What will you do with this rental property?

[Lue C.]

Hi everyone,

I'd love to hear your opinion on this one.  What would you do about this rental property if you were me? 

We (my wife and I) bought this 3 bedroom, 1.5 bathrooms single family home at the height of the market for $315K in 2007.  We lived there for 8 years and paid off the mortgage.  We moved out in 2015, and decided to turn it into a rental property.  I screened applicants very carefully, and found a great family as our first tenant.  They signed a one-year lease and renewed one.  The rent is $2000 a month, and I don't really do much as far as managing them.  Because we don't have mortgage on this house, the cash flow is pretty good.  However, the more I learn about real estate investment options, personal finances, and tax strategies, I start to wonder if this is the best return for my money (equity in this case) by holding it as a rental property.  I've come up with the following strategies, and let me know what you think.

Other background information: 

- The house has an estimated market value of $270K as of today.
- With reserve of 10% EACH on vacancy, repair and cap ex, 11% for property management even though I am managing myself,  the cash flow is about $400 a month.
- This is our only rental property.

Strategy #1 -
Keep it as a rental, and continue receive cash flow of $400/month.  We can sell it when it appreciates and do a 1031.

Strategy #2 -
Sell it now, in open market via an agent.  After commission, we probably have $250K cash left. Because we bought it at $315K, I believe it's a capital loss of $65K.  Can I use it to offset my ordinary income?  If you are a CPA or tax export, please jump in!  (Amanda Han's book says it can, if I understand it correctly). Regardless, I will then use $250K to invest in one or more multifamily apartment syndication deals that usually project >15% IRR over 5 to 10 years.

Strategy #3 -
If we don't have a way to unitize the loss if we sell it now, we wait until it appreciates to $315K, sell it, and use the cash (now it's $315K) to invest in syndication deals like strategy #2.

Strategy #4 -
Sell it now to the current tenant who said they were in the market of buying.  It will save me the agent commission of 5-6% ($16K). Use the cash to invest elsewhere.

Strategy #5 -
Sell it to anyone (tenant included) with seller financing. Since we own it free and clear, we can do owner financing.  Get a sizable down payment, which we will invest in syndication deals, and receive monthly "mailbox money" for the remaining balance over 30 years.  I don't have to deal with tenants, nor will I have any more ongoing expenses.  I can even sell the note later if I choose to.  If they default, I get the house back.

Strategy #6 -
Tap into line of credits. Before we moved out, we established a HELOC of $150K. The current rate is 4%, and we have 8 more years to draw. Use $150 K to invest in deals that return more than 4% (again, syndication deals usually has 8% PRR. Dave Van Horn's PPR note fund pays 10%), and the profit will be the difference between the gain and the 4% interest. The interest of HELOC we pay will be tax deductible. We will continue to receive cash flow from the rental.

That's it for me!  What will you do?  Other than these 6 options, what else will you suggest?

Thanks,
Lue

[Emanuele Pani]

Lue I think it all depends on what your long term strategy is and what your needs are, I personally would do option #6. What I would do is use this first property to finance the purchase of other properties, I would use the $150k you have as a downpayment on a small multi unit (4plex maybe or larger based on your market) and just keep repeating the cycle every couple of years using the money as a down payment and then having your tenants pay off the debt for you while you build your wealth.

[Justin Tahilramani]

@Lue C. - why not do a cash out refinance on a 30 year note?

[Jackson Carr]

I agree that 6 is the best option. I am currently doing something similar and would use the HELOC to put a down payment and fix up on another property and then rent it out. Current tenants will pay off the HELOC loan while the new tenants pay off new mortgage on a 3-4 plex. If you find the right deal you can still probably get a nice cash flow.

Goodluck,

Jack

[John Thedford]

I don't think the return is high enough to justify holding it. Have you ever considered HML? If legal in your state, you could cash out and make a much higher return without having property taxes, broken toilets, tenants, etc.

[Account Closed]

My understanding is you will be limited to $3,000 per year on capital losses. If you sell it for a $65,000 loss, you might offset that with any capital gains you might have - or time it for a sale that way.

Personally, I'd run the numbers with a loan on it and if it makes sense, buy another property, If it doesn't, then turn it over to a property manager and let them manage it for you while you get the check in the mail every month.

