Sell now off market or wait 10 months?

[Alex Todd]

Hey BP - we have a SFH that has been a LT rental (only 2yrs) but with same tenants, who are asking if we'd be willing to sell off market, in the next 90 days.

Their current lease extends to  April 2025, which at that point we were planning on selling.

Why sell in the first place? ROE is so low (.6%) that at this point in our RE journey, we believe our $$ can do more for us elsewhere and we still sit within Sec121 exclusion to avoid some CG tax. 

Any strong positions to waiting? Moving forward? Things we should look out for, lobby for, strategize on? 

Thanks!

Alex

[Marcus Auerbach]

Seldom sell. It's called buy and hold for a reason. Where do you think this will be in 10, 20, 30 years? I regret every property I sold 10 years ago (except the ones in the hood, that was a short term experiment I am glad I got out off).

Your total net worth contribution is a lot higher than 0.6%, just the paydown of your loan is double digit ROI. Plus appreciation. Cash flow is overrated, it does very little to create wealth. Even in the Midwest (I am in Milwaukee) it is hard to make more than $200 per door, regardless of your goal, you need many, many doors. Like 50 or 100, not just 2.

Not enough specifics to give you a better answer, but it sounds to me like you are considering giving up a great equity play that moves the needle quite a bit (San Diego, right?) for a couple hundred dollars in cash flow and a lot of work. Think long term! 

[Alex Todd]

@Marcus Auerbach - thanks for quick response. What details would you want to provide for a better answer?

Good points on long term hold and let appreciation do the work! We struggle with this too on a strategy.

[Theresa Harris]

If you are planning on selling it anyhow, why not sell it to them for market value?  You'll save on realtor's fees.

One thing to remember is unless you are flipping, selling a rental and buying a new one frequently is going to lose you money.  Rents do go up over time (as do costs, but hopefully at a lower rate).  When you buy the next one, learn from the current one as to what you could do differently to get a better rental.

I've only sold two of my rentals-one I had for ~20 years and while the price continued to go up after I sold, I was happy I did as there was a massive loan taken out for renos (multi million dollar) just after I sold it. Plus there were rent caps. I used that money to buy two other rentals.  One of which I just sold (had it 7 years) because I was tired of frequent turnover and high condo fees.  I don't regret selling either of them.

[Bill B.]

How much do you have in potential capital gains? (Selling price minus selling costs minus purchase price)

What’s the price of this property? (How much do you save by not using a realtor?)

You say it’s been a rental for 2 years but their lease doesn’t expire until April 2025. Will that make it a rental for 3 years and no longer eligible for sec 121? (You must complete the sale before 3 years passes from your move out date, so it can’t be a rental for 3 years.)

So…

If you have a large capital gain that will become taxable when their lease expires (both federal and state income tax) you pretty much have to sell before that date or not for at least 10 years just to break even with selling now. 

I’d get an appraisal and decide if you’d want to sell for that much. If so, would they be willing to pay that much and not use a realtor? Their leverage is buying without a realtor saves you money. Your leverage is they owe you 10 x months of rent. It could become a big win win. 

Lastly, do you know why they want the 90 day period? The farther you push it out the more rent you get. Let me know what you find out and how it turns out. 

[Rick Bassett]

I've sold 3 properties over the years, I regretted selling the 1st so much that I bought it back 5 years later. I learned the hard lesson about taxes (fed, stat, recapture) on the 1st one sold, will not make that mistake again.

Didn't mind selling the other 2 as I was able to 1031 them into properties with better ROE.

[Alex Todd]

Hey @Bill B.

Call in $800k in CG. Buy price $823, sale at market $1.75, sales costs ~$100k. 

If the realtor takes a transaction only fee ~$5k? (Idk if this is a still a normal practice) savings are real for both parties. 

We will be within the sec121 limits come April 2025. Roughly 6 months till that mark.

90 days - realistic timeline for them to sell their rental property to support downpayment. This is an assumption on my end. 

[Bill B.]

So you moved out of the home October 2022.

You absolutely 100% have to sell. You’ll save $75k in capital gains tax if you live in a state with no income tax. Closer to $125k if your state has income tax.  plus, if you don’t sell to them you’re going to end up paying at least $50k in realtor commissions. Divide $175k by your rental profit last year and that’s how many years you’d have to rent it out with zero vacancy or capex to BREAKEVEN with selling. 

If a realtor won’t do the deal for $5k you can EASILY get a state legal contract for under $100. It will walk you through the process. I’ve only sold 2 personal residences and I sold them both myself. It didn’t take an hour of my time. The title company (assuming you’re In a title state) will do all the work for their minuscule fee you’re going to pay anyway. 

