When to sell?

Question

Good Morning, I have a question about when to sell. My husband and I have five SFH with a few paid off. When do you decide to sell vs buy and hold?

We have a house we paid 85k, put in 10k, and have had it rented for 8 years. We have a mortgage of 64k on it. If we sold I would list at 250k, which is underpriced for area, but it is a home built in the late 1800’s, so it’s not for everyone. It cash flows well.

But if we sold we could pay off our house mortgage, and actually make per month and save the on the interest we pay to the bank. But everyone always says buy and hold.

I know capital gains may be hefty on the sale. We have never sold and I don’t know much about this. But it seems like there is a lot of equity sitting in this house and we do not feel like getting any more rentals.

Any advice and thought are very much appreciated. What is the tipping point for most people?

Hilary Tuttle · Answer

Thanks for the reply. We are not yet ready to get out of rentals but I think it would be nice to not have a house payment for our own place. I have read as much as possible about capital gains and think that the sale will still be profitable. But between that and real estate fees it sucks!

JD Martin · Answer

If you want to access the equity and you don't want a mortgage, there's not too many other (safe, legal) options that you can take other than selling and getting out.

That said, if it is a profitable rental, and you don't plan on getting out of the rental business altogether, why would it matter if you're paying on a mortgage? You could potentially use the sale of the house to finance your lifestyle in bulk - lots of people use rentals to finance their day-to-day lifestyle - by paying off a more expensive mortgage. Or you could just refinance what you have if it was done at a more expensive time.

There's really no good answer to your question. My experience, most landlord tipping points are when they are ready to get out of the business altogether from weariness or age or both. Few people sell profitable properties, unless the level of aggravation exceeds the level of profit.

Dave Foster · Answer

@Hilary Tuttle, The strategy you're contemplating is a sound one. Certainly a 1031 exchange would allow you to defer payment on that capital gain and the associated depreciation recapture. But it would not reduce your indebtedness. Many will encourage you to complete a 1031 and then refinance the new property. And that too is a good strategy but again does not reduce your indebtedness. I sounds like you're really wanting to strengthen the balance sheet.

I would encourage you to do a similar analysis on all of your properties. A common strategy for our investors is to pick their property that has the lowest gain/least depreciation taken/highest debt and sell that, absorb the tax and use the proceeds to pay off other mortgages.

Approaching it this way you accomplish your goal of reducing debt and putting yourself into a more secure position. You also leave yourself the option to continue holding your other rentals long term. And when it is time for you to sell you'll be able to complete 1031 exchanges on the properties you currently hold now that will have the greatest amount of inherent gain but now they'll be debt free.

Less tax now. Security on going. Opportunity to continue investing tax advantaged. Not a bad way to go.

Leslie Pappas · Answer

Hi @Hilary Tuttle, you can defer those capital gains utilizing a 1031 Exchange and if you're an accredited investor, you might consider reinvestment into DSTs (Delaware Statutory Trusts). They are hands-off, institutional grade real estate investments, and they allow you the option to diversify. You get potential cash flow, tax shelter and appreciation. Loans are non-recourse. Happy to answer any questions you may have. - Leslie

When to sell?

When to sell?

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