Would you sell or hold?

[Brandon B.]

We have a single family rental that a previous tenant would like to buy. Last year the house appraised for $126,000. It is rented for $850/month. I built the house as a spec home in 1999 but couldn’t sell it at the time and have rented it out for the past few years.

We do not have a mortgage on the house, but we did use $20k of its value as collateral for our last investment property purchase. The paperwork was drawn up so that we have access to another $60k of its value to use for future investments. We are now in the beginning phases of tapping into about $40k of that to build a duplex on a lot we already own. We have bids for the project and are awaiting an appraisal of the plans to figure out how much of a loan we can get. We believe if the appraisal comes in high enough over our construction costs, we might not have to use any of the collateral. 

When asked what price range he was looking for, the previous tenant said in the $130ks. He said they were preapproved, although they are not necessarily in a big hurry to buy.

Our current tenant’s lease ends at the end of this month (July). They’ve been excellent tenants. They told us they would like to stay, but have been on an extended vacation, so we haven’t yet signed a renewal. That’s not to say we would kick them out next month—we just have some flexibility to sign a shorter term lease with them as opposed to a year should selling be the better option. (We would still kind of feel like jerks though because after we asked them if they wanted to stay in the house for another year, they’ve obviously understood we would sign another year long lease.)

The house was built for about $84k in 1999.We do not currently have anything identified to buy (although there are off market properties we would be interested in IF the owners wanted to sell, and we’ve been meaning to contact some of these people) so we are worried about tax implications if we can’t do a 1031 exchange—of which we have very little knowledge.

The house has been very easy to rent because it looks great and is in a great location. Its main drawback is the lack of a basement in an area prone to tornados, which is a big reason why it didn’t sell as a spec home. Our current tenant is great, but who knows what the next one will be like.

If the bank will approve it, is it better to sell and have the money to invest, even if we have to hold on to the money for a while until we find some things we want to buy? Or is it better to hold on to this property because we are able to get some rent every month while still being able to use some of the equity by using the house as collateral?

We would really appreciate others' thoughts on this. What would you do and why?