Should I sell or should I hold?

Question

A few years ago, I bought a single family home in Parker, Colorado. I bought it as a foreclosure and have rented it out for a few years. Since I bought it, it has appreciated significantly and now worth around 500k. I have paid off the mortgage and I rent it out for $2600 a month.

The house is in a great area and attracts good renters. After looking at what its worth vs what I rent it out for. I was thinking about selling it and buying other rental properties elsewhere, where I could get a higher rate of return. One area I have invested in is Wichita, KS where I have a couple of rental properties and I am getting a good return. I have thought about selling the house and buying some more properties there or elsewhere with a better return then I am getting here in Colorado. I would appreciate any thoughts you might have.

Thank You,

Eric

Dave Foster · Answer

@Eric Ingersoll, While your running those numbers I wanted to piggy back on something @Bill S. said.  If you were thinking about moving back in so you could access the profit through the primary residence exclusion you'll only be able to prorate it between the times of "qualified use" (as primary) and "non qualified use" (as rental).  So in your case you'd have to move in for 2 years and then would still only qualify for 2/?ths of the gain to be tax free.  Not the worst thing but it does leave you with a tax bill and it also slows you down.

As long as you perform a 1031 exchange when you sell the Parker property, which you can do right now, you'll be able to move it with no tax consequences at all into whatever market you choose.

If retirement in a few years is possible you may want your portfolio to be closer to you unless you have great long term management in place or decide to 1031 into passive investments.

Account Closed · Answer

You will have to weigh whether the $31,400 per year in rents are worth less than the equity cash out to buy further rental properties. If you could buy multiple rentals with the cash out and achieve similar or better cash flow from the new ones then the choice should be obvious. Let the numbers be your guide.

Leslie Pappas · Answer

Hi Eric, I know you said you'd like to own the properties outright for your out of state investing you might want to also consider syndications if you qualify as accredited investor.  Large multi-family apartment investing can be an attractive area option especially for folks that want to invest w/experts that do value add investing for a living and you can help fund the acquisition and share in the profits.  I've written a few blogs you might find of interest as alternative to "traditional" real estate investing, which most folks I talk to migrate away from due to the extra hassles of managing their own properties, even if they have property management.

https://www.biggerpockets.com/blogs/7993/48729-are...

Thomas S. · Answer

If you are looking for highest returns then owning outright is the most conservative and lowest possible return available due to the opportunity value of your equity.

You could get a similar or high return by selling and investing in a income fund. You would avoid any real estate down turns and the hassles of dealing with tenant and maintenance issues.

Maximum returns in real estate investing can only be achieved through leverage. Equity is a cash flow killer.

Norberto Villanueva · Answer

@Eric Ingersoll - thanks for posting. I'm with the hold crowd. Sure, you can cash in your chips, perhaps do more but, isn't Parker growing like nuts i.e. lots of upside left? Leaving money on the table is no bueno.

And, "what if told you" that, using leverage you have the potential of acquiring at least 4 times as many income producing properties in Parker, Colorado Springs, wherever, doing really nice things like, reducing your principal balance and tax burden, more tax benefits done right and, never least, appreciation. Some like to call it, "icing on the cake" but, it's not like we can't make a reasonable projection of what it'll be say, 20 - 30 years from now so we prefer to call it, "putting your money to work for you". A little more, please.

But, never mind the extra. With an increase of about 7% over last year in Denver (https://www.cpr.org/news/newsbeat/colorado-springs...) and no contraction in sight, scheduled rent increases should continue to multiply that $2,600 of mailbox money forever more, or at least until your portfolio review. Heck, it will be $2,782 (might as well go for $2,800) next year alone!

Done right, holding might just meet the needs of your retirement, children's college education or other financial objectives of your golden years quite nicely, making you appreciate that foreclosure you bought and held in Parker way back when.

To summarize, if the market has upside, you might want to hold and use leverage to buy more in similarly increasing markets, like Colorado Springs. ;)

Michael Plante · Answer

personally I would sell and buy a few more properties where your other rentals are.

To me that rent is horribly blow for a property worth 500k

I also don't like mortgages and so it seems you don't either.

Jared Viernes · Answer

@Eric Ingersoll if your goal is cash flow you will get the best cash flow of you purchase new properties on a loan using your previous property as collateral.  You still own the previous property outright, the loan is just on the new propertie.  If you buy right you can easily cash flow on those properties as well.

If your goal is cash flow while minimizing risk.  Then keep what you have, it is a known and therefore provides much less risk than selling and purchasing something new.

Bill S. · Answer

You can always find better numbers somewhere else. I understand the need for cash flow and based on what your have said, it wouldn't be hard to get more. That said, if all you follow is the numbers you will end up with junk properties in undesirable areas. You have to have other criteria.

What about moving into the rental for a period of time (making it your primary residence) and then selling to take capital gains exemption for your primary residence?

If you have good people out of state, then you would likely do better there. If you don't, then you could see all your funds disappear and you wind up with no cash flow and no equity.

You could go to Colorado Springs with the money and buy a 4-plex and perhaps get more cash flow (more management too).

Good place to be to have tough decisions like this to make.

Eric Ingersoll · Answer

Thank you for your responses. My goal is to achieve better cash flow by cashing the property out and buying new rental properties, likely in another area. I really don't wan't to get a loan, I am looking to retire in five years and would like to own all properties outright. I agree with the comment, let the numbers be your guide. There is allot to consider including appreciation, which I have done pretty well on this home. However, I don't know if the Denver/Parker area will continue to appreciated like it has.

Should I sell or should I hold?

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