Get an appraisal. Decide if you’d sell for that much. If so, ask them if they’d pay that much. If so, take a 2% downpayment ($25k?)  toward the purchase that they agree to forfeit if they don’t buy the property by the end of the lease. (No reason to say 90 days because you’d rather collect more rent and sell towards end of the lease.)Plus if they decide to ask for repairs you can say no thanks and keep the $25k. Maybe you want to make it $50k so it covers the cost of using a realtor to sell to someone else. 

Good luck. 

[Crystal Smith]

Quote from @Alex Todd:

Hey BP - we have a SFH that has been a LT rental (only 2yrs) but with same tenants, who are asking if we'd be willing to sell off market, in the next 90 days.

Their current lease extends to  April 2025, which at that point we were planning on selling.

Why sell in the first place? ROE is so low (.6%) that at this point in our RE journey, we believe our $$ can do more for us elsewhere and we still sit within Sec121 exclusion to avoid some CG tax. 

Any strong positions to waiting? Moving forward? Things we should look out for, lobby for, strategize on? 

Thanks!

Alex

While there's not enough information in your original post to provide advice here are some things to consider:

1. With a .6% ROE and a current inflation rate of 3.3% year over year, you are losing ground unless the projected appreciation rate of your property is high enough to overcome these negative numbers. If the projected appreciation is high enough to overcome these numbers then you hold.  If not then you sell.

2. A strategy you may consider  is selling is using either a 1031 or a structured installment sale to delay taxes.  You can talk to @Aaron Hickey to see if a structured installment sale would work for you.

3. If you decide to sell then having a tenant who wants to buy is perfect. Before signing a contract with the tenant request a Proof of Funds if they are paying cash or a pre-approval if they are going to get financing. Don't commit to a contract until you know they can close.

[Aaron Hickey]

Quote from @Alex Todd:

Hey BP - we have a SFH that has been a LT rental (only 2yrs) but with same tenants, who are asking if we'd be willing to sell off market, in the next 90 days.

Their current lease extends to  April 2025, which at that point we were planning on selling.

Why sell in the first place? ROE is so low (.6%) that at this point in our RE journey, we believe our $$ can do more for us elsewhere and we still sit within Sec121 exclusion to avoid some CG tax. 

Any strong positions to waiting? Moving forward? Things we should look out for, lobby for, strategize on? 

Thanks!

Alex

 Alex,

Interesting scenario you have here! Crystal mentioned a Structured Installment Sale may be a good soution along with possibily a 1031 Exchange. Both tax stratedgies but with different end goals...Please feel free to reach out to me if you'd like to review this at your convenience. 

Thanks!

[Alex Todd]

Quote from @Crystal Smith:

Quote from @Alex Todd:

Hey BP - we have a SFH that has been a LT rental (only 2yrs) but with same tenants, who are asking if we'd be willing to sell off market, in the next 90 days.

Their current lease extends to  April 2025, which at that point we were planning on selling.

Why sell in the first place? ROE is so low (.6%) that at this point in our RE journey, we believe our $$ can do more for us elsewhere and we still sit within Sec121 exclusion to avoid some CG tax. 

Any strong positions to waiting? Moving forward? Things we should look out for, lobby for, strategize on? 

Thanks!

Alex

While there's not enough information in your original post to provide advice here are some things to consider:

1. With a .6% ROE and a current inflation rate of 3.3% year over year, you are losing ground unless the projected appreciation rate of your property is high enough to overcome these negative numbers. If the projected appreciation is high enough to overcome these numbers then you hold.  If not then you sell.

2. A strategy you may consider  is selling is using either a 1031 or a structured installment sale to delay taxes.  You can talk to @Aaron Hickey to see if a structured installment sale would work for you.

3. If you decide to sell then having a tenant who wants to buy is perfect. Before signing a contract with the tenant request a Proof of Funds if they are paying cash or a pre-approval if they are going to get financing. Don't commit to a contract until you know they can close.

 Thanks Crystal! Good call on proof of funds.

Were straddling between doing a 121exc and 1031 or just selling straightup with the 121exc and paying the remaining CG taxes to have some flexibility on where to reinvest v forced timeline of the 1031. 

[Crystal Smith]

Quote from @Alex Todd:

Quote from @Crystal Smith:

Quote from @Alex Todd:

Hey BP - we have a SFH that has been a LT rental (only 2yrs) but with same tenants, who are asking if we'd be willing to sell off market, in the next 90 days.

