Sell or continue to rent it out

[Raymond T.]

Hello BP,

Here's my current situation and I would like to hear your opinion on what would you do if you were me.  My question is should I sell my rental in Riverside County or continue to rent it out when the current lease expired in Aug 2017.  Thanks in advanced for reading and providing your opinion.

Background Info

Age - both my wife and I are 37 with 2 kids and one on the way

Goal - To buy more rentals with savings. I am not ready to use hardmoney or creative financing right now.

Income - in 28% bracket

Debt - No debt that we are concern to pay back right away

Savings - Mostly in retirement account in 6 figures.

Emergency Funds - only for about 1 month

Primary Residence - 1 SFR in Orange County of California

Rental Properties - 2 SFRs (one in LA County and one in Riverside County of California)

Cash flow from Rentals - LA County +$350, Riverside +$350 (after PITI, tax and insurance)

The rental in Riverside County used to be my primary residence until last year.  This house has been rented for about 8 months.  The LA County rental has been rented for more than 4 years.  

Sell Scenario

I feel that the market in Riverside is close to 2005 level (highest) and I do not feel it can get higher since the local median income can no longer support the mortgage payments.  I do not need to sell the property but I was looking to selling it to take advantages of the current market price and no capital gain.

Pro - I will have about $130k in gain after realtor fees and minor fixes ($5k) when I sell this.  I do not have to pay capital gain tax since the house is rented for less than 2 years in the last 5 years.  I can use this to fund my emergency funds and put aside for down payment on another rental when the market takes a turn.

It also has a swimming pool - liability and additional expenses (pool cleaning credit + potential for pump to break down). I do not have the umbrella policy yet and all 3 properties are under our names without LLC.

Con - I will lose the the positive cash flow property and properties may continue to climb up.  I may be tempted to use the proceeds from the sales.  

I also initially intended to sell this house if needed to pay for my daughter's college expenses. I estimated about $200k ($50k / year * 4).  

Rent Scenario

Pro - I have a great tenant in place right now.  They have been paying early or on time and no issue whatsoever.  i.e. They paid next month's rent already.  I can continue to save the cash flow of $350 per month to buy another rental later.

Con - I will have to pay capital gain tax if I see it later.  This is the only window that I have to sell without any capital gain tax.  I can do the 1031 exchange but this is only deferring tax.  The capital gain tax is approx $20k at 15% rate.  With only $350 cash flow, it will take more more than 4 and half years to recover $20k.  If I include the depreciation right off, I will take me a little over 2 years.

I have been leaning towards selling for the following reasons:

1. Current market price (nice equity appreciation)

2. No capital gain

3. No liability from swimming pool and 

4. Fund my emergency funds

Thanks for reading this far.  I know it's a long post but I want to provide as much facts as I can.