams, appliance, carpet and paint).

Its been 7 years since I bought and my interest rate for 30 year was 3%. I have paid off more than 40%. The house has appraised to almost double my original purchase price.

the property generates little positive cash flow of $250 per month. (Keeps growing since I have renters who just renewed for 2 more years and I kept nominally increasing every year. Last few years insurance and property taxes have impacted cash flow a lot.

since the property is old every now and then I have had issues such as leaks in pipes, fence falling, and appliances.

My question is should I sell this house and buy a slightly newer and rent it out OR just pay off and get full cash flow and till then invest for my repairs from my pocket/heloc for repairs which will increase.

Marc Winter · Answer

My advice--In this, and immediate future market, don't play 'skip'.  Depending on your current age and investment goals, you have several options:

1.  Sell and hold cash.  Pros--you'll be ready to buy any bottom of the market.  Cons--TAXES on cap gains and recapture of depreciation.

2.  Refi or HELOC for available cash.  Pros--have cash ready.  Cons--can't always count on a HELOC to be there when you need it.  A new mortgage will always have to be paid.

3.  1031.  Pros--no real tax consequence if done properly.  Cons--can't touch any cash, and time constraints on declaring and closing on the replacement property.

4.  Sit Tight.  Pros--hold it long enough and any dip in price or recession declines will eventually correct themselves.  Cons--Short to mid-term future uncertain, and difficult if not impossible to change your mind about selling during a major downturn.

5.  Meditate and pray on it.  Pros--don't have to listen to other opinions that tend to confuse--Let the universe guide you.  Cons--well, um, none.

Good luck!

Bill B. · Answer

Because you just renewed the lease it’s a bad time to sell. Your buyer will have to honor that lease. That means you can’t sell to an owner occupant, the buyer who would pay the most. Real estate investing is slow and boring and probably you should wait to sell. You could ask your tenants if they’re interested.

Don’t worry about cash flow, unless you need it, in which case you should sell immediately. The appreciation and principle pay down is where all your wealth will be made.

A 1983 home is very old for Vegas and maybe your area, but there are plenty of markets where that would still be relatively new. If you do an exchange to a newer property you will more likely than not cash flow even less if at all. (Higher interest rates combined with the fact that higher priced properties tend to return a lower percentage of price in rent.).

I’m not saying don’t do it, I’m saying don’t do it for more cash flow. I recently exchanged a paid off $370k home for a new $610k home with a $240k mortgage. The cash flow went down as the rent is only $1,000/mo higher and even at only 6% the mortgage payment is $1,440, the insurance is a little more, and the property taxes are $3,000/yr ($250/mo) higher. So the cash flow went down $700/mo. But I’m not investing for cash flow.  good luck.