Keep as rental or sell for profit?

Question

I own 4 contiguous lots and I’m building 4 identical homes. To date, I’ve always sold the homes, but I’ve considered keeping them as rentals. Without getting in to all the numbers, I can essentially build and refinance with 75% LTV to recover all (or within $5k) of my costs. What stays in is the would-be profit of about $26k per house. Home value will be about $180k and rent for $1300-1350. I like the lower maintenance of the new homes and the long term income, but I’m wondering if it makes more sense to sell and Brrrr something else. Also, capital gains on the sale are a significant concern that makes holding appealing. I appreciate the feedback!

Michael Noto · Answer

Those are good numbers for a rental, especially a brand new home that you know the ins and outs of.

Keep them and milk the period where there should be low maintenance costs and then when the homes become vacant assess the market then if it is a good idea to sell or not at that point. You should also be able to attract quality tenants to brand new homes which is an added benefit along with the lower maintenance.

Jaysen Medhurst · Answer

@James York, my quick math shows you cash flowing ~$200/house/month. I was conservative. With $45k of equity in each, that's a Return on Equity (ROE) of ~5%. Not great, but if you don't have anywhere else to put your cash...

If you can expect good appreciation, may be worth holding for a few years before you sell. You can then 1031 into something with better returns.

James York · Answer

@Allan Smith $135k Mortgage, $1200 property taxes, insurance is low on new homes. Theyll cash flow pretty well.

Allan Smith · Answer

What would the monthly cash-flow be on these bad boys? At that price to rent ratio I'm kind of wondering if you would even be making money each month. It's not really an investment if it's making $12 per unit.

James York · Answer

@Josh Franklin appreciation is certainly possible, but never promised.

@James Hamling this is in an investor heavy area already. The MLS prices make renting tough, but it’s a good rental market.

Filipe, its about $100k left in for all 4 houses and $5200 gross rent for all 4 houses. I hope that makes sense.

James Hamling · Answer

@James York that is a great question. I think the answer lies in what the market is like in that area, today, 3,5,10 yr prospects, weighed against how that would impact your financial position and business going forward.

It could have the unintended added benefit of proof-of-concept to show buy & hold investors, and in the end drive additional development business.

I would say if there are no significant negatives, why not give it a shot, you can always change directions and sell if it dosnt workout, right. More upsides than down.

Filipe Pereira · Answer

@James York Sounds like 100K cost for $1,300 a month, if I understood that correctly. If so, if this were my market, I would sell. Sounds like there's more upside in selling than renting these out, unless you're expecting the area to appreciate over the next few years. If that's the case, I would hold, then sell. The only reason I would hold indefinitely is if the rental market is very hot in your area and you are seeing lower returns on the MLS. In CT I see properties listed on the MLS at about 1.3-1.4% (Gross income divided by purchase price). Let's say that number for you is 1%...that's the situation where I would hold as you are beating the market average at that point!

Josh Franklin · Answer

I would keep them and reevaluate in 5 years or so. Are you able to project appreciation on these homes based on the previous homes you built? I would definitely take that into account as well.

Guifre Mora · Answer

If capital gains are your concern you can always do 1031.

Keeping them sounds more sound investment.

No maintenance issues or rehab and if you recoup the investment its a no brainer.

Keep as rental or sell for profit?

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