Should I sell or rent and hold?

Question

I purchased a property in 2013 for $265,000 and leased it out ever since at $2,300. The return rate (without depreciation) is at about 5%. The selling price of the property is at least 325,000 right now. The property is already paid off. I am debating should I just sell the property right now or should I continue to lease out and take out an equity loan to purchase another property with better return? Thank you!

Dave Foster · Answer

@Heather Yan, the ideas that Account Closed proposes regarding positioning your real estate so that you get the maximum rent out of the lowest property value can be a key component of a successful 1031 exchange.  In your case because the property is owned free and clear if you sell it you will generate somewhere around 300K in proceeds.  In exchange for allowing you to avoid paying capital gains on the sale the 1031 requires you to purchase at least as much as you sell (in this case around 300K).

However, you do not have to put it into one property.  One type of 1031 exchange can be called a "diversification" exchange.  You sell your on big property and buy 3 smaller properties.  Maybe the demographics in Katy are such that a 100K rental generates 1200/month in rent.  Or 100K duplexes are renting for 750/side.  If you used your 1031 to buy three of those you are in the exact same debt position you were (none) but you just jumped your monthly rent from 2300 on a 325K asset to 4500 on three 100K assets.

This is just one of the ways A 1031 exchange could be a powerful tool for you at this stage.  But you must begin it before you complete your sale and you must use the services of an unrelated third party called a Qualified Intermediary.

Heather Yan · Answer

Matt R.

Thank you for your opinion! That opened another window. Yes, the property is at a quality central area where schools are excellent and location is very convenient. I listened to the podcast 113 and feel that I share the same feeling as the guest speaker on rentals. I like good cash flow, but I also like to deal with better quality tenants only. Guess I really need to take my time to think this through.

Brent Rogers · Answer

Do what David said. Interest rates are still so low. You should be able to buy multiple properties with the 300k and get very favorable rates (assuming your credit and other underwriting criteria is in good shape). Borrowing at 3 - 5% and getting returns at 10 - 15% is how money is made in most markets. There are a few exceptions (like S.F.) where cash flow is tough and you make your money from appreciation.

I live in the south and it's all about finding cash flow and maximizing the difference between the borrowed rate and the return rate. Any price appreciation is gravy.

I live in the south and it's all about finding cash flow and maximizing the difference between the borrowed rate and the return rate.  Any price appreciation is gravy.

Account Closed · Answer

@Heather Yan 2nd vote to definitely sell. Even with a selling price of 265k I would still sell, so the possible increased selling price only further shows you should sell this. you should be getting a much higher return rate then that with rentals and without sacrificing quality of tenants. Main issue is likely value of the property, its too high value to make a good return on, unless your in a highly dense area where entry level/1st time home buyer type properties cost that much. The higher you go in value, then typically the more the property is not appropriate for a rental (unless your in a place like Manhattan NY where a 1 bedroom apartment could cost that much). Very rare that you should ever allow yourself to receive less then 1% of value/month in rental income. Regardless if the property is owned outright, the money is not working very hard for you. I personally go for 1.5% of rent to value per month. Allot of the investors  here shoot for 2%.

so unless your able to raise rents to $3k-$3.5k or higher per month then its likely you need to transition to less expensive properties, you should be able to do this and still remain in the A class to B class property types.

Heather Yan · Answer

Account ClosedYes, I planned to do a cash out refinance and use the money to buy other properties. Line of credit is less cash and also have to pay closing costs as well as annual fees. Because of the appreciation, it is hard to get good ROI in good areas, and I prefer to deal with higher income tenants only. At this point, I will focus on higher appreciation on house values than higher cash flow.

Account Closed · Answer

You could take a line against the property free of charge, with a really low rate rate, somewhere in the high 3's, but in Texas I believe you can only take 50% of the value on a line.

You could also take a cashout refinance up to 80% LTV and use the 80% to buy additional rentals.

Since you are making money from the rental and your area is appreciating (most of Texas is), I would take the 80% cashout and buy additional rentals. If you sell now, I think you might be losing out.

Matt R. · Answer

@Heather Yan

Keep in mind this property is adding 2k a month to your bottom line net worth factoring the 70k appreciation. Add in the $2300 rent and it is over 3k a month for one door. Some might say that is a home run or at least a triple. This one must be located in a quality area. Some fundamental elements of this investment look good from a far.

If you get a chance check out bp podcast 113. He is in Texas too and wrote the book on this stuff literally, co written by Gary Keller. You seem to have close to what he would recommend.

Good luck with your search!

Lorraine Pennington · Answer

I agree with some of the other posters. Leverage the equity and pull out the cash. You will be able to leverage at least 70% of the value and put it down on other properties. 1031 has some time limits that will govern how fast you need to invest it. Target a higher return than the 5%

Keep us updated ... we'd love to hear what you decided your next steps to be.  Good luck to you!

Heather Yan · Answer

@David Foster, thank you! Very useful information. I was just wondering about if I could do what you said.

Heather Yan · Answer

Thank you all for the great input! I will go ahead look into the sec. 1031 exchange.

Should I sell or rent and hold?

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