Buy or sell first bought property?

Question

So I'll start off with the numbers with a home we purchased in Summerville SC. Purchase price: $217,500. Current principal: $204,000. Rent: $1,650. Mortgage: $1,216 We have lived in the home for two years and got orders to Hawaii. We purchased the home on 07/28/2016 which means, from my understanding we have approximately a year before we are out of the capital gains window. The home was built in 2013. The house is currently empty but has a lot of interest with potential renters. I believe this area will continue to grow and go up in value, however, I've heard people/agents saying we potentially headed for a down turn in the market. I self manage the property and after expenses I would say I clear about $100 month. I know it's not much but we put $0 down and have currently gotten a decent amount of equity in the property. I'm unsure if we should sell now and take the money to re-invest or let it ride out as a rental. Appreciate any insights in advance and let me know if any more information is needed to help figure out the best decision!

Thanks,

Jake

Thanks,

Jake

Jose Rey · Answer

I'm an agent/investor in Summerville and I completely disagree with whoever said we were headed towards a downturn. I don't know who would have said that to be honest, the National Association of Realtors just identified the Charleston SC market as one of the top 10 that are expected to outperform over the next 3-5 yrs. (https://www.nar.realtor/newsroom/nar-identifies-10-markets-expected-to-outperform-over-the-next-three-to-five-years)

It's tough, I don't know if $100 per month is going to be worth tying up your equity. But at the same time, if you sell you want to make sure you're making something as well. It just depends on what you can net on the potential sale, that's what I would try to figure out next.

Kristopher Kyzar · Answer

@Jacob Trimble Weighing all options without bias toward one or the other is key.  Math is rough, so don't quote me.

Option 1: Sell.  Since the house has been rented for the last 2+ years, there is without a doubt some work that needs to be done to get it ready to sell at retail price (probably close to $265-270K).  If nothing else, at least paint, flooring cleaning/refinish, and possibly some hardware.  Then you'll list it, and assuming the usual situation exists, you'll pay 6% of the purchase price to agent commissions, and about 1.5-2% toward your closing costs.  Your buyer will likely want closing cost assistance, so another 2.5-3% there.  If it sold for $270K, you're looking at about $240K before paying off your existing mortgage, netting you around $40K that you could then use to invest in Hawaii.

Option 2: Continue to rent.  Not knowing what you consider "all expenses", let's assume you got them all...  Continue to rent with your $100/month cash flow.  Take advantage of all available tax benefits including depreciation.  You're netting $1200 in cash flow, about $1500 in returned taxes, and an equity build-up of about $4500/year (not accounting for appreciation) for a total of $7200/year.

Option 3: Refinance and rent.  Assuming all things equal except for percentage rate and balance, cash flow goes to $200/month, and equity build-up would drop to about $4380/year (not accounting for appreciation) for a total of $6080/year.  Net for the year goes down slightly, but net monthly (actual cash flow) goes up, creating a bit of a buffer.  You could even stash a little more back for contingency.

Again, the numbers a rough, but I wanted to lay it out there a little more clearly for you.  Ultimately, it's about what your goals are with the investment.

John Semanchuk · Answer

To clarify, you bought it in July 2016 but when did you move out?  The Cap gains countdown starts when you move out and you have 3 years from that date.  Have you been managing it since then from a distance?   Not sure how you're calculating the $100 but remember the roof, the hvac, the appliances, flooring, etc are all aging.  $100 per month would not be enough to convince me to hold it unless you want to make a play for equity gain.

I personally don't think we're headed for a downturn in the Charleston area but the universe has never paid much attention to my opinion.

Also Jose's question as to how much it might sell for now is important as well as what you would do with the gains (if any) once you had them.

Jacob Trimble · Answer

Hey,

Thanks a lot for everyone's advice! As of now we decided to keep it. I called my insurance and made some adjustments and was able to get a lower premium and I also got a lot of requests for the property as a rental and was able to increase the rents. We have about 18 months until our capital gains window is up so we may still end up selling after the 1 year lease. Crazy side note, I called my lender about a question on my most recent statement which after that concluded ended up with me talking to someone about re-financing the property in SC. They offered to take me from 3.5% to 3.0% which I considered but since I was unsure about whether I was selling or not I decided to pass. However, I asked for a quote on our condo that we currently live in in HI which we bought for $435,000 at a 4.625% fixed rate and we ended up getting locked in at a 2.75% interest rate which decreased our monthly payment by almost $500! it'll only take us 23 months to recoup the cost to refinance and not only are we now saving that extra $500 but we also will be paying down $800 in principal a month instead of the $600 we were paying before. Anyway, I think that's a good deal. Again, thanks for the input and I'll make sure to post some more updates for anyone who's interested.

Duc Ong · Answer

@Jacob Trimble I would sell before the capital gains window closes. $100 cashflow isn't life-changing, and the deal seems tight if you're self-managing. If you had to use a PM, that cashflow might be closer to zero. Self-managing out of state rentals is possible, but not very scalable. In my opinion, if you are remote, it should be stronger cashflow, and I wouldn't bet on appreciation.

Jaron Walling · Answer

100% I'd sell.

Reinvest that into something else and it doesn't have to be real estate. Hawaii is expense I'm sure. Maybe you have interest in index funds or stocks? I'd use the knowledge gained from this property to get a better deal on the next one.

Jacob Trimble · Answer

Hey,

So my agent got back to me and she said with repairs we could sell for high $260s and without repairs mid 250s. She estimated about 4k in repairs.

Basit Siddiqi · Answer

@Jacob TrimbleWhat is the property currently valued at?If the value is just slightly more than the $217,500, then the option of being able to do section 121 exclusion isint too high. But if the property shot up in value, it would be hard to pass that up.

John Vietmeyer · Answer

I have a hard time selling as well, but If you qualify for the tax free distribution id go for it. Refinancing will cost you a few K and eliminate any cash flow you may currently be seeing.

If you sell, you can then reinvest in whatever asset you believe will have the best return moving forward.  That could be Charleston real estate with a higher return than your current property or something else.

Jaron Walling · Answer

What's the current value?

$100 per month cash flow seems weak at best, dangerous at worst. It sounds like a gamble on appreciation. I'm not a gambling man personally. If you have any appliances or repair expenses pop up you're paying everything out of pocket.

Buy or sell first bought property?

Most Popular Reply