Help me decide: Sell and Reinvest or Hold?

Question

Hello BP'ers,

I wanted to get some of your opinions on my current situation. I purchased a foreclosure townhome in Alexandria VA in May of last year for $190k ($20k down). It was a fixer upper that I lived in for 6 months and did a lot of the reno work myself. I ended up dropping another $20k for repairs/upgrades.

I moved to Tulsa, OK for my job in Feb of this year and decided to hold and rent my Alexandria, VA property. Currently it is cash flowing about $450 per month (would be more but I am paying a PM). The DC market has been pretty hot this past year and recently a couple identical units have sold in my development for around $270k. Therefore, if I sold now I could potentially walk away with around $100k to reinvest.

Here is my dilemma:

1. I really like the stability of the DC market (lots of jobs) so I know the rent will continue to be consistent as well as increase over time. I also like having the "safety net" of owning a property there in case I ever want to move back.

2. If I sold I would need to reinvest so I am not penalized by capital gains. I really only feel comfortable in buying and renovating in markets that I live in (I'm ok holding properties after I leave however). This would mean I need to purchase in Tulsa, OK. To be honest it's a decent market for cash flow but I won't be in Tulsa for more than a couple years. It's also not a place I really want to come back to after I move away ;).

3. $100k is a lot of money. I could probably buy 3 properties in Tulsa for that kind of money. I could also probably double my cash flow from the $450 it is now to about $900 per month.

I want to make sure I don't act on impulse here. It is easy to be greedy in this situation and sell but I was always told "slow and steady wins the race" as a kid :).

What are everybody's thoughts? Thanks in advance for your comments!

Curt Davis · Answer

If I follow you are in this property for the $190k purchase + another $20k for rehab.

If you sell you will pay a 6% commission, most likely 6% closing cost for buyers, some repairs when the current renters move out to get the home ready for retail sale.

If you get full price of say $270k, by the time you deduct all these expenses you will have around a $27,600 true profit if I did my math correctly.

I would just keep it as a rental if the cash flow is that good.

Account Closed · Answer

Since you will only be in Tulsa a couple of years and it is not a place you want to go back to after moving away, I would keep the VA property.

Richard G. · Answer

@Timothy Sparrow

Interesting dilemma to have, I also stay in Alexandria, VA and I would suggest to keep the property.  The increasing Government workforce and Corporate sector employees makes this area worthwhile in providing your cash flow needs.

Karen Margrave · Answer

Keep it! It's in a high demand area, meaning it will probably continue to appreciate, etc., and you have a great cash flow.

Dave Foster · Answer

Hey Timothy,

As much as I love to tout the virtues of 1031 exchanges there's another angle to explore with your accountant.  You say you lived in it as your primary prior to being transferred to Tulsa in 2014.  Since you established it as your primary residence and then an "unforseen job related event" happened you should be able to pro-rate the time necessary to claim the sec 121 gain.  since you were in it for 1/4th of the time for the full exclusion  you could be able to take as much as 1/4th of 500K in profit (if your married.  14th of 250K if not).  The ability to tap that profit tax free might be a game changer for you in your decision making.  Of course you'll be wanting to buy and live in something in Tulsa so in two years you can once again take the sec 121 exemption and turn some more real estate profit into tax free :)

Dave

Mike Sattem · Answer

@Timothy Sparrow,

I agree wholeheartedly with @Curt Davis. Once you pay for the sale also remember that you will eat a 1031 exchange fee, and if you mortgage your new properties you will also be eating the loan fees for these new properties either on the front end which will lower your available cash, or the back end which would lower your monthly cashflow. My vote is to keep it, since it probably also has a great rate on the note.

Mary Denby · Answer

I live in Alexandria and this is a great area to own. The rental market is always good and our property values keep climbing.

Let me know if you ever need a boots on the ground person in the area.

Chris Simmons · Answer

What would you need to do to sell it?  Assuming you sell it while occupied, you can most likely expect to sell it to another investor and unless they like to speculate about values, you won't get what you are hoping for.  If you wait until they move out, what repairs or upgrades will be needed to get full value?  Where do you expect to move to next?  If you don't expect to go back to VA in a few years and are comfortable being far away from your rentals, (I am not), then why not get the best of both worlds?  If you really believe there is that much appreciation, do a cash out refi, pocket the net proceeds and put them to work locally.  Then when you are ready to leave, either sell or keep this property or properties as well.

Look at the numbers and determine where you feel most comfortable.  Is more cashflow via more properties in a more stable, slower growth market like tulsa better or is lower cashflow in a more volatile market with opportunities for rapid appreciation more what interests you?

I am from Tulsa and do not care for townhomes due to their monthly fees, tendency to lose value quickly in a down market and the abundance of single family homes in this market.  I don't know a single thing about the DC market so you will have to gauge all this yourself.

At minimum, please tell me you bought a local turd and are fixing it up so that you can sell it for no capital gains tax after living in it for at least 2 years as your primary residence.

Help me decide: Sell and Reinvest or Hold?

Most Popular Reply