What are your thoughts? Hold or Sell?

Question

Hi all,

I've been considering selling the two rentals I have and maybe refinancing one of the two. I'm interested in thoughts from you guys on the pros and cons of selling and maybe some creative opportunities I might not be aware of. Here's some background on each of rentals.

Rental 1: 3/2.5 (1400 sq ft) Townhouse - Atlanta, GA

I bought this as my first home in the fall of 2007 and not understanding market cycles bought it while prices were falling. As a first home buy, I was basically in the house for $500 - which speaks volumes about the state of the lending market. At the real estate market's worst, the home's value was 50% of what I purchased it for. In 2011, my wife and I moved our family up to Kalamazoo, MI and so it became a rental to avoid an foreclosure. After the mortgage, HOA fees, and property management fees I'm basically breaking even every month. One option is to sell now that the market has recovered to the point that if I sold I might get my original $500 back which is better than having to write a check at closing. The other option is to refinance to reduce the mortgage payment by maybe $250, which after netting out closing costs over nearly a year and half would finally make it a cash flow positive investment. The downside is its with new mortgage. The condition of the property is good considering it was built in 2006 and its been more preventative maintenance than repairs.

Rental 2: 4-plex (each unit 2/1 approx 830 sq ft) - Battle Creek, MI

In 2014, I jumped into the deep end to bought a multifamily property. Without understanding the importance of implementing systems and processes to manage a rental or even properly evaluating one before buying, it has been a costly learning experience in both time and money. But still its been learning experience. With the market up, I've got the chance to sell and make a profit and walk away to hit the reset button with my newfound knowledge. In pulling unofficial comps of 3 similar properties that have sold this past year I could make a few thousand before capital gains. I say unofficial because I didn't get them from the official MLS from an agent, just a local site that pulls at least some data from the MLS. Three units are occupied, one of which has a deadbeat who hasn't paid in 3 months, and the fourth is vacant because I have not had the time to turn it (but I'm close to wrapping it up). If everyone pays their rent - it cash flows just north of $1000 a month. Once the fourth is finished, that number will increase to around $1500. The property is a 1940s build with a roof, 4 water heaters, and a furnace that should be replaced within the next 2-3 years. Holding onto it could be highly profitable after tackling capital expenses and improving the management of the property, but it may also be a good time to cut my losses, sell, and hit reset.

BP, what are your thoughts?

Sebby Gabre Madhin · Answer

Why is everybody ragging on the OP?  He already admitted that that he didn't know enough and has made mistakes....

Anyway, I would agree with advice to keep the multi and ditch the townhouse, even if you have to pay a little to get out from under it.  It's hard to get a good multiproperty and it sounds like you have a good deal which you (by luck or by skill, who cares!!) bought right.  Now you just need to decide if you really want to stay in real estate.  If not, sell and take your $$ happily elsewhere.  If you do want to stay in the game, LEARN.

An empty unit is such a drag on your bottom line, need to correct that immediately.  Nothing should be more important to you than rehabbing and getting that unit back on ASAP.

Unless Michigan is very different from Florida, if you have a tenant in place that hasn't paid in 3 months and you are, JUST NOW, getting to your court date, then you need to evict your property manager as well as your tenant.  Go to your local REIA, look for recommendations, and, again, LEARN.

IF you want to get out of real estate, no shame in selling, but if you want to stay in, you are not very  likely, in today's hot multifam market, to get as good of a deal as the one you got in 2014. So the idea of selling this one to reinvest in another doesn't sound good to me unless there is really something fundamentally wrong with the property, not just with how it has been managed so far.

Mike H. · Answer

@Sebby Gabre Madhin thanks for looking out and for the advice! You're absolutely right about learning the game. I plan to stay in so I've got to buckle down and learn. Also, very good point about the difference in the market from 2014 now and the availability of deals. One of my biggest issues is not connecting with the local REI community but that's changing now. I attended a meeting last week and a property crawl over the weekend. In addition to connecting with others locally and even here, I plan to get tuned into the resources available here and also revisit a few books and sit down and study as opposed to just listening while I'm working or driving.

Andrew Hart · Answer

Mike H. I don't know anything about Atlantas market but I have rental properties in BC and know the rental market is getting better but you still have to deal with the city unfortunately With the 4 plex I think you could cash flow pretty well once all 4 units are rented. Depending on purchase price but understanding the market in BC I'm sure you got a pretty decent deal on it. But if you decide to sell the 4 plex to get out of a bad situation I might be interested.

Brad McCance · Answer

It sounds like you are faced with a difficult decision. While one property is producing income the other is just out of touch of actually producing a gain for you. I would consult your tax advisor to see what your tax implications would be for selling each property. Typically you don't have to pay a recapture of depreciation on sales where a gain wasn't realized, however sometimes you do. It would be awful to sale the town house and later realize your have a tax burden to take into account.

Thomas S. · Answer

Sell the first hold the second assuming you have learned how to properly manage a rental property.

Your cash flow numbers seem rather high on the 4plex so from my perspective I am not certain you have yet learned.

With one dead beat that you have not yet evicted and a vacant unit it appears your management skills still require a lot of improvement. My guess is you have been deep into negative cash flow and, unfortunately, you may require a PM to get you on your feet. Your present situation does not show you have reached a point of turn around especially if you are not already 3 months into the eviction process on the dead beat.

If this is infact your situation then you may be farther ahead to sell both properties before things get worse.

Michaela G. · Answer

If the 1st one is in between tenants, then you might also want to check on current rents, which have gone up a lot in the past year. You might find out that you can get a few hundred more - which can make a difference.

Cindrell Harry · Answer

My thought is that you should sell the Atlanta based property and hold on to the four-plex for dear life. It's a lot easier to deal with a locally owned property during the "learning process" than having to pay a property manager or fly in the manage an emergency. My thought is you should do what ever you can to implement a system to manage your four-plex yourself and squeeze as much profit from it as possible ( I'm not knowledgeable about your area but if you can make minor cosmetic improvements to gradualy increase the rent in one of the unit as a tester, would be worth a try ), and/or consider vacation home rental if your area supports it.

Michaela G. · Answer

Sell the first and keep the 2nd. Evict the bad tenant. Otherwise you'd give away your profit to another investor

What are your thoughts? Hold or Sell?

Most Popular Reply