Their current lease extends to  April 2025, which at that point we were planning on selling.

Why sell in the first place? ROE is so low (.6%) that at this point in our RE journey, we believe our $$ can do more for us elsewhere and we still sit within Sec121 exclusion to avoid some CG tax. 

Any strong positions to waiting? Moving forward? Things we should look out for, lobby for, strategize on? 

Thanks!

Alex

While there's not enough information in your original post to provide advice here are some things to consider:

1. With a .6% ROE and a current inflation rate of 3.3% year over year, you are losing ground unless the projected appreciation rate of your property is high enough to overcome these negative numbers. If the projected appreciation is high enough to overcome these numbers then you hold.  If not then you sell.

2. A strategy you may consider  is selling is using either a 1031 or a structured installment sale to delay taxes.  You can talk to @Aaron Hickey to see if a structured installment sale would work for you.

3. If you decide to sell then having a tenant who wants to buy is perfect. Before signing a contract with the tenant request a Proof of Funds if they are paying cash or a pre-approval if they are going to get financing. Don't commit to a contract until you know they can close.

 Thanks Crystal! Good call on proof of funds.

Were straddling between doing a 121exc and 1031 or just selling straightup with the 121exc and paying the remaining CG taxes to have some flexibility on where to reinvest v forced timeline of the 1031. 

 Make sure you talk to @Aaron Hickey about using the structured settlement approach.  It removes the forced timeline associated with 1031 while providing the same tax delay benefits.

[Tanner Cindrich]

Always hard to judge the market but it is slightly a sellers market right now. Look at the numbers and if you're okay with them, sell no

[Alan Asriants]

Quote from @Marcus Auerbach:

Seldom sell. It's called buy and hold for a reason. Where do you think this will be in 10, 20, 30 years? I regret every property I sold 10 years ago (except the ones in the hood, that was a short term experiment I am glad I got out off).

Your total net worth contribution is a lot higher than 0.6%, just the paydown of your loan is double digit ROI. Plus appreciation. Cash flow is overrated, it does very little to create wealth. Even in the Midwest (I am in Milwaukee) it is hard to make more than $200 per door, regardless of your goal, you need many, many doors. Like 50 or 100, not just 2.

Not enough specifics to give you a better answer, but it sounds to me like you are considering giving up a great equity play that moves the needle quite a bit (San Diego, right?) for a couple hundred dollars in cash flow and a lot of work. Think long term! 

 I've heard this one too many times as well, and I agree.

Most regret selling but never regret buying and holding. Seems like youre in a strong market that should continue to appreciate. 

Keep the best, sell the rest

[Dave Foster]

@Alex Todd, if that property was your primary residence for at least two years prior to turning it into a rental then absolutely sell now and take up to the first $500K of profit. A huge consideration is that this sale will conceivably save you 6% or so in real estate commissions.  Ask yourself the likelihood that this property will appreciate that much in the next year.  With another year of wear and tear on the property as well it is highly unlikely that you will actually net more gain in a year than selling right now without a realtor.

If this has always been a rental then you do not have a 121 option.  That is only for your primary residence.  But you could do a 1031 exchange.  That would indefinitely defer all tax and depreciation recapture.  If you go that route then a consideration would be selling to them but they give you a floating closing date so you can have more time to search for your replacement property.  this could be a huge advantage to you.

[Alex Todd]

@Dave Foster It was our primary, then moved to rental for last 2 years..thus fitting into both the 121 and 1031 options, no?

How standard is a floating close date? We're actively trying to structure our "buying requirement" checklist to walk through with our tenants/buyers and want to be crisp on our asks outside of asking price. 

6% in appreciation in 10 months, not likely :) 

[Dave Foster]

@Alex Todd, yep, you would qualify for both as long as you sell next year in time.

So then the question comes down to - If you're going to make the same amount of money either way would you prefer to sell now and 1031 (but eliminate the risk of another year holding).  Or would you rather accept the risk of holding in exchange for getting the money tax free.

That's a really intriguing question!!!  

Closing dates are generally 30-60 days right?  You have to remember that they're probably going to be somewhat at the mercy of a lender so a 30-45 day window is pretty standard.  But if you could get them to agree contractually to a 60 day close with another 30 day extension if needed.  That would buy you 4 and a half months to identify and get into contract on your new property from the time you go into contract with your buyer.  They can be somewhat flexible because they're not moving.  And don't have to coordinate an additional closing.

[Chris Lopez]

@Alex Todd I'm a big ROE fan! Many people overlook it when evaluating their properties.

