Should I sell my rental property?

Question

My husband and I are in our later 20s we currently own a rental property that could sell for $180K or more. It brings in $1,475 a month. We do not have a mortgage on this home. We are moving to Arizona for my husbands job. His starting pay is only $45k a year. Should we sell the rental to buy a home for ourselves, keep the rental as an additional income, or sell the rental and use the money to put down payments on multiple properties?

Mark H. Porter · Answer

Why not sell the rental property when you move to Arizona and 1031 it into a multi valued at $600,000? If you can get a 4-unit you could live in one of them for a year and save some money.

Courtney Buck · Answer

@Lillis Hawker Where is your current house now? Do you expect to rent it easily if it doesn't sell right now? You might look at the depreciation as well. We like rentals as well for that aspect alone:)

Dave Foster · Answer

@Lillis Hawker, Given your situation of needing rental income to supplement a lower than desired salary, but also needing to obtain a place to live in your new location I think @Mark H. Porter is on to something for you. If you sell your investment property and do a 1031 exchange you'll avoid all tax on gain and depreciation recapture. And you'll unlock all of the equity relatively pain free as @Joshua Ferrari said.But where it could get potentially very interesting for you is that your replacement property could be a multi family of 2-4 units. Very favorable FHA rates are available on multifamily properties up to 4 units. $180K down payment could easily get you a $400K 4-plex of which you would live in one and rent the others. Doing it this way lets the 1031 exchange pay for your new home while the valuations of the other 3 cover your re-investment target for the 1031 and can supplement your husbands salary.

Mark H. Porter · Answer

@Lillis Hawker lillis, there is nothing we do without risk. The only difference between the millionaires on this site and those that are not is that they said “yes” more. Nothing else.talk to a realtor in Arizona and do the investigation into buying up to a four unit and living in one of f the units. Is the whole mortgage covered by the other three units (or close)? Are you able to save a bit? Now compare that to having what you have left of the $180k after paying capital gains. What do the numbers look like 5 years from now?

Melanie Johnston · Answer

@Lillis Hawker You are getting some solid advice here! Congratulations on getting started building your portfolio. My recommendation would be to talk with a lender (or 2 or 3) to see what's available on the mortgage market now so that you know your options. As you may have heard, that industry is in a bit of turmoil and lenders are changing their requirements and programs to try to cope.What was available--and would have been a good solution for you 30 days ago--might not be available today. No way to know until you put your feelers out and start building your knowledge of current conditions. This would be valuable in influencing which direction you decide to go.Best of luck in your new Arizona adventure! Pack your sunscreen. If I can answer any questions or help you connect with people, let me know.Melanie

Joshua Ferrari · Answer

@Lillis Hawker If the original property has no mortgage on it, then that's a lot of potential equity tied up there that you could use as a down payment for your new home. No banks are doing cash out refis right now, so I would consider going the HELOC (Home Equity Line of Credit) route. Only issue with that is that it's essentially like a credit card where there would continue to be a minimum payment every month on whatever number of capital you take out. You would want to be sure that whatever you take out of the original property for the new one, could be paid back monthly from the $1,475/Month income. If you can make that happen, then you've essentially bought a second house for free, steered clear of closing costs, taxes, & realtor fees, & have been able to keep your old house of which is probably still appreciating, still cash flowing, & is giving you immaculate tax benefits such as depreciation. I highly recommend keeping the property. If you've been managing the property yourself, and now you're moving away, then you'll need to also consider property management fees. Typically 5-10% of the monthly income. If all of that can calculate into profit, then that's the route to go!

Ryan Wilson · Answer

A lot would depend on your long term goals, condition of property, long term outlook on the property, and other factors. My thought would be if it is a good property and decent area with long term potential, you might consider keeping the property but pulling some of the equity from the property and use that as a down on additional properties, if you want to purchase additional properties. Based on the numbers it would probably still cash flow pretty nice, and avoid the selling costs and taxes ( assuming there is profit).

Lillis Hawker · Answer

@Mark H. PorterThank you, I have been thinking of doing something like that. I just worry with our household income outside of the property being so low, if we fell on hard times we would not be able to pay the mortgage. But, our end goal IS to have multiple properties/units. I just don't know how fast we can scale up.

Ryan Wilson · Answer

As @Joshua Ferrari said it is hard to do cash out, especially on a property that does not already have a mortgage ( does not make much sense to me, but found out the hard why, when I bought a property cash at auction and then could not get a loan), but you could probably get a HELOC and pull that money out and then down the road refinance that into a traditional mortgage ( I am assuming, lenders please correct me if I am wrong, for both of our knowledge).

Lillis Hawker · Answer

@Joshua FerrariThank you for the reply! I'm painfully new to this and will definitely check out doing an HELOC.