Do I sell my house or do short term rental?

Question

So I’m struggling on what to do and need some help. My house is on the the shoreline of CT. Downtown walking distance to everything including the train station. We added a suana and converted our garage  into a a legit gym with turf and all. We can sell for 490k in this market make 200k off the house immediately or do we do Airbnb as we are in  a vacation town. My concerns is when the market drops I won’t get the sale price again and airbnbs pricing in the market will drop as well or I won’t make that $ Airbnb for a few years? Etc.  Do I sell and make the cash and continue to flip houses or keep this house and Airbnb?

Dave Stokley · Answer

If you have $200k equity why not refinance it and pull out some cash AND make it a vacation rental?

Lauren Kormylo · Answer

What @Conner Olsen said.  You don't want to miss getting that exemption if you have a lot of appreciation.  You can only STR it for just under 3 years or you'll lose that exemption.

Jonathan Avellaneda · Answer

I believe a little more analysis is needed.

1. Look up Airbnb, VRBO, and probably Airdna in your area. What are places similar to yours renting for? Also consider that with STR you are responsible for all the water/gas/sewer etc bills that you wouldn't normally be for in a LTR.

2. Is your place fully furnished and ready to go as an STR? Are you OK leaving all your furniture there with the expectation that everything will get wear, and things will get broken that need to be replaced? If it's not furnished, what do you think it would cost to do so?

3. If you sell, would you invest the difference in something else? If that would be real estate would you do a 1031 or flat out sell and buy. Consider if you would need to pay capital gains tax if you do sell...not sure the situation.

4. How passive do you want to have your investment? STR is going to yield more revenue, but it requires customer service, management of cleaners (or cleaning the place yourself), dealing with repairs or damage to the property after stays, initial setup of platforms, and continued inventory replenishment to keep the place stocked. Mind you, a lot of these you can systemize, but it takes time initially to set everything up and some management to maintain.

Also, I agree with Dave Stokely that if short term rent analysis supports it , you can refi out the cash and do STR.

Conner Olsen · Answer

@Jenn Marino I would also take the primary residence capital gains exception into consideration. If you live in the property for 2 of the last 5 years you are eligible for exemption on the capital gains of your home.

Account Closed · Answer

@Jenn Marino  Assuming the numbers pencil in then I’d lean towards keeping the property and making it an STR.  I’ve always regretted selling properties.  Also, it takes a ton of time, energy, and costs to purchase and get your first STR up and running. Sounds like you’ve already got one. I’d use this opportunity to try it out.  The experience and mindset shift could be more valuable than any immediate monetary gain.  Plus, your house will probably be worth more if/when go to sell later…or you could leverage it as others have suggested and eat your cake too.

Basit Siddiqi · Answer

@Jenn MarinoItems to consider when selling a houseYou may pay around 7% to 9% of the value of the home in fees(Realtor Commissions, Title costs, Title Insurance, Stamps etc).The sale may also result in taxes(Federal taxes + State Taxes).You might be able to avoid taxes by doing a 1031 exchange or QOF Fund.You no longer have an asset that can potentially provide you cash-flow / appreciation.Do you think you can make up the 7% - 9% in fees + Taxes over time by buying another property?Items to consider when you rent the homeYou will collect gross rental income and pay for expenses(Insurance, RE Taxes, Interest, Repairs, etc). Hopefully you are cash-flow positive on the property.The property will gain or lose value over time.Are you happy with the cash-flow and appreciation? Keep itDo you think you can find another property that will Cash-flow / appreciate better and also cover the 7% - 9% fees described above? Sell it

William Collins · Answer

@Jenn Marino  the big questions to ask:

1) Is there a market in your town? AirDNA.co and  $20 can answer that question.

2) Is there favorable laws to you short-term renting in your town? I know the the town of Lyme for instance is looking to lemit it.

3) What would you do with the $200,000 and what are your goals? Where would you live, are you bound to this market?

Todd Goedeke · Answer

Sell and take advantage of people paying overinflated prices for RE. It sounds like you have experience in flipping a property. Continue to use your expertise in flipping vs STVRs which involve running a hospitality business.

Michael Baum · Answer

Hey @Jenn Marino, lots of great info so far, but first, make sure it is legal to do STR in your municipality.

Steve K. · Answer

@Jonathan Avellaneda Brings up some excellent points here especially doing research on what Airdna and other STR comps are showing for nightly rates and occupancy rates in your area. One note on his comment however: a 1031 exchange generally only involves investment properties. Your primary typically isn't eligible. Even a second home that you live in some of the time is ineligible if you don't treat it as an investment property for tax purposes. However the good news is, as Conner points out (and Lauren who was apparently typing as I was...edit), you may not have to pay any capital gains anyway because a capital gain from the sale of your primary residence may qualify you to exclude up to $250,000 of that gain as an individual and up to $500,000 if you file a joint return, if you have lived in the property for 2 of the last 5 years. We have converted several old primaries to rentals and have found it was best for us to hold them up to 3 years after we move out and then sell before we hit that mark where cap gains would be triggered.

I have family with STR's in CT that are doing well right now with Covid and everyone looking to get out of the cities, so if it's a nice area I bet you could do really well with it as an STR. Another strategy to consider would be furnished medium term (30+ days) which is what we ended up doing with our last primary. We use sites like sabbatical homes, furnished finder, and FB marketplace to find quality tenants who want to stay for a month or 2 or 3, and we charge the same rate as an STR but find it to be less management intensive, higher occupancy rate and less work than an STR. It's a little more in my wheelhouse as a long term rental owner and a little less like running a B&B/hotel. Neighbors may not mind as much either as there will be less strangers coming and going, and it's easier to comply with any current or future STR regulations/licensing requirements/taxes.

I don't know what the tea leaves are saying for your market in terms of appreciation or average days on market/salability in 3 years, but I'd probably lean toward holding another couple of years and renting either as an STR or MTR to maximize returns while still avoiding cap gains through the 2 of 5 rule.

Do I sell my house or do short term rental?

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