To rent or sell?

Question

Hello Bigger Pockets financial geniuses!

I am not totally new to the world of real estate.  I have purchased and sold 3 houses in my life but have never considered any options other than selling and upgrading.  I am at the point in my life where I am considering downsizing my living space in order to free up some monthly expenses.  I am currently in a house and 5 years into a 30 mortgage with about 120K in equity.  I realize this is a great time to take a chance on something new.

I am looking at a few different options, but was hoping to receive some advice from people who are surrounded by this information.  Here are a few paths i was considering.

1- Refinance, pull out some cash, purchase condo, turn current residents into my first rental that is doing better than the desired 1% rule.

2- Sell property, purchase condo for living, put 25% down on 4plex for first rental property.

I am sure there are a thousand different ways i could approach my situation, and i am sure there are meticulous details that could help see more options.  Feel free if you have any questions or comments, I am very excited to hear from the community.

Thank you,

Kyle

Christopher Brainard · Answer

It isn't a bad idea, but A+ areas in Las Vegas do not have very favorable rent to value ratios. You will also need to ensure you stay within the 5 year window for the tax exclusion, if it doesn't sell fast enough, you could miss out. I'm also not a fan of putting tenants in properties, if they're already in great shape, prior to selling. Tenants never take as good of your property as you do. You're likely to incur repair costs returning the house back to tip top shape after the tenants move out.

-Christopher

Kyle Rowland · Answer

Thank you Steve for your post!

I have so many options to consider.  If this house is sold i will have no residence, and nice chunk of cash.  The next strategy would need to include adding a new permanent residence, with the residuals going to the next rental investment.

Phillip Dwyer · Answer

I don't like the idea of down grading your property to buy crappy Vegas 4-plexes.  @Steve Vaughan does have a good point though.  It's worth considering selling the residence for a potential tax free gain, but you still want to weigh that against your other options.

If the current house is in an A+ area, a different option, after you talk to your accountant, could be to rent your current residence out for 2-3 years, and then sell it.  Assuming the market stays flat or increases at 5%+/- a year, you could take advantage of appreciation, rents, and the tax free gain.

Houses in A+ areas will typically attract the best tenants that want to live there versus the tenants that rent Vegas 4-plexes because that's the only thing they can afford.

Steve Vaughan · Answer

I would at least consider taking advantage of selling and getting a tax-free gain of $120k.  Doesn't happen very often!

Kyle Rowland · Answer

Thank you Oliver for your insight,

It's a nice problem we have to sort out.  My future goals are to be done with the 9-5 grind within the next 10 years.  I would hope to have enough rental income to support my not so needy lifestyle.  I will make sure to check in on your progress.

Kyle

Oliver Martin · Answer

This is a good problem to have and any decision you make is a good one. It's all about just making the better or best decision in this situation.

I wouldn't refinance if I am planning to sell the house in 2 or 2 1/12 years, due to the closing costs if there is no cash out involved, plus higher leverage if there is a cash out.

Renting it out for 2 and 1/2 years is also a good option if you predict that you will gain another 5-10% appreciation down the road.  There is a good chance of appreciation in the next couple of years although of course we can't tell for sure so it's still an educated gamble.  Strict tenant screening is the key and I would use the two years positive cash flow for hopefully just minor rehab when you're ready to sell. You could still potentially gain about 10% more in the process, while still taking advantage of the tax free benefit.

If you are to sell your house now, you would have to buy the condo first or rent while waiting for your $ from the house you're selling.

If you are going to buy a condo with cash. I agree that I would use the remaining $ towards buying a small SFR rather than a 4plex due to maintenance issues and quality of tenants you have to deal with. It all depends on your analysis and level of experience you have.

All the advice here makes sense.  I'm also in the same situation and I will follow this thread to help me make my decision. I just bought my "down size" home and have now narrowed it down whether to sell now or rent out first the bigger house. My experience with initial tenant applicants made me re-evaluate my decision of renting it out first.

There will also be other factors: personal, financial, long term goals etc, that will help you make the decision. Good luck!

Kyle Rowland · Answer

Great point Christopher.  The house is in good shape and very ready to hit the market if that were to be my plan.

Kyle Rowland · Answer

Thank you Phillip for taking the time to respond.  The stability of this Vegas market is constantly in question.  With the recent influx of new housing going up, i am not sure which way to lean.

Kyle

Phillip Dwyer · Answer

Chris, you have a point with the upkeep, and getting a property ready to sell after it's beeen a rental.  Still, it's worth a consideration.  The cap rate may be lower, but so is the likely headache.

Christopher Brainard · Answer

@Kyle Rowland

No problem - if you want a second opinion and don't mind sharing your address, you can send me a PM and I'll give you a more detailed opinion. I actually live in Henderson as well.

-Christopher

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