South Boston Property - Sell or Hold?

Question

Hi all,

I am looking for some advice related to my first property which is a condo located in South Boston, MA that I purchased a little over two years ago.  My girlfriend and I currently live in the condo.  The market has really appreciated and I am considering my options for the near/long term...  I have two primary options I am considering:

1. Live in the condo until my girlfriend and I can find another property (preferably two units, one of which we can rent out) , make some minor updates and rent the property for the long term.

2. Live in the condo until my girlfriend and I can find another property (preferably two units, one of which we can rent out) , make some minor updates and sell the property within three years of moving in order to take advantage of exclusion of tax on capital gains for a primary residence.  Hopefully use the equity to purchase my next investment or two.

Any thoughts? My gut is telling me to hold the property for the long run, take advantage of some cash flow and principle pay down and possibly use a home equity loan for additional investments in the future.  Losing out on the capital gain tax break is quite significant though...

Thanks!

Shaun Reilly · Answer

Hey Jeff,

Your numbers look okay.

I agree with Kris though that you want to budget for major repairs and assessments since they will come up if you are going to keep the place for a while.  If some of that stuff is newer you could keep it lower like another 5% on top the regular maintenance.

Also you don't have management so you are planning on doing it yourself.  That is fine but keep in mind if you want to shed that at some point, or have to for some reason, you will probably have to add 8-10% onto the expenses.  Also keep in mind that self management does NOT increase the return, it is a JOB that you are doing that would normally just pay you $200-240/month if you did it for someone else.

So even without budgeting for reserves you are basically break even but can save $200+ a month on expenses by doing the management.  You still have very good appreciation potential so still could be a good deal if you want to hold out for a bigger payday.  As long as you can break even or make a little you can float it.  If it turns out you are off and it is costing you money you can always sell it at the end of the first lease term and still be able to get the Cap Gains tax free since it was your primary that recently.

Kristopher K. · Answer

Hi @Jeff Neblett , I'd keep your vacancy rate. You will rent it fast depending on what part of Southie, but we typically take 2 weeks between tenants for painting ect. We have done it with overlap when the units are in good shape but it's nice to have the cushion and do the work without people around.

Put in a number for the maintenance anyways and bank it - special assessments or sudden problems are not fun, better to save up for them.

Also, just as an aside, tag people in posts you are looking for replies from. I got a notification because I was watching this post but @Shaun Reilly and @Robert Adams

might not be.

Jeff Neblett · Answer

Shaun & Robert,

Thank you for the replies.  Sorry I was slow to get back to you.  I was out of town and then very busy at work when I returned.

After analyzing the numbers a bit I think my projections may have been a bit too rosy as I wasn't including the increased taxes I will have to pay due to the loss of the residential exemption I am currently benefiting from in Boston.  This amounts to an extra $150/month in taxes unless I can somehow keep the exemption.  In the next few months I plan on updating my kitchen by refacing my cabinets, putting in a new countertop, and buying new appliances (need to install dishwasher as there is currently not one).  With these updates I believe I could rent out the unit at $2,400/month and have the tenants pay for all utilities.  Also, these updates should allow me to get rid of the monthly PMI of $103 I am paying, which can largely offset the increased taxes. Please see below for the figures:

Rent:                               $2,400Vacancy (1 mo.):                (200)  Net Rent                          $2,200

Less:

Mortgage:                  ($1,201)         Taxes:                            (317)Insurance:                       (75)PMI:                               (103)Maint. (.5%)                   (116)HOA Fee:                       (175)Total Expenses          ($1,987)

Total Monthly NOI:              $213

Removing PMI puts me at monthly cash flow of about $315.  Maintenance could be slightly higher, however, the boiler was recently replaced, hot water heater is pretty new, etc. so I do not foresee very large costs in the next few years (knock on wood...).  Also, if I do it correctly, vacancy should be probably be zero as the rental market in Southie is extremely hot things are not on the market long.

Let me know what you guys think.  Obvioulsy I understand my expenses fall below the 40%/50% rule.

Robert Adams · Answer

Do you need to the cash from your current property in order to purchase another?

Do you have your eye on another good buy right now?

What did you buy it for vs what can you sell it for right now?

If you don't need the cash to buy your next property then I would lean towards hold the property for it's current cashflow as well future appreciation and then sell prior to the 5 year mark of when you purchased for the tax benefits. If you do need the money and you have a good buy in mind I would run the numbers and it may be better to sell take the money tax free and start the clock over on the next property and the tax free benefit. But it does not make sense to sell a good cashflowing  property to sit on the money without your next move in place.

Give us more numbers as to what you bought it for, it's current value, rental rates, and realistic expenses. I am with Shaun that the numbers sound a little too god to be true so there might be a more accurate way to calculate expenses, vacancies, repairs, etc. You may very well be correct but I would like to hear more numbers in order to better advise you.

Either way best of luck with your property.

Shaun Reilly · Answer

@Jeff Neblett

I'd be interested in seeing your numbers on the condo rental.

Frankly I think you HAVE to be low balling a lot of potential costs.  I thought you MIGHT say you could get $150-200 out of it.  If you own it outright I could believe it pretty easy but I assume you have a mortgage on it since you mentioned principal pay down as a benefit.

Maybe you happened to land some amazing deal, but something around here that cash flows that well with a mortgage is rare at best.

Jeff Neblett · Answer

Kristopher,

Thanks for the advice.  Good call on the tagging, will be sure to do it in the future.

Jeff Neblett · Answer

Robert, Shaun, or anyone else.  Any thoughts on the figures I posted above?  Am I being too rosy?

Jeff Neblett · Answer

Thank you for the thoughts guys.  This seems to reaffirm my gut feelings on the situation.  Ultimately I want to be a buy-and-hold investor and acquire a new property every two years.  I can realistically cash flow anywhere from $400-$600 a month on this property so it would be dumb to turn that down.

What areas in MA have you all been focused on?

Shaun Reilly · Answer

It really depends on the numbers.

What would it rent for and what will it cost you to hold it?

If you can cash flow a couple hundred bucks then might be worth holding onto long term for big appreciation potential and long term positive cash flow (That will likely increase over time).

However if you are going to put money into it every month that is different.  If you are looking at a 5 figure tax free profit instead of paying to own the place take the money and run.  Put the equity and profit into something that will make you money off the bat.

South Boston Property - Sell or Hold?

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