Should I sell it or rent it?

Question

I bought a property with the intent of rehabbing it and then renting it. I also knew I had another exit strategy of selling if need be. The market is so crazy that I'm considering selling now. Here are the numbers:

I could sell and profit $75K to $90K after buying, selling, and rehab costs but before taxes. I would also get my deposit back as well, $32K. Hopefully I'd be able to flip that money into another property (tax free? I'll have to educate myself on that real quick)

or

Rent at about $850 cash flow a month. (considering everything is new including heater, AC, appliances, bathrooms, kitchen, etc I don't think I would have capital expenditures any time soon). That being said, I would be banking this money anyway as I don't need it nor do I just want to spend it.

or

Put a renter in there and sell in a little less than a year. With certain risks including the housing market cooling off a little or a lot

Opinions? Advantages or disadvantages of either of those strategies?

Thanks,

Joe

Joe P. · Answer

Better performing? Not going to do a lot better than $700 CF per month (again, depending on overall numbers). He's better off HELOCing and finding another good performing property and BRRRRing it. If he was making $50 cash flow per month then the sale would absolutely make sense. But in this case, he has appreciation (which means he has equity bullets) and he's making money hand over fist. This is a golden goose -- why would he sell?

Joe P. · Answer

We don't have the rest of the story on the financials of the property (e.g. if you put 1 million cash into the property, $700 monthly cash flow is garbage. If you put $50,000 in it, totally different story). So I'll assume that the cash flow AND cash on cash return is really good here -- if so, don't look a gift horse in the mouth. If it's a high performing rental property, use it to your advantage even beyond the cash flow, e.g. HELOC for another property. I don't recommend refinancing unless the terms are not great - even cashing out money for the next property is a good idea, but I'd rather have a short term loan to pay back via a BRRRR on the next property than pull out all the equity on this one. Personal opinion, of course.

Joe Steinheiser · Answer

Closing costs, deposit and rehab I have $70K in to this property. I do think it has great cash flow, the CoC return is good too. I think I will keep it and, like you mentioned, get a HELOC instead of Refi. If I sold and took the money it will be very hard to find a better property. The market is crazy and it's hard to find a good rental deal right now.

Joe P. · Answer

I think ultimately every decision should be inline with your investment goals. If you want to buy and hold property, make sure its a great buy and hold. If you only want triangle-shaped apartment buildings with exactly 7 one-bedroom lofts, then take action to meet that goal.IF your goal is buy-and-hold for cash flow, and you've properly analyzed this unit's CF potential (Income minus PITI, CAPEX, maintenance, vacancy, management, utilities, city/license costs, business expenses, HOAs, whatever...) and it does indeed cash flow $850 per month...then holy hell man, hang onto this cash register. If the cash flow is actually like $50, you might want to consider selling for a better quality CF property.So step 1...define your goal...step 2...determine if this property helps you meet it.

Steve Babiak · Answer

It is treated as capital gains if rented; if held less than a year plus one day then the gains are short term and thus taxed at the ordinary income rate that you pay; if held for at least one year plus one day then the capital gains are taxed as long term gains. For a 1031 exchange, many would advise to hold for at least a year to avoid having to prove intent.If sold without renting, it could be considered like a flip and taxed as not only ordinary income but also as self employment. Things like intent could come into play, but with the IRS who knows. And doing a 1031 exchange in this case gets murky.Just my $0.02 worth, and you are getting that for free.

Dave Foster · Answer

@Joe Steinheiser, if you sell before owning a year you will pay ordinary income tax. If you do the 1031 then all federal gain is deferred. Unfortunately you'll still pay the 3.07% PA state tax since PA doesn't recognize 1031 at the state level. You have stated your appropriate intent to hold here. If ever asked you'll want to use that along with other things to demonstrate your intent such as discussions with your cpa, your past history, rent advertisements, etc. Ultimately it comes down to an opportunity cost exercise - what are you giving up by having that property now - if you can buy better and for longer holds with less costs then the 1031 would let you do that without paying tax.

Joe Steinheiser · Answer

Right place, right time, right Realtor. ;)

Young Park · Answer

I second @Joe P. hahaLooks like you have a great, cash-flowing property and benefiting from both forced appreciation and market appreciation. Opening up a HELOC or even doing a cashout refi would make a nice BRRRR (assuming the numbers make sense) and roll it over to your next property!

Joe P. · Answer

Agreed, and this is probably the right move. Would love to know where you found a property to get 700 CF per month! Hook a fellow investor up ;)

Slawek Jakubowski · Answer

Maybe you should consider taking advantage of this hot market we are in right now, and pick up another (potentially better performing) investment property when the market cools off.