To sell or not to sell?

Question

Hey Guys, I am new here but in short I manage a few rentals for my father. He acquired them about 20 months ago to help diversify his retirement portfolio. Things have been going well with them, great tenants, solid rents, and the market has appreciated more than expected. He is getting closer to retirement and given the outlook of the current market, we are trying to see if in the next few months if it is the time to sell or not. Originally the goal was to hold long term but given the appreciation selling might be a better option. We are afraid that the market could see some depreciation over the next year or two. Not to the extent of WA, CO or CA might experience but perhaps a small decrease or period of stagnation. Right now they each have a mortgage and getting rid of those and paying all cash for some Midwest properties would generate a better cash-flow and take away the worry of having multiple mortgages at his age.

Does anyone have any thoughts on the Phoenix market for the next 12 to 36 months? Obviously no one has a crystal ball but a lot of people on here are more knowledgeable that us at this subject. I would appreciate any incite on the subject. If it helps there are three houses, current market values are roughly $255k, $280k, and $290k. All are in the northwest valley around Lake Pleasant rd and Happy Valley rd.

Does anyone have any thoughts on the Phoenix market for the next 12 to 36 months?  Obviously no one has a crystal ball but a lot of people on here are more knowledgeable that us at this subject.  I would appreciate any incite on the subject.  If it helps there are three houses, current market values are roughly $255k, $280k, and $290k.  All are in the northwest valley around Lake Pleasant rd and Happy Valley rd.

Michael S. · Answer

I don't know too much about the Arizona real estate market to give sound advice on where the market overthere is headed but it sounds like you thought this through pretty thoroughly if you already know that you can get better cash flow in the midwest. A lot of investors that I work with here in Los Angeles would never want to invest outside the city so the fact that you have a higher tolerance to outside investing says to me that you should follow through with your plan. Like @Peter M. said, trying to time the market is a fools errand and there truly is no "best" time to sell. The best time to sell is when you don't have to and when you're ready to move on.

David S. · Answer

You're going to get a lot of debate on the market conditions front. I tend to agree with you that it's probably not a bad time to sell, but most will argue otherwise for a variety of reasons. Peter does make a good point; if you're worried, sell the worst one. I do disagree with him on the "fools errand" as statistically speaking markets ARE cyclical and we've had a heck of a run. There are some times where it makes more sense to sell than others historically speaking (like now). He is right of course that it COULD be a bad time to sell, but it's a risk to reward quandary and in that sense the risk now is relatively high especially if there's an aversion to loss and/or little equity. But you do lose the diversification if you sell them, which seems counterintuitive when that was the reason to buy them 20 months ago.

As Peter mentioned, the tax implications are significant as well.

Chris Tabanico · Answer

Hey Samuel,

I share a similar belief. Midwest has much better returns. Phoenix is still appreciating and will continue to do for about another year or so (imo). He could hold on to them for a little longer if he wants to see a little bit more of an increase in gains. Keep in mind that the summer months (before school starts) are the best time to sell. If he decides to pivot and divert his portfolio to the Midwest he will have to do some homework to assemble a good team as part of the proper due diligence process. I can help here if he's interested in Ohio.

Good luck!

Peter M. · Answer

Is he cashflow positive right now? If he sells how much will he pay in taxes? What will he invest in with the proceeds? There are a lot more questions to answer than just the local market. If he is cash flow positive, even if the market cools will rents change significantly? Trying to time the market whether it be RE or stocks is a fools errand. It is tempting to try to sell high but if he is confident in his investment stick it out. It is just like value investing in the stock market. If he wants to hedge, sell the worst performing one and either pay down the other two or invest it in something he's more confident in.

Clayton Coombs · Answer

Hey Samuel, I live and work as a real estate agent in the North West valley so I am very familiar with the area. On a positive note he has good tenants, I'm assuming it's a newer home since most of the homes in that area were built after 2005 (So low maintenance) and the properties are local so they are easier to manage. You are absolutely correct that you could get better cash flow in other states but with that he would likely hire a property management, Need to find need good tenants and if he purchased an older home it could have it's own list of problems.

