When to sell a multi-family rental or hold on?

Question

Hello BPers!!!

I pose a conundrum to the forums.  At what point to I sell off my highly appreciated, low cash flowing multi-family that I just bought 6 months ago?  This is on Munger in Dallas, TX (lower greenville area)

Here are the numbers:

Paid: $242,000 (put down: $60,000)

Owed: $180,000

Monthly PITI: $1900

Property Manager: $240 (10%)

Rent Total: $2400

Avg maintenance monthly (lawn care, handy man, etc - I'm out of state): $200

As you can see I'm super tight on cashflow, usually under $100/mo.  My other similar multifamilies are yielding $500+ monthly but I have had them longer.  This neighborhood has appreciated quickly so comps are now in the $290-$310K range as is or if put $40K into getting it all fixed up comps are close to $350-$370K.  I'm not keen on selling and would wait at least 6 months to avoid the cap gains but I'd like to start thinking about my next move.

If I sell I'd probably put it into the Tampa, FL market where I'm doing great cashflow and prices are still low.

I'm interested to hear some thoughts.

Adrian Smude · Answer

@Ryder MeehanI'd sell.  If you're not in a rush to sell put it on the market on the higher end and see what happens.  Make someone come to you.  Good luck.

Anthony Gayden · Answer

It doesn't cash flow much, but it does cash flow. How much do you think you would have to spend to get the upper end of comps? Also if you fix it up can you raise the rents to make it cash flow better? Finally would refinancing to draw out equity put you in negative cash flow?

Dan Mackin · Answer

The rental market compared to overall appreciation is dependent upon a lot of factors and is not completely predictable. I would say that overall the trends for the two are somewhat correlated. If the market appreciates so do the rental prices, but one of the big factors is what the demand is for each type. I won't say specifically on your market since I don't know it. If you could bump up rents that would definitely be helpful, but your numbers still concern me a little. Do you do any saving for capex in those numbers? I didn't see you mention it so figured I would ask.

Dan Mackin · Answer

I would hold on for a little until the market starts to slow a little bit especially at those monthly rent numbers. I'm curious how waiting 6 months will help you avoid the cap gains?

Ryder Meehan · Answer

Yep, I've been thinking of fixing it up but have been waiting on my neighbors to fix theirs up first haha!  Some places are totally renovated but 2 out of 3 in the area are still similar to the condition of mine.

I estimate $40K to repair and paint the siding, resurface wood flooring, update kitchens/baths, and other cosmetic fixes and updates.  If I did all this I might be able to charge a $100 more per month but the neighborhood wouldn't pay much more than that.

My only equity is really the down payment I put in.  I just closed on another property so I'm pretty leveraged, it would be hard to qualify for a refi until I can build up some cash savings again.

Ryder Meehan · Answer

Hi Matthew, good questions.  I did get quite a good deal, it was priced below market due to a foundation issue that was less to repair than they thought.  That repair cost was included in my $60K down since the work was down pre-closing.  They were quoted $30K, my guy did it for $10K.

If I sold it I would do a 1031 into a multi-family property or 2  in Florida where I'm currently getting better cashflow than Dallas.

Ryder Meehan · Answer

Yeh, that is definitely another concern - if I factor in around 10% for capex I'm in the red.  This is 1930's fourplex so as with any older property the repairs will be extensive.  If I can get out early I probably dodge any major repair if selling as is or invest to bring it up to move in ready.  The neighhorhood is a mix of fully renovated multi-family properties converted back to single families with owner occupants and multi-family class B's like mine so I'm on the fence there too.

Ryder Meehan · Answer

Thanks for the insight @Dan Mackin I appreciate your perspective.  Do you generally find that rental increases trail market appreciation?  I also think I could bump up the rents once current leases expire the end of this year.

Regarding capital gains I was referring to avoiding the short-term gains (25%) but of course I'll still have to pay long-term gains (15%) if/when I sell.

When to sell a multi-family rental or hold on?

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