Single family rental home for 4 years -- sell or hold?

Question

Been lurking here for quite awhile, but now at a cross roads with our old home we've been renting for 4 years now. We purchased our 3 bedroom 1 bath home with a 2 car detached garage sitting on 0.28ac in Northwest Indiana back in July, 2009. It was a foreclosure we purchased for $54,000 with a 5.5% APR. We currently owe $39,000 on the mortgage. While living in the house we put in central heat/AC, new siding, new roofs, new asphalt driveway, remodeled the bathroom, and refinished one of the bedroom's hardwood floors.

In February, 2014 we moved out of this house into our new home and started doing some minor updates. We placed our first tenant in March, of 2014 and have had three tenants in the property since. Rent is $1,200 a month and includes lawn mowing/snow removal and sewer bill (city service). All other utilities and appliances are on the tenant. Mortgage payment is $680 a month including taxes/insurance. Previous tenant just moved out in May, 2018. Since renting the property we've only really replaced the water heater. No other significant upgrades were done to the home during the 4+ years of rental.

We had our agent come by this past weekend and they estimated a sale price of $100k as-is, or $125-$130k if we redid the kitchen (20-25 yrs old, pretty dated) and the bathroom. So right now my wife and I are at an impasse -- sell it or keep renting? What has me leaning towards selling primarily is how hot this area is right now. Homes in the area of this rental shouldn't be selling for $130K, in my opinion. But due to migrations from IL, stuff is sitting on the market here for weeks and then gone. I feel we're nearing the top of what I'll ever be able to extract from this house. However, that also means buying a new investment is going to be potentially over-priced as well. This leads me to think we won't qualify for 1031 since we could possibly be 12-18 months before buying something else.

Regardless of selling or renting, we have already started remodeling the kitchen/bathroom, and we intend to place appliances in the home. Between this and refinishing the floors we estimate to spend about $10-$13k.

There's some other outstanding things that need attention on the home, though:

Minor basement seepage.
Retaining wall in backyard needs to be replaced.
Garage is not in the greatest condition -- likely needs to be rebuilt due to some dumb decisions by previous owner(s), such as cutting rafters to install a garage door opener...

We're both currently on the "sell" side of this fence, but the tax implications have me concerned. We've generally not reported a profit on the property since we basically take every penny extra and put it towards the mortgage.

I would say we're not done being landlords. However, because of the market inflation we're unsure if we will find another property to qualify for the time deadlines of 1031.

So here we are -- any advice on whether we should sell or rent? The only "done deal" is we need to finish the bathroom (doing same thing whether rental or selling) and the kitchen (fairly well set on the Klearvue cabinets). Everything else is still options at this point.

Note: I will be scheduling an appointment with a CPA this week to discuss the tax implications. However I would like fellow investor advice before I make a final decision.

Colleen Goldstein · Answer

I don’t think there is as clear of a decision as it’s going to depend on what you are going to do with the money and your desire to remain a landlord. I know some people are cashing out since the market is hot, however I view real estate as a buy & hold stock- it’s going to fluctuate and go up and down, but as long as I’m getting paid it’s a sound investment. The only exception I would say would be if it was a dog of an investment and you did not like the area, had too many tenant or maintenance issues with the property & was a headache. If that was the case, cash out and get your money out to put it somewhere better. You can try to time the market, sell hold and hope for a crash- but at the amount of return you’re making on your investment and paying off the mortgage, I’d hold if I were you.

Adrien C. · Answer

make a decision yet? If you want another opinion on price, isn’t be happy to give my 2 cents. I have some experience selling houses both off market and listed :) Regarding nonprofits because you paid extra to the mortgage, that’s not true. You did have profit each year but choose to put that profit towards principal pay down instead of buying a car or something. I’m not a CPA but you’re long term capital gain joy shouldn’t be that high. Your basis will be the $54k plus improvements. Net gain is net sale proceeds minus basis. Depending on income, might only have to pay 10% of net gain which could be $5-6k. So is it worth getting $70-80k now and paying $5-6k in taxes? If you don’t want to buy because prices are high, lend the money to someone at a decent rant and make $6-7k a year in interest which is more than you were netting with it as a rental. When house values dip in 2-3 years, go buy something.

Ali Hashemi · Answer

Based solely on the information you've included in your post, I personally say sell. Here's why:The place has served you well as a primary residence. You've gotten your use out of it. Now it's time to realize the capital gains and purchase a property based on 'rental' characteristics rather than 'primary residence' characteristics. If you can realize the gains you've mentioned, you can own a new property free and clear, renovate and flip. It sounds like this is where your skill set lies. And flipping is the best way to make money. The market right now is great for selling and flipping in my opinion (even though all my personal investments are buy and hold). When the market drops again you'll be well positioned to buy something much larger and build equity/wealth in the buy and hold strategy.In summary, lock in the gains. 1031 into a new property. Flip that. Then take your liquid assets and really take your time and find a solid long term equity building rental.Whichever route you take, it sounds like you're making the right moves! Best of luck!