Should I sell my rental?

[Lisa Vitchayanonda]

On year five of owning my rental,  3 BR. 2.5 ba. house I purchased in 2004 around the time of the peak pricing of $295,000.  My current rent of Is $1,795 per month. This property is 4 minutes walk to the medical center and 15 minutes walk to a University. It situated in a good rental area. 

After deducting all the expense ( property manager, HOA, property tax, insurances), I made $10,000 a year before paying income tax and Lower to $8,000 if there is vacancy (usually no more than 1 month.)

I owned this property for 16 years and never live in there.  Currently calculated depreciation recapture tax if I sell it is $34,000.  Current price $360,000-380,000. If I sell it and pay capital gain tax, realtor fee, reconditioning the property and selling cost,  I probably gonna get net cash less than $295,000 I original paid.

I'm a single female with 1 grown up daughter. I live in a house that's also paid off ($570K). I am about to medically retired in a few months due to cancer (already had surgery) I have adequate pension income and have a very diversified portfolio ($700K of 401K, devident stocks, IRA, annuity, 200K cash in the bank, no debt and Have inherited a couple property overseas.

Question:  Is this rental a poor investment (3% annually net income?) It is still better than the bank saving account Rate.

Should I sell the property doing 1031 exchange knowing this is not an ideal time to buy since the housing price is skyrocket now.

What to do with the money if I sell the property and make a better return of investment?

THANK YOU.

[Dave Toelkes]

1. 1031 exchange into 3 or 4 $100K properties and rent them for $800 - $1000 each. Assuming all cash purchase of 3 properties at $100K each, and assuming an NOI of $400 - $500 per month per property (50% rule), you should get a 4.8% to 6.0% return on equity. This would equate to $14.4K to $18K annual cash flow. use leverage to purchase 6 or 7 rentals with financing, your cash on cash return will be even higher.

2.  Sell the property and use the after tax proceeds to purchase AAA rated, insured municipal bonds issued by your state of residence that pay about 4.0% interest.  The bond income will be tax-free on your federal income tax return

3.  Use the after tax sale proceeds to purchase a diversified basket of dividend paying stocks.  If you choose 5 - 10 companies that are the leaders in their respective markets, you should see a healthy dividend and price appreciation over time.  Accelerate your portfolio growth by reinvesting the dividends.

4.  Do nothing.  If your current income adequately supports your current lifestyle, there is no compelling reason to sell.