Renter vacated my townhome. Rent again or sell?

Question

I own a beautiful 2,400 square foot townhome in a nice neighborhood in central phoenix. The previous renter left early because of Covid. Now that it's empty, I'm faced with a dilemma because of my fears that the market will crash later this year/early next year as a result of a virus resurgence causing high unemployment and associated economic woes, plus the cyclical downturn that was predicted even pre-covid. Or maybe i'm wrong...

I've owned the home for four years and have a good amount of equity. It's not hard to rent now for about $2,800 a month, which pays all fees and nets me about $800. As a new RE investor, I don't really have the proper tools to analyze this decision, other than thinking that the potential upside of renting is small compared to the potential downsides of a RE crash, future vacancy between tenants, falling rental prices, falling home prices, etc. I've played with the rent vs buy calculators online and the result is so dependent on so many factors, so it's hard to know. I can change values in the calculator and make the outcome look however I want. But based on my best guesses, it says selling will net me more in five years than renting. Also, I have sufficient cash reserves to purchase more RE if the opportunity arises, and don't really have an immediate need for the equity in this property, and being generally risk-averse, I'm not likely to immediately reinvest the funds if I sell.

Can anyone chime in on how to best assess this situation? I always wanted to hold real estate as part of a retirement plan, but maybe I need to move to multi-unit instead of single family...or at least sell while the market is good and buy again later?

Thanks.

Michaela G. · Answer

A lot may depend on the FMV.

1) You have a property that's worth 200K and rents for 2400 and your expenses are $ 1600

2) Or you have a property that's worth 400K and rents for 2400 and your expenses are 1600.

Both cashflow $ 800, but a big difference in value. The 1st one many investors would buy as investment. The 2nd one they wouldn't. The 2nd one I would sell

Andrew Cichon · Answer

David - National household ownership is around 63% so rentals are 37%. The average home ownership time is 7 yrs., there is always going to be some turnover in the housing market, Covid-19 is just going to be a big bump in the road that we will get over. If you can wait out the vacancy,  look for somebody that has a really stable employment situation. That being said the total number of deaths in the US in 2019 = 2,813,503. Even the most stable lessee could drop dead tomorrow. The time to exit the market, liquidate assest is when prices stop rising and start to decline. Currently Atlanta is doing fine, have a Realtor provide you with a monthly MLS sales report , using a 6 month rolling average like this https://bit.ly/3cU3Vb7

Theresa Harris · Answer

If it would net $800/month after all expenses, I'd keep it.  This also assumes you planned to keep it long term.  $800 cash flow is really good.  With the money you have invested in the home, could you take the money and do better?

Roochita P. · Answer

First, it's always great to recognize that you have a good problem :) Owning a rental that cash flows well and having generated equity along the way is a great achievement. Congrats! As for what to do with your property, there's really no easy answer. It depends on your goals. You'll likely get a 100 different opinions that point you in 100 different directions. That being said, here's my opinion:

I wouldn't try to time the market. While it may go down in the short term, housing is generally in limited supply and most macro trends point towards a growing population of renters. If you're feeling conservative, I'd continue to rent it and generate the cash flow. Once you get to a point where you can refinance the house, you can pull out some of the equity and use to invest in your next property.

If you're feeling like you're ready for some risk, then you can try the route of selling and doing a 1031 exchange to trade up into into a larger property that generates more income (and, more work) for you. There are a lot of little details to iron out when it comes to an exchange, so do your homework and engage with an accountant/tax professional/1031 specialist to know what you're getting into.

Personally, I think if you've already got a good cash flowing property on your hands AND you've got equity to put into another property, then there shouldn't be any rush to sell. Take your other equity and put it to use in finding your next property.

Good luck and keep us updated!