I've created a few videos on BP YouTube around Return on Equity. Search for "Achieve Financial Freedom 4x Faster with the “ROE Rule” of Real Estate"

My gut: If you're ROE is low and you can sell it cap gains free, then sell it and smile to the bank. Not having the 1031 pressure is great. 

If you DM me, I'm happy to share my spreadsheet to help you analyze it.

[Alex Olson]

@Chris Lopez. Yes! ROE (Return on Equity) is the most valuable calculation when considering a 1031 exchange. What are you making on your current equity (not equity when you bought it). Knowing that you can double your return on your equity by selling a property you have in today's interest rate environment is a logical calculation that investors should take when trying to decide what to do with their property. 1031 exchange is usually the answer. 

[Becca F.]

I agree with Marcus' points, too much focus on cash flow. There's not enough information given but unless you can find a property that will give you the same return on equity, I'd keep it. Where would you look to buy to get a better ROI?

San Jose is a great market. I heavily lean towards keeping a Bay Area property. I had a couple of people suggest to me to 1031 my Bay Area SFH to buy an apartment complex or multiple single family/duplexes out of state to "cash flow" better. More tenants, higher property tax (mine is reasonable due to Prop. 13) - no thanks. I'm willing to bet money that there are some Bay Area people that regretted selling.

Would run the numbers with different scenarios and evaluate this carefully, maybe with your tax advisor too. 

[Alex Todd]

Quote from @Becca F.:

I agree with Marcus' points, too much focus on cash flow. There's not enough information given but unless you can find a property that will give you the same return on equity, I'd keep it. Where would you look to buy to get a better ROI?

San Jose is a great market. I heavily lean towards keeping a Bay Area property. I had a couple of people suggest to me to 1031 my Bay Area SFH to buy an apartment complex or multiple single family/duplexes out of state to "cash flow" better. More tenants, higher property tax (mine is reasonable due to Prop. 13) - no thanks. I'm willing to bet money that there are some Bay Area people that regretted selling.

Would run the numbers with different scenarios and evaluate this carefully, maybe with your tax advisor too. 

 Thanks @Becca F. - I totally agree with you on the location piece and that makes this tough.This isn't just about cash flow but a seemingly unique and great oppty for taking $500k of tax free Sec121 dollars off the table.

Curious if you see the the alternative strategy to be : 

- to hold the SFH long enough for appreciation + CF to cover the $500k + taxes on those capital gains if selling?
- Hold until the monthly rent increases enough over next 10yrs where with a cash out refi we would still be net positive cash flow but be able to pull out that $500k tax free? 
- hold forever and stack up W2 earnings invest elsewhere? 

[Chris Lopez]

@Alex Todd In terms of keeping your money working hard and growing fast for you (aka. IRR) you're most likely best selling the property.

I sold two condos earlier this year because the IRR peaked. 

The return on equity (ROE) is 9.5%, which is about the same as historical stock market returns. If I’m dealing with the headaches and risks of rentals, I want higher return than the stock market.

Plus, the internal rate of return (IRR) is going down every year I hold onto it. IRR shows the annual returns over the investment's holding period. ROE shows the estimated returns for the next year.

The condos are in the same complex that I purchased for $195,000 and $207,000 in 2020 with a 25% down payment. Below is a graph that shows the IRR if I sold in that year. The IRR's for both are very similar, so I took the average.

What do you notice about the IRR? It shot up in 2021 and 2022! Since the values peaked in 2022 and leveled-off, IRR will start decreasing every year. I wish I could say it was from value that I added. It's not. It was the gift of low interest rates that made the values dramatically increase. In markets, like Denver, most of the return has been through appreciation (equity gain), not from cash flow. Since IRR takes into account the time value of money, it's no surprise the IRR is highest in the first two years.

I ran four scenarios and raising rent doesn't impact the IRR.

Scenario #1: Keep it and Raise Rents by $500+

Both units had the same tenants in there for the lasts three years. They are great tenants and I had no vacancy or turn costs by keeping them. However, my rents are below market by $250 per unit or about 8%.

Increasing the rents changes the ROE from 9.5% to 11.8%. A 2.3% bump is nice, but it’s still below my 15% ROE baseline target.

An interesting point is that a $500/mo increase in rents has a relatively low impact on IRR. Below is a graph showing the IRR results over the next five years if I held onto the properties and increased them to market rent.

If I hold for 5 more years, the IRR still goes down! Since so much of the return was front loaded in the first two years, IRR will not improve by holding onto the properties.

The only way to tap into equity is to refinance or sell the property.