Prices are high, but should I sell my rental property?

Question

I own a rental house in a hot neighborhood in Dallas, Texas that was built in the early 1950's. People are demolishing the older houses left and right here and putting up larger homes. Last year, the first home on my block was scraped and the newly built home sold for $945,000. I can easily fill my little house with good tenants in about a week from putting out an ad. Plumbing, electrical, AC, water heater, roof, windows have all been replaced so it is low-maintenance. Also, I don't mind being a landlord.

I paid $88,000 for the house in 1998 but it is now worth about $275,000. I no longer have a mortgage, so after property tax and insurance I clear $9,000 a year (Dallas taxes are quite high).

The market in Dallas is really, really good right now so I feel as if I should sell. But if I did sell, I'm also not sure what I would do with the cash that I'd be pocketing.

...Or perhaps I should hang on to it. It really has turned out to be an easy way to make an extra $9,000 a year.

Is there anyone in a similar predicament who might have some ideas?

(A little about my situation...I am a 51 year old teacher, I live in a $200,000 home in which I still owe about $100,000 and should have that paid off in ten years. I will retire in 12 years.

Russell Brazil · Answer

Do not sell and wait for the market to correct. (Sorry to harp on the person who gave this advice). Markets go up and down. If someone sold in 2003 while there was a hot market and waited for it to correct, it didnt correct low enough 7 years later to get down to a 2003 price (In most of the country). The fact is no one can predict the peaks and valleys of real estate booms and busts. Ive bought things dam near the bottom and sold somethings dam near the heights, and it was 90% luck.

I wouldnt sell though till you knew what you wanted to do with the money. @Jay Hinrichs makes a great suggestion of doing a 1031 into a larger property. I might also suggest consider trading up, but taking your wounds now and paying the taxes. Im selling one of my multis now to trade up, but Im going to pay my taxes now instead of going into the next property with some crazy low cost basis, which could kill me on future taxes if long term capital gains rates get raised at some point in the far future.

Bill Devola · Answer

@Russell Brazil makes a good point. I will take one of his points one step further: what would you do with the money? People are throwing out figures of 5%-15%. Which is possible. But how much time per week or month do you have to devote to a new investment? Is a 1031 to a larger unit something you want to even do? For someone going in guns blazing it might be the right move. For someone just looking for a little passive income that has a full time job/life already it might be different.

I agree that the 3.25% your getting now is low, but it sounds like its damn near passive. Lastly, if your place rents within one week consistently you might consider raising the rent. Might be a telltale sign its under priced.

Thomas S. · Answer

You are actually losing a minimum of $4750 per year not earning $9000.

The return on $275000 invested at 5% (conservative %) is $13750 compared to your measly $9000.

You are losing money not making money, sell, sell now.

Cliff S. · Answer

keep your cash cow if are not planning on investment in the future. Todays market is good for you to sell but if you sell now, you may have to be lossing 9k a year withiout reinvesting if market does not favore you next year.( talking only RE market)

Jay Hinrichs · Answer

@Russell Brazil when we sold our Tree farm in Oregon a few years ago and had a massive gain we paid the tax's because of the low tax rate ... I like that thought process.

Matt Y. · Answer

$9000 / $275000 = 3.27% on your money

I'd strongly consider selling. You can probably use leverage and get a cash on cash return of 15%. Your $275k would then be making you $41k.

Gary Rutledge · Answer

...i mean 75220!

Gary Rutledge · Answer

Yes, decisions, decisions. All of this is good advice.

(and Tom, the zipcode is 75234...davila drive west of lakemont. love the neighborhood but also love where your place was in east dallas)

Jay Hinrichs · Answer

@Gary Rutledge prime opportunity to sell 1031 into a larger multi ... have to run the numbers.

Prices are high, but should I sell my rental property?

Prices are high, but should I sell my rental property?

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