Keeping or Selling Rentals

[Sophia K.]

Going through a divorce and trying to decide whether to keep our rental properties or to sell them. It is a long post please bear with me.

Property A: Located in greater Boston. In a great location and great tenant. He is on the market to buy and has expressed interest in our rental. It has shown nice equity growth although the cash flow is relatively low.

• Mortgage Balance: $430,000
• Monthly Mortgage Payment: $3,100
• Current Rent: $4,100/month (below market rate, planning to gradually adjust it during yearly renewal to eventually catch up to the market rate)
• Appraised Value: $900,000 (purchased for $657,000 8 yrs ago)
• Managed by a property manager
• Loan assumable

Property B: Located in VA. In a great location and neighborhood. Never have any problem with renting out. The current tenant has been there for 7 years.

• Mortgage Balance: $60,000
• Monthly Mortgage Payment: $1200
• Current Rent: $1950/month (below market rate, with potential for increases upon renewal)
• Appraised Value: $325,000 (purchased for $188,000 20 yrs ago)
• Managed by a property manager
• Loan not assumable

Here are my options:

Option 1: Keep the property and buy out his 50% of equity, which is about $235,000 for property A, $132,500 for property B.

• - Mortgage: It is an assumable mortgage. He has agreed to remain on the mortgage for 2 years while I work on refinancing it.
• - Equity growth: Although cash flow is low, the property has significant equity growth potential.
• - Future rental income: I can continue to rent it out and let the equity grow. Cash flow could be negative if efinance at new rate.
• - 1031 exchange opportunity: I could potentially do a 1031 exchange to acquire a duplex or triplex, deferring taxes.
• - Access to funds: I could consider a cash-out refinance or a HELOC to access funds for additional investments.
• - which property would you recommended me to keep? 

Option 2: Sell them and split the proceeds.

Considerations:

• - Immediate liquidity: I would have cash on hand for new rental or stock investments.
• - Eliminate mortgage obligation: Selling would relieve me of the mortgage.
• - Able to keep the retirement fund that was going to be used to buy out the equity.
• - Missed future appreciation: I would miss out on potential future equity growth.

Questions:

If I were to calculate IRR (assuming option 1), what would be my purchase price? The current appraised value? Or the mortgage balance + the 50% buyout equity?

Is the equity my "new" downpayment for calculating IRR?

Refinance – property A loan is assumable, “under certain conditions” (verbatim from the clause). I contacted the bank and they told me the person needs to go through the regular qualifying process such as income, credit core, employment history, etc. I know I won’t be able to refinance it right away as I have been a stay at home mom for many years. I’ll need to refresh my skills and knowledge (project manager).

Has anyone here ever able to assume the loan on the original terms under the Garn St-Germain Act of 1982 in a divorce case? If I understand the Act correctly, the regulation allow one spouse transfer loans to another spouse keeping the existing terms without the regular qualifying requirements. This is only allowable in divorce or death case.

By assuming the remaining mortgage and equity buyout, am I essentially acquiring the property at its current appraised value? For property A at $900K with 4100/mo rent, would it make more financial sense to sell the property, take the proceeds and start a new investment in either stock or real estate? And keep the retirement fund instead of buyout?

Appreciate any thoughts and insights. Thank you!