When to Sell and Feeling It is a Good Decision

Question

I own a property in Colorado that I was an owner occupant in for 4 years and then moved in with my significant other.  For the past year, it has been a rental that cash flows about $250/month.

I have decided to sell and have notified the tenants that the property will be listed in the coming weeks.

Even though it is a stable investment (there is upside on rents, positive cash flow and should have a nearly zero vacancy rate), I have decided to sell because I have almost made back from renting it what I put down and going to be listing it for 190% of what I paid for it as well as the factors below.

Now as the listing date gets close, I am starting to re-think selling it.

Arguments for selling:

- I don't trust the HOA and dues have been going up steadily in the past 5 years and some potential high cost items need to be taking care of.

-Cashing out while the market is high and have stockpile of cash to invest in a less expensive market or if there is a drop in the market having cash on hand.

-Unit needs about 10k in rennovation/maintenance

-Variable rate mortgage and only refinancing options are non-warrantable

Arguments for keeping

- Stable rental income.

- Upside on rents

- Continually Strong real estate market (Boulder, CO)

I am having trouble getting past the emotional aspect of selling the first place I purchased while I feel there are strong arguments for keeping or selling.  Any input or feedback would be much appreciated.

Bill S. · Answer

@Taylor Horowitz three thoughts 1) bad HOA means get out. To me that trumps all. Now is the HOA bad just because assessments are increasing. No, I actually consider that a good thing. The older a property the more maintenance. Now Boards making short sighted, self serving, and emotional decisions. That is a reason to bolt.

2) Capital gains. Now is the time to consider whether to hold or sell. With the way the capital gains are figured holding longer makes you on the hook for more which is a major downside in holding. If you want to roll it into more RE then you use a 1031 and gains get put off to another day.

3) Replacement property. It is very very hard to find a replacement property that will perform like what you are selling locally and I am solidly against investing at a distance especially for beginners.

Happy investing and know that your dilemma is a good one to have. Definitely a first world problem.

Jean Bolger · Answer

Originally posted by @Taylor Horowitz:

I own a property in Colorado that I was an owner occupant in for 4 years and then moved in with my significant other.  For the past year, it has been a rental that cash flows about $250/month.

That's not bad, but what are your long term financial goals, and is this approach going to get you there effectively?

I have decided to sell and have notified the tenants that the property will be listed in the coming weeks.

Even though it is a stable investment (there is upside on rents, positive cash flow and should have a nearly zero vacancy rate), I have decided to sell because I have almost made back from renting it what I put down and going to be listing it for 190% of what I paid for it as well as the factors below.

That's a nice return for five years.

Now as the listing date gets close, I am starting to re-think selling it.

Arguments for selling:

- I don't trust the HOA and dues have been going up steadily in the past 5 years and some potential high cost items need to be taking care of.

Hmmm, expensive assessment ahead? That could cut into your profit for sure.

-Cashing out while the market is high and have stockpile of cash to invest in a less expensive market or if there is a drop in the market having cash on hand.

Yes, it's a pretty great time to sell, especially if you are in the lower price range (I know that's relative in Boulder, lol)But as others have mentioned, going to a different market can be dicey- don't forget to budget for your time (a few trips a year) and overestimate what you think your property management will cost when you run the numbers. Whether you'll have a lot of good options locall may depend on the amount of cash you'll have on hand after a sale. It's hard to do a lot with a little right now.

-Unit needs about 10k in rennovation/maintenance

Make sure you're accounting for that when your contemplate your listing price. If you  don't, you may end up having to adjust your sale price upon inspection objections anyway.

-Variable rate mortgage and only refinancing options are non-warrantable

Probably not an issue for you if you refi, there are plenty of lenders who will do that (Elevations CU, which is right in Boulder, is one). You probably want to have a little list of lenders that can do it to give to potential buyers if you put it on the market though.

Arguments for keeping

- Stable rental income.

- Upside on rents

- Continually Strong real estate market (Boulder, CO)

All valid!

I am having trouble getting past the emotional aspect of selling the first place I purchased while I feel there are strong arguments for keeping or selling.  Any input or feedback would be much appreciated.

You can reframe the emotional attachment by picturing it as the great savvy move that launched you towards financial success rather than your "first home". You can be just as proud of selling something as you were of buying it.I would base the final decision on a long term financial plan. If you don't have one of those yet, take your time and do some reading and studying -- on BP and elsewhere too. Real estate investing is a great financial tool, and the one that makes the most sense to me. But it's not the only one.

I'm sure it will all become clear. You've got two more years before you lose your personal residence tax exemption so you don't need to rush.

Larry Modak · Answer

Hi @Taylor Horowitz I to just recently struggled about selling a house I lived in for 7 years and have rented for the last 12 years. I have tossed this emotional sale back and forth for almost 2 years and have finally decided to pull the trigger. It has not been an easy decision, but one I will now be able to live with...it was time to cut emotional ties.

It has been a great rental over the years and my tenants have been very steady. I self managed and for a while it was tough watching things get beat up. Renters no matter how good do not take the same care as an owner. So that helped my decision to sell.

It's not a light decision but the market is great and that makes it easier. I will reinvest the gains in property that I will make more money with.

David Faulkner · Answer

Nice problem to have. Since you lived there 4 years and have only rented it out for a year sounds like you will be selling tax free (at least up to 250k in gains), which is great. You can keep the cash ready for when a local opportunity comes up, which may end up being in a few years after the RE market softens up. I would NOT seek out greener pastures out of state, unless you plan to move there yourself. Trust me on this one ... been there, done that, got ripped of repeatedly; stay local and as you already have learned, avoid HOAs.

Kevin Grinstead · Answer

Hi Taylor,

It is an interesting time in the market in Colorado. Here's the way I look at it:

Option 1:

Sell the property and use the money to diversify in other markets (it would be hard to find multiple properties in Colorado for the profit plus down you had in this purchase)

Option 2:

Sell the property and purchase one other property in Colorado (if you can find one with better cashflow)

Option 3:

Keep the property, Refinance your equity out and use the equity to buy an additional property for rental income.

Option 4:

Keep the property and keep current rental income.

Each of these options have benefits and challenges based on all the available numbers. Once calculated you should be able to come up with the optimal decision based on what you know now and what you speculate about the market.  Make what seems to be the best decision and run with it. Time will only tell what the best option is.

I personally like the idea of a refinance and using the equity to diversify.

Travis Sperr · Answer

@Taylor Horowitz ask yourself, if you didn't own this property would you buy it today?

Chances are the cash is better to get into other propeties (assuming that is what you are looking to do). Keep in mind that is is challenging to find great deals in our market, have you explored what you would replace it with?

Jake Thomas · Answer

Sell it and use the money to fund 2-4 more properties. I parted ways with my first purchase last year and since then we have only been adding to the portfolio. Sometimes all the equity you have in one house needs to come out in order to grow the business. Don't let emotions get in the way of a business decision, the house doesn't have feelings. :)

Aaron Linde · Answer

You said it best, "I am having trouble getting past the emotional aspect of selling the first place I purchased..."

When emotions run with the property, it will NEVER be a good time to sell.  Your arguments for keeping it could change in the coming months and then you'll be angry that you didn't sell.  Run the numbers, make your decision and don't look back.

If I still had my first flip from 12 years ago, I could sell it today for 2.5X what I sold it for then.  That still doesn't change the fact that I was happy to sell it for a $40k profit and do another flip...and then another...etc.

Do your best to remove emotion from the equation.

Good luck!!