[Leslie Pappas]

Hi @Lue C., if you're an accredited investor and you decide to sell and want to defer your capital gains, you might consider learning about DSTs (Delaware Statutory Trusts). They are hands-off, institutional grade real estate investments, and they allow you the option to diversify.

By reinvesting in 1031-qualified DSTs, you purchase ownership interest in multimillion dollar properties that offer long-term income - and don't require you to be a landlord! Whether your exchange is $100,000 or $1 million, DST investments can be sized to fit your exchange.

[Lue C.]

@Justin Tahilramani It's held under a LLC. I was told by a banker that not many banks does refi with LLC.

[Anthony Hurlburt]

I would choose option #6.  I would be building my portfolio of properties.

[David Thompson]

Lue,

After talking with you, you and your wife have very busy lives with two jobs and a young and growing family.  That's a lot of cash to be sitting in a house that's not really appreciating.  Eventually, as most recognize, actively managing property can be an annoyance when resident issues hit the fan at the wrong time, like weekends when you want to spend time relaxing w/your family.  

You are making some solid moves with syndication.  I think you are off to a great start thinking along these lines.  As accredited investors, you now have the privilege of professional management in niche markets and geographies our parents could only have dreamed of.  

Since you would have a loss if you sell, talk to your CPA about how that might work w/your other income and asset sales during the year to see if timing is good.  It's spring time, always a good time to show a home.  Put the cash in the bank and start looking for alternative strategies that have solid track records, solid partners and allow you to diversify into more attractive markets.

I like several strategies, for taxable money, niches like value add apartments in strongest markets / submarkets (like DFW), self storage and mobile home parks make sense to me.  For SD_IRA funds I like your notes strategy you mention where it throws of interest income that is not so tax efficient.

Study the niches, find the respectable sponsors and get to work placing your money carefully and patiently into these areas.

[Thomas S.]

Your property as it sits is a terrible investment property. Rent to value is far to low to produce any real cash flow.

When you consider the amount of equity, even at the equilivant value of saving 4% on a mortgage you are negative $500 per month cash flow.

If you attribute a more realistic value of 10% as the opportunity value of the $270K, which is $2250 you are so deep into negative cash flow it is unimaginable.

You should be selling now and get every dime you can for the property. It will likely never recover to $315K but even if it does you will be losing over $60/day waiting for it to happen.

[Pearce G.]

@Lue C.  Suppose that instead of having a paid off investment property worth 270K, you had 270K in cash.  Which option would you choose?  Would you buy the same house with its $400/mo cash flow?  Would you invest in syndicated deals?  Would you lend it to other homebuyers?  Or would you buy your own income properties?

Personally, I like the seller financing (with an attorney drawing up the paperwork, of course).  You can tailor the down payment, interest, and amortization schedule to fit both party's needs.  And you don't have to pay the first 4% to somebody else.

[Lue C.]

@Emanuele Pani  Thanks for commenting .  You are right - it really depends on my goal.  Initially, I was thinking to build a portfolio of rentals (singles to quads).  The more I learned, the more I realized that I might not have the time to do it.  In the end, actively building real estate portfolio may not be the best use of my time.  That's when I started to look at other more "passive" investment options like turnkey properties, syndication deals and funds (note or PE).   The idea is to get the equity in the house to work for me, and I am debating how to get the cash out.

[Lue C.]

@Thomas S. Damn, it hurts when you put it into numbers...^_^  That's exactly the problem - opportunity lost.  Now I am more motivated to make a move.  Thanks!

[Lue C.]

@Pearce G. If I had $270K cash, I would definitely invest in multifamily syndication deals.  If I can find a buyer to agree to a seller financing note, it would be nice too.  Reaching out to lawyers and agents about that now.  Thanks for commenting.

[Joshua Pagan]

I am in no way an expert in this field, this is just my opinion.

Option 5 sounds the best to me because the "mailbox money" is always nice to have every month. With the option to sell the note and quickly gain cash I can see that being very beneficial especially if you plan to reinvest. The bank does not care how long it takes to get its money so by selling the note to them, it turns into a win-win-win. 

That is just what I would do personally. If you have 10/10 tenants that are not destroying the property then give it a few months to collect your "mailbox money" and in the meantime do some research on your next project. When the time is right, cash the note and jump into your next investment.

Hope I gave you another insight to think about!

good luck!