Rental Property in another state, sell or hold?

Question

I have a single family home in Denver, CO. This was my personal residence until I moved to Oregon, I have been here now for 2 years. I have no intention of returning to Colorado. The residence has been rented and I am currently making about $1000 per month after all my costs including property management. My question is,  should I sell it or hold it? I have quite a bit of equity in the property. Because it was my previous residence if I sell it in the next year I won't have to pay property gains tax. If I sell it I would have enough funds to purchase at least 4 other single family homes in my current location. However I do have a great property management company and solid rentors  currently (who I believe will likely buy a home when the current lease is up in April 2018). If I hold it I could refinance it and barrow against my equity and buy potentially 3 other homes. The house is solid, class B property but is older (built in early 60's) and so there are frequent repairs. Any advice on the situation?

Ali Boone · Answer

I'd say, make it all about the numbers. If you sold it and bought 4 properties in OR, what would the total cash flow on those be and what would the total value/equity of the houses be, and how do both of those compare to the CO house? At the end of the day, that should be the question.

If you sell the CO house in a few years, outside of the no capital gains window, you still won't have to pay gains on it if you 1031 that money into more RE, so shouldn't be any major time worries there.

My first thought before I even finished reading your post was the refinancing idea and using that money to buy more properties. My main reason for that is--my suspicion is CO is going to keep climbing in values. Values have already jumped pretty hard but I foresee them continuing. So if you just refi instead of sell, you can continue to reap any appreciation.

If you do refi it and use that money to snowball into more properties, just again check the numbers. What will the net cash flow all of the properties (CO house and new properties), taking into account the refi loan principle + interest you're now paying? Just make sure the cash flow you are getting on the properties you buy with the refi-ed money cash flow well enough to surpass how much you are paying on that new loan you just took out.

I think the main thing will be what kind of deals you are going to find in OR. Typically, OR isn't really known for cash flow. So while you have great plan options, none of them will be worth it if you buy properties that are low or minimal on the cash flow.

I do know I'd have a hard time selling a property with steady, good tenants and good property management that is cash-flowing well and likely to appreciate more. As someone who has been through the gamut on tenants and property managers, finding good ones is really worth it's weight in gold! Just food for thought.

Bill S. · Answer

@Micah Lundstedt my vote is sell. Get the money out tax free. Doing a 1031 with multiple homes on the buy side is a huge nightmare. I don't think you can expect the same appreciation over the next 5 years that you got from the previous 5 years. You should look at a multiunit building in your current market.

Matt M. · Answer

If you are not coming back, I'd personally sell it right before you have to 1031 to protect your gains. Also $250 a month in management can be beat. There are companies doing it for $50 a month flat fee here in town.

Make sure to sell it when our market is in the prime selling season.

Dave Foster · Answer

@Micah Lundstedt, 1031 is certainly an option as it is an investment property right now. But there may be a more attractive scenario for you that tips the scales to sell now.

You've been out of the house for 2 years.  Did you live in it for two years prior to moving?  If so then you have lived in the house for two out of the previous five years and you would get the first $250K in profit ($500K if married) tax free.  You could actually rent that property for a while longer and still qualify since you could live in it for two and rent it for 3 and still meet the two out of five criteria. But be careful to pay very close attention to the calendar.  If you fall outside the 2/5 window you could still 1031 but that would be tax deferred and you would have to reinvest the proceeds.

Tax free income is a big incentive.

Kevin Grinstead · Answer

Hi Micah, Being a realtor in Colorado, this is how I see the market affecting you: Right now the market is changing, you can see it in number of offers and how long properties sit on the market.  Houses above 400k are taking longer to sell.

The rental market does not seem to have any issues or a slowdown and depending on the neighborhood, you might be able to continue to rent and find new renters to pay even higher rent.

A $1000 a month cash flow is a nice starter. If you can buy 4 other properties, how much can you cash flow?

Personally, I believe in diversification to help reduce risk. If I could make more with several properties, I would go that route.  I would worry about the market slowing down or reversing if you Refi to pull out equity. It would be a shame to go from being almost paid off to being underwater.

Nicole Hoss · Answer

@Micah Lundstedt There are a LOT of us in here that invest in Indy and have never lived there! It's a great place to look at. I've been investing in Indy for just over a year and have no plan on stopping. You should consider it!

Micah Lundstedt · Answer

Thanks for all the responses. I have been leaning toward selling it and after reading your responses I am even more confident if this. Jeff Wallenius I am curious who you invest with in Indianapolis? Do you have a broker you work with there? I know Oregon is tough in general for cash flow but I am nervous about investing in markets I have never lived in or are familiar with. I would be very interested in learning more about your experience investing in Indianapolis. I've heard the expected growth of the market there is supposed to be quite strong over the next several years.

Thomas S. · Answer

The greatest disadvantage you have with the property as it stands is the amount of dead equity. 300K @10% return is killing your cash flow to the tune of $2598/month. The property is actually earning nothing and as a result all expenses, including the mortgage,  are coming straight out of your pocket.

The property in itself is a liability and if you sold, investing in a income fund, you would make a higher return.

You could pull the equity to invest in additional properties but selling would be a far better business decision when all factors are considered.

Shawn Ackerman · Answer

@Micah Lundstedt are there any forseen Major Cap Ex coming your way on the Co property?  If not I may consider leveraging it and picking the other rentals in your local market.

Rental Property in another state, sell or hold?

Most Popular Reply