I don't have a crystal ball but I also agree a correction is coming in 1-2 years but not just in Phoenix, it will be nation wide. I would not suggest selling his homes in AZ to invest in another state just for appreciation reasons but it could make sense if the extra cash flow makes it worth it. I would just make sure you are familiar with the other areas you are thinking about investing in.

I know you mentioned multiple mortgages and current market values but you didn't disclose how much equity he has in the properties and how much the mortgages are for. If he has a lot of equity maybe he can sell one property and pay off the other 2? If he is getting close to retirement he probably wants to play it safe and he doesn't want to be over leveraged when the market does correct it's self.

My suggestion if he has a lot of equity would be to sell one property to pay off the other 2, that way he no longer making mortgage payments and can increase cash flow well playing it safe. However if he isn't able to do that it could be a better option to sell all 3 properties combine the equity to buy 1-2 properties for cash in a more affordable state that offers higher rents.

Scott Mclaren · Answer

Sam,

I have rentals here in the Valley and in the Midwest , (St Louis) and I thought I would put in my 2 cents.

I am looking at selling my rentals in St Louis and keeping the ones here in AZ . So kind of opposite of what you are talking about.

My experience is that owning out of state you are giving up a lot of oversight of your investment. You may find trustworthy managers but you may also very find untrustworthy ones. Without the ability to drive by once in a while you can easily be taken for a ride. Houses here in the Valley tend to be newer and need less maintenance as well.

If the goal is to not have mortgages , I would sell one and use the proceeds to pay the other mortgages down.

Eric Adobo · Answer

😱 sell. Half of one percent rentals are OK in Hawaii.

Not recommended in Arizona.

Samuel Glantz · Answer

@David Smit we have accounted for the fees associated with selling, profits are still very good. I estimate roughly a 56% CoC return after selling cost currently. Again just rough numbers.

He would still own two properties here since he owns 5 total and would be looking to purchase in another market, looking at Indy.  Indy would have much better Cash Flow and lower costs to entry.

@Peter M. He is sort of. currently he is generating a small CF of $260.  However he is putting a lot of money into the properties to pay down the mortgages each month.  So in reality all cash flow goes to principal paydown.  When he got these the goal was pay all off within 5 years and use income as retirement cash flow. More of a down the road long term mindset not focused on the right now.

He would be using a 1031 to roll the money into new properties in the midwest to avoid taxes. Rents are $1420, $1445 and $1445 respectivly, so a cool down is possible.

@Eric Adobo I get the question but his net worth is not for me to disclose, out of respect for him. I will just say he does alright. Yes we did some things wrong, and got lucky, we are both very new to this endeavor, but hey I'll take a little luck. Going forward we would prefer to not go in blind and hope for the best.

Thank you for the feedback everyone, if I left anything else out or you have more questions let me know.

Steve Vaughan · Answer

If they'll sell at retail, occupied, by owner why not?  If you'll/he'll have to spend tens of thousands on commissions... not so much.

I sold 3 over the last 12 months by owner to owner-occs at retail as they became vacant and were facing cap ex anyway.  These were also my least favorite rental houses and I am happier.

What will he do with the proceeds?  How will selling in the same calendar year affect his tax position?  I don't have a crystal ball, but timing for timings sake rarely works.  At least spread the sales out over 2 calendar years if not exchanging.  That's what I did .  Worked too hard to be bumped up into a  new stratosphere of taxation.

Funny, Peter and I were typing at the same time and asking the same questions. They're that important!

David S. · Answer

After just 20 months I have to wonder how much of the gain you're giving up by selling them, especially if most of the equity is due to market conditions rather than rehabbing. As the seller you're paying both agents unless you perhaps sell to another investor, but then you're not getting top dollar anyway.

Has this been factored in?

To sell or not to sell?

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