House Hack Rental or Disposal Dilemma

[Greg Jeanfreau]

Hello all, 

My wife and I are currently in an interesting situation with our investments and we are trying to come up with the best plan of action to proceed. For the last 8 years or so, we have been living in a 2/3 of double in New Orleans, Louisiana that I renovated over a long and exhaustive 3 years. I put a lot of my own blood, sweat and tears into the renovation and really tried to make it a place that we could enjoy while keeping in mind that it would ultimately become a rental...so I thought. 

I will get to some numbers. I paid $120k for it in 2006 and by 2009, put about $160k into the renovations for a total capital outlay of $280k. This involved moving into the small unit while I finished the "owner's unit" in the mornings and evenings. We finally finished our side and rented out the small side. We have only had 2 tenants on the small side and have never had to advertise because the location is very sought after and the tenants stay for years at a time. When we finished the renovation, the property was worth maybe $300k-$340k, but because I did so much of the work myself and paid for a lot of it out of pocket over the years, we still only owed about $120k by 2010. So, I refinanced to a 15 year to accelerate that paydown and then opened a HELOC for about $170k on the house. We have used that HELOC to BRRRR a few rentals and it has been great! But now, we just bought a new house that we are renovating for ourselves (and our little one arriving next month) and need to decide what to do with our current house. At this time, it is worth probably $375k-$425k all day. If we rent out our side we will get $1700 and the smaller side is renting for $950. Now, we don't owe much on it at this point (about $72k) with about 6 years left, so it is cash flowing. If someone came to me and said they had a "deal" for $400k with $2650 in total rent, I would not even consider it, but that is essentially what we would be doing in a way. But it is a higher end rental and we can really pick and choose our tenants. As Jay Papasan said the tenants that this property attracts are the types that I would "invite to dinner" with good credit and spotless backgrounds. So, if we walked with $250k-$300k, we could continue to BRRRR, but without the HELOC interest payment pressure. Or we can keep our house, keep the HELOC and continue, but without the higher potential cash flow that could come from transferring our equity into say, two (or limitless BRRRR) doubles. Another factor to consider is that since 2/3 of it was our residence for at least 2 out of the last 5 years, we would only pay capital gain and depreciation recapture on the 1/3 rental portion. Also, the market in NOLA has been HOT and it may be a good idea to be a little fearful while others are still greedy. So, if you've stuck with me to this point, thank you and I hope you will share your opinion on this dilemma (for which I am very grateful to be in). So, should we sell or hold? 

[Robert Leonard]

It's your decision, but I would cash-in if I were in your shoes.  The tax free portion of your huge well-earned gain based on current tax rules is the main reason I would cash in.  Tax reform is coming and who knows what the rules will be when that all settles?  

Historically high values are another reason to sell now.  Yes, it might go up more in value, but how much appreciation will it take to cover what you stand to lose if the gain becomes taxable?  You could avoid the increased taxes with a 1031 Exchange, but those are a lot easier said than done.

You clearly understand the business.  IMO, there's no better way to access 100% of your equity with 2/3 of that being tax free than to sell now.  That's how I would look at it.  Congratulations!