When to cash out on single family home

Question

I have a single family home in colorado that was recently remodeled with the thought it would be my long term home.  I have since moved out and have gone back and forth on keeping it as a rental or selling and cashing out on the property.  My concern is the ongoing maintenance of such a large property and I put more money into the remodel than I would have if I originally viewed it as a rental.  My thought would be to use the proceeds from the sale to purchase a condo or townhouse which i view as an easier type of property to maintain.  As a rental it would have about $200-300 after 1st mortgage,HELOC,maintenance, and vacancy taken into account.  If sold should make about 120-150k.  Any thoughts?  What is the thought process of selling a property?

Account Closed · Answer

This is something you need to decide for yourself. Asking other people's opinions is great. Asking other people to tell you what to do is not a long term path to success. Analyze the pros and cons of your scenario, seek clarification on anything you are not clear on, then make the choice you think is best for you. If you are happy with your choice long term, great! If you are not happy with your choice long term, now you have experience to draw from in the future. At the end of the day it's just money. Relationships and experiences are much more important - you can always make more money.

Mario Tavares · Answer

In my humble opinion, sell the home.

Don't fall into being a landlord, but plan to be a landlord.

This home was not remodeled as a rental property, so I can only assume the products within the property are above rental quality...and tenants will not treat the property like you would treat the property.  It sounds like you have the property ready to be put on the market for sell, and that's what I would do.  Take the proceeds, payoff the debt associated with the property and buy a true rental...like you already mentioned as your first thought.

Dave Foster · Answer

@Peter O'Bryan, Regardless of your decision there are two very important factors to consider now that can compound your return.

1. as @Travis Sperr alluded to, the first 250K  (500K if married) of gain is tax free if you've lived in that house for 2 out of the last 5 years.  The time doesn't have to be consecutive, just a total of 2 out of the 5 before you sell it.

So if you're short on time you can move back in for the remaining necessary and turn a huge tax hit into tax free.  Even better is if you already have lived in it long enough you could sell now and take the gain tax free...or wait and rent it for an additional 3 years (this way you've still lived in it for 2 out of the previous 5).  By doing this you enjoy three more years of income and appreciation and you don't have to make a decision right now.

2. If it is a rental now you can still benefit from doing a 1031 exchange when you sell.  This will not eliminate the gain immediately but it will defer the tax on it and you will be able to use the deferred tax to buy more replacement real estate.

Both of these factors should play strongly into your decision - taxed to tax free or taxed to tax deferred.  Nothing will boost your return more than paying attention to these immediately.  And they can both be made to work with whatever timing scenario you want.

Peter O'Bryan · Answer

Thanks.  Really with there was a magical number to tell you what to do but as with everything each individual needs to make the best decision they can.

Robert Butler · Answer

Keeping the property is probably not a bad thing.  If the numbers are right then you may be able to have a cash flowing property that will continue to build equity assuming the market value increases.  Of course, you don't want to bet your money on the equity later, but rather focus on the cash flow now.  Alternatively, you can sell the property yourself or use an agent, which since you are a seller will generally run you about 6%.  If it makes since to do that then go for it.

Tony Howard · Answer

The problem with selling is obviously the huge transaction costs - i.e. realtor, closing costs, etc. Better to use as investment, borrow against it or be creative in some way!

James Wise · Answer

If you can afford to keep it I would hang on of,it for awhile. Let the tenants pay down that mortgage for you then when it's time to sell you will be putting a few 100k in your pocket as opposed to 150k.

Fred Heller · Answer

@Peter O'Bryan   I always like to consider the opportunity cost in a situation like this.

The opportunity cost is the $120,000 to $150,000, minus any tax liability, if any, that you could invest elsewhere. Compare that to the $2400 to $3600 a year you would clear by keeping the home as a rental.

Peter O'Bryan · Answer

thanks for the feedback and helping me see the different sides of this issue!  It is a lot to chew on but ultimately I think it is time to move on from this property.  I'm going to take my gains and find a more suitable investment property.  Thanks again!!

When to cash out on single family home

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