Tenants want to buy my rental property in Philly - should I sell?

Question

I own a one-bedroom condo in a desirable part of Philadelphia (Fairmount/Art Museum). I paid $265k for it in 2015 and am lucky enough to own it free and clear. I moved away from Philly last fall and listed it for $275k. There was a lot of interest but only a few bites; the feedback was that it was priced too high. I put it up for rent and thought I'll see what happens market-wise. For the last six months it's been leased to a young couple for $1,600/mo.

Last week I got a call from the tenants' agent saying they love the unit and want to make an offer for the previous asking price of $275k. From an investment standpoint, I'm wondering what makes more sense given the times we're in right now. This is what I'm weighing:

1) Just sell it. It feels like the market is as about high as it's going to get for a while, with COVID and all the fallout being talked about. I've had several people tell me to just sell it and hang on to the cash for now. Prices will fall probably sooner or later, and there could be opportunities to reinvest for more growth.

2) Keep it. My parents (who made have a stake in the property) feel strongly that I should hold on to it. They say that if we enter a deeper recession/depression, inflation will be a concern and that real estate is a good hedge against that. (I should note they have a few other rental properties, so there'd still be some buffer either way.) They also believe that selling the property because of COVID feels like a "panic move".

Finally, I'll just note that I don't have any plans to live in Philly again, so there's no personal motivation to keep the property.

Obviously a crystal ball would be great here, but short of that I'm wondering what other folks would do with this offer sitting in their lap. It's essentially a break-even situation, but I see it as a good chance to get out before prices start to slide. I'm also wondering if rental incomes could slip as the economy worsens. This is more out there, but I also think about behavioral factors like—as millennials age and have this recent memory of a pandemic that battered East Coast cities, will living smack dab in Philly be as desirable as, say, a suburban SFH? A repeat of the 60s-80s, in a way?

Looking forward hearing what others think about this!

Mike McCarthy · Answer

@Robert M. Personally, I would take COVID out of your decision process. No one knows whether it will be better or worse, but I don’t think you should be making a decision based on what’s happening today.

That said, $1600/mo on a $275K property doesn’t sound like a great cash flowing investment.

How’s it working for you? Good PM, not much maintenance, any deferred maintenance? Any big capex repairs coming?

Zachary Paul · Answer

Another point to consider are the tax implications. *I am not a tax attorney*, however, you can sell your primary residence exempt of capital gains taxes on the first $250,000 if you are single and $500,000 if married. This exemption is only allowable once every two years. You can add your cost basis and costs of any improvements you made to the home to the $250,000 if single or $500,000 if married.

If you continue to hold onto the property you might lose out on this exemption and have to pay a significant amount of capital gains if/and when you sell.

Fairmount/Art Museum area of Philadelphia is a pretty stable residential market in the city with not many major swings (as compared to other up and coming neighborhoods), but with your intentions of not returning to Philly, my thoughts are it would be best to sell. Another benefit to think of would be that since the Buyers are currently Tenants, they might not ask for a home inspection (w/ potential repairs) and buy the condo in as-is condition, thus saving you time, money, and headaches.

Ryan Smith · Answer

Disclaimer: I am a newbie and don't own an rental property yet (have put in offers recently, but nothing has stuck), but hopefully I can offer perspective.

I see that you moved away, and that you own it free and clear. Have you thought about what you'd do with $275k cash, minus agent fees? You could use that money to fund a BRRRR or put 20% down on a few properties, whichever kind you are interested in investing in. Doing a quick calculation of cash flow could show you how much that money could work for you. That is, comparing it to what you're getting from this condo. However, if you bought it for $265k, and can sell it for $275k, it seems that you bought it kind of high. Remember, condos can lose value quick. This might be a good opportunity to get out from that and get into a more stable asset, in terms of holding and gaining value. But if you are cash flowing a crazy amount and don't plan on letting it go anytime soon, that might be justification enough to hold on to it. Seeing that you've already listed it before, and you don't live around there anymore, it seems that you have seriously wanted to get rid of it.

Just a few ideas to toss around. I would brainstorm what that cash could do for you and weigh that out. If you could get, let's say, $13k/year in NOI, that's only a 5% return on $265k. But if you're getting 15% (in the ballpark of $40k NOI), it could go either way. But it doesn't look like you're in that ballpark with the current renters.

Frank Hinck · Answer

@Robert M.

Sell it, cash out your parents, and either put it to use for BRRRR or buy SFHs, or if you’re not in that kind of mode then loan it out as hard money to legitimate proven flippers.

Theresa Harris · Answer

Your parents are right in that real estate, if done properly, is a good investment.  Having said that, I'd sell and use your money to buy another place where the return is better.  You can use that money to finance a few rentals.  I would buy a single family home or duplex-something without condo or HOA fees.  Property taxes may be higher (depending where you buy), but condo fees eat up a lot of your money.  Talk to a bank and see how much of a loan you qualify for and buy your rentals using the bank's money.

Eric Greenberg · Answer

Im not sure what type of contract you have with your old selling agent, but you may look into using their agent for both sides of the deal since the price is already agreed upon. That way the agent may be fine with taking small percentage from you while overall still making more than they would have as only the buyers agent.

Steve F. · Answer

sell

Nick Brown · Answer

@Robert M. If it's not producing great returns and you've got a solid offer on the table I'd definitely consider it. I also agree with @Zachary Paul - see how favorable you can get your side of the agreement in terms of inspections, mortgage contingency, etc. After all, they live there now so they know what they are getting and they're coming to you with this idea to purchase because they love the unit so much.

Troy Sheets · Answer

I agree with this. Take the tax free money and run! The value on this condo isn't going up much any time soon and I'm sure you can make better returns in a different investment. Also, don't pay that agent 6%, negotiate the fee way down, 3% or less. Maybe even a much lower flat fee.

Robert M. · Answer

Thanks @Ryan Smith, these are great points to consider. This place is definitely on the lower end cash-flow wise. I would guess the NOI is $12-13k/yr. I like the idea of using the cash as 20% down on several other places, especially if prices go down in the near future. Will keep this in mind and keep thinking on uses for the cash, as you suggested!

Tenants want to buy my rental property in Philly - should I sell?

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