Should I sell this property?

Question

I own a SFR in the Phoenix area. The current tenant is excellent and has been there for many years. Current rent is under market at $1500. With the Phoenix housing price boom, then property can now sell for $450K+, loan has 80K left on it @ 3.75%.

Options I'm considering is

1. Sell it, and go invest in another market where I can pick up better ROI
2. Raise the rent. Current renter is great, so have to be something manageable.

If I sold, I'd have capital gains tax on 300K unless we can do an 1031. Leaning toward selling it and look to buy in Michigan or another state where the price to rent ratio is better.

Theresa Harris · Answer

Even if you raised the rent to market value, could you do better with your money in the other market you are thinking about?  If you sold at $450K (say $400K after expenses) and have $80K on the mortgage, you'd get over $300K.  using some of that for down payments (yes plural) what would the numbers look like if you used it to buy two or three new rentals (SFH and duplex)?

Allie Pfannenstiel · Answer

I have 10 rentals here in PHX market...appreciation is crazy good here and will be strong in the future with the population and job force growing so rapidly here. What is appreciation like in the states your looking in to?

Scott Esmail · Answer

If you do sell, for sure do a 1031 exchange with that much equity gain and since you say your going to buy anyways once you sell. If you have not already see how fast and if there is any good deals in the market you want to invest in first and how easy it is to get a deal under contract. I find it hard to find good deals in this market to 1031 into but of course can be done. I have done lots if 1031's in the last couple years usually just to get rid of a problem property I used @dave foster for the 1031's company he is on this site and recommend. In regards to cash flow I think you could do better with that amount of equity. But if you reside close to your rental in Phoenix and not out of state, me personally I like to have my rentals close to where I live and would take less ROI to be close. You could raise the rent to market and get a cash out re fi and invest with that instead of selling as another option.

Account Closed · Answer

Ask the tenant if they are initerested in buying, sell it without an agent since you have a buyer, time the sale to being able to do a 1031 and move to the new market.

Dan H. · Answer

>Sell it, and go invest in another market where I can pick up better ROI I like numbers. In 10 years you have over $300K of appreciation. This implies you likely purchased it for less than $150K. You do not indicated what LTV your loan had at purchase, but I will use 80% LTV. This implies <$30K + closing costs. Total investment likely would have been <$35K. On the appreciation alone you have a return >750%. Or an annual return from the appreciation of ~24%. This is an outstanding return over the 10 years. It is my view that your use of "another market where I can pick up better ROI" is not really implying a better ROI, but better initial cash flow. Most markets with better initial cash flow have the better cash flow because the properties are cheap. They are cheap because the market believes they should be cheap. The market price is based on numerous parameters. Two primary parameters are ROI and Risk. The market is cheap because the ROI is not expected to be great or the Risk is expected to be high. Typically the ROI is not great because the market is a zero/low appreciation market. This low appreciation is not just applied to the property but also to the rents. The market with the higher rate of rent increase will always eventually out cash flow the market with the lower rate of rent increase. It is pure numbers (number guy). The rent increases is why you likely have good cash flow even though your rent to value is horrendous (you did not purchase at the current value). In addition, OOS has challenges. Building and maintaining the OOS team takes work and IMO is not worth it for a few units. I have a hard enough time maintaining my local core team. So what do I recommend? The higher equity than required on the current investment property is not being well leveraged (producing minimal return, i.e. the return is the increased cash flow that is basically purchased at a not cheap rate). I would refinance and extract significant equity (at the cost of cash flow). I would leverage that extracted money so that it is producing a return. Each investor has their own risk tolerance and level of effort (passive versus significant effort). Only you can decide the correct investment for you but some to consider include S&P 500 (lifetime return of almost 10% and very passive), trusted syndication (better than 10%, likely more risk than S&P, passive), another local RE (better than 10%, not passive), a BRRRR (should be far better than 50% return in the short term, but a lot of effort). The potential investment options are too many to list. Good luck

Drew Brown · Answer

@Brian Weaver seeing the word cash flow on here a lot after talking about a cash out refi or HELOC on your rental property. If you pulled equity or actually took a loan against this rental, would your rent cover the cost of the loan? If the rent does cover the cost of the loan and the other variable costs of operating your rental this might be the win win for your current situation. Keep the rental you currently have, don’t get hammered by taxes, but also have cash to invest into another property. Brian I hope this helps. If you have any questions about this let me know. Best of luck on your next endeavor!

Ronald Allen Barney · Answer

If the renter won't pay you market it's not a good renter.  Don't get emotionally attached.  Raise the rent next lease.

Tony Kim · Answer

Build equity at a marginally faster rate, but kill $120K in equity to achieve this? His current equity is $370K. That's a lot of equity to give up just to increase your cash flow a few hundred bucks.

Brian Weaver · Answer

So many good responses here, thank you so much for all of your thoughtful and excellent advise.  After reading all of the comments, the most common advise is to refinance so the equity can be used in another cash-flowing investment. I can refi, and there is plenty of room to raise the rent so it will still cash flow even after a refi.  I agree the Phoenix market will probably continue to appreciate given the job and population growth, so it is worth holding on to, even if cash flow isn't as high in this market.  I suspect rents will rapidly increase as leases are renewed over the next year to catch up with the 20%+ property appreciation we had over the last year.

Charles Kao · Answer

@Brian Weaver If it cashflows 100 a month then 1 year of cashflow is 1200.  5 years of cashflow would be 6000.  Using a 5 year metric if you can make 30k now in this example or

more I would definitely consider selling instead of waiting 5 years to get it. I personally like to do 7 years of cashflow or more but 5 is a minimum

Should I sell this property?

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