Sell rental (capture all Cap. Gains) or Hold?

[Kyle Thomas]

My wife and I are trying to determine if we want to sell our property and capture all the capital gains or hold the property and possibly incur some costly repairs.

We turned our previous home into a rental property and have a reliable tenant who will have stayed in the property for 3 years at the end of may. The property has had good cashflow considering we've had a few large repairs each year, but there are a few that will most likely require repairs within the next few years.

The repairs would be: A/C unit, duct work, roof, railroad tie retaining wall, sprinkler system.

If we sold before the end of may we would capture about $340k+ in our pocket tax free where we could put it in a CD at 5.5% for a year and pretty much get the same amount as we would from our rental.

I know we could hold and roll it into a 1030 exchange, but the repairs will most likely eat into or profits.

Any suggestions are welcome! Thanks!

[Melissa Nash]

I think you are thinking too small. There is more to real estate than just cashflow or the cash on cash return. You are missing out on a lot of wealth just thinking of it as a 5.5%.

Here is what you are missing:

Tax benefits- that is depreciation + Interest payments

Equity growth- national average is 4-5% (some markets much higher, some might be lower). 

Hedging inflation- loans taken out locked in at 30 years- inflation is 7%+

And then the tenant is buying you a house at the end of the day- each month they are paying your mortgage off. 

So you are really talking about Real Estate earning (without knowing the property details) 30-40% return just year 1. (This is based on proforma's that hit my desk daily).

So you are giving up a big return. Also if you took that $340k profit and leveraged it, you are talking about buying A LOT of houses and using 20% down- you are missing out on A LOT of wealth. 

Example:

SFH in Kansas City- renovated and ready for tenant

$182,500 Purchase

+$1645 Rents year 1 (+ add 3% each year)

+$259 cashflow after ALL fixed expenses year 1 (7.4% )

+$258 Principal reduction each MONTH

+$1065 Appreciation each MONTH

+$111 tax savings each MONTH

Total $1692 = 38% ROI year 1

If you look at year 5.... you have $118k in equity and 204% ROI. 

**this doesn't even include inflation at 7% +

That is the power of real estate. Times that by 10 SFH houses.... that could be a almost $2 mil portfolio year 1.... imagine that growth by year 5.... $3mil.

So what do you want 5.5% return or 38% return + generational wealth?