Residential Rentals. Sell or rent?

Question

I own multiple rental homes, and commercial retail properties. They are all paid for. The residential properties all have great tenants that pay rent on time, take care of the homes, etc.

A typical rent scenario looks like this: Rent $800. Tenant pays all utilities, landlord pays property tax and hazard insurance. Insurance and property taxes cost me about $100 per month.

The market is a currently a sellers market, there are no listings on the board at the real estate office. I was approached by a local real estate agent who inquired about my interest in selling some of my rental homes, as he had buyers and no inventory. According to the agent, the two properties I would be interested in selling, would bring $150k and $165k.

Here lies my question. Is it better to hold the properties as rentals, or sell the properties?

Jimmy O'Connor · Answer

@Thomas S. I hear you on that one! One reason I love rentals is that it is easier to build my portfolio as a young player in the game. Without deep pockets of capital and a limited amount of hands holding hammers, you are limited to the amount of flips you can do in that year. The process of buying and selling those homes is a head ache of moving sludge through the pipeline as it is. With a good enough credit score, the ability to use hard money lenders allows me to invest in multiple EASIER fixes that help pay off my future mortgages. The key with this is that I know this is the longer play that is less stressful as I allocate my funds to solid property management companies. Not Knocking flipping at all, when the market is hot you can make some serious cash but for my own stress levels and ability to manage, I personally PREFER rentals.

Any thoughts on this?

Thomas S. · Answer

You will hear both sides, some will say hold others will say sell. Neither choice is right or wrong. All the advice will be useless to you until you have a business plan of your own.

The two sides will be....never sell a rental property, or, sell to reinvest in something better.

The one thing you should be doing is investing your equity. It is now dying a slow death as dead equity. It is killing your achievable cash flow and needs to be invested where it can earn it's keep. Right now it is earning at best 3%-4% return. Is that good enough. If it is let it sit indefinitely.

Jaron Walling · Answer

@Mike Bellevue HELOC is really good strategy. I would reach out to some lenders and see what they offer. Make them work for you. You could take out 5, 10, 15, or 30 yr fixed rate loan. I would choose a time frame based on your exit strategy. I don't know the tax implications of using a HELOC but I'm going to research it now.

Mike Bellevue · Answer

My thought process was to cull two older, remodeled units before they would need upkeep or additional maintenance. I have not utilized a 1031 exchange yet, but was considering trading up to other properties.

When you talk about using the equity in the houses to buy more properties, what is the best method? HELOC? Any other insight?

Nathan Gesner · Answer

It depends on your goals. If you sell them outright, you face tax consequences and you'll have money sitting in an account doing nothing. What have you gained?

I recommend you cash out some of the equity and buy another property or two. You get tax benefits of carrying a mortgage, you increase your return, and you'll likely increase your monthly cash flow.

You don't have to get crazy and cash out 80% of your equity but it would be completely reasonable and safe to cash out 25%, just enough to buy another investment property.

Jaron Walling · Answer

@Mike Bellevue That's a lot of paid off property and good problem to have. You should be using some equity to find more property or sell! I'd wait till the spring to see what the market does and narrow down selling prices. Those numbers could go up if the market keeps on pace. In my opinion the market has reached a plateau. Either way you're in a good position.

Jim Cummings · Answer

@Mike Bellevue. An envious situation with "Free & Clear" Real Estate. In my opinion, the question to ask yourself is "if I sell, what better options do I have for my money?" Can I realize more Cash Flow? Have more secure investments?

Really all depends upon where you are coming from - it's a nice problem to have!

Residential Rentals. Sell or rent?

Residential Rentals. Sell or rent?

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