Sell or Hold Rental property

[John McLaughlin]

I own a rental in the outskirts if San Diego City.  I would consider it a B location.  Due to location its been easy to rent over the years but the quality of the tenant lends itself to a larger turnover expense when they tenant leaves.  But they do tend to stay for at least 2 years.  Here are the details.  Looking for advice on whether I should sell or continue to hold this property.  

Paid $300,000 in 2003

20% down $60,000

Loan Balance  $210,000 (approx) I hate not getting monthly statements anymore

Current value $500,000

Curent PITI and fixed monthly expenses $1800

Current Rent.  $2300

Improvements/repairs $30,000 total

expected expenses in next 10 years.  $20,000 (roof, HVAC, etc)

Current and expected appreciation rate 3-4%

I think I covered everything but let me know if I missed any pertinent info.  

The next question would be…….What do I replace it with?  I was thinking a commercial or 5+ unit property ether local or out of area.  My self employment status does not offer many residential financing opportunities so I was think commercial loans would be more readily available.  (Thank you Dodd Frank)

Any input would be appreciated.  

[John Hostetler]

Hi John,

I live in SD and knew that rentals were tough to cash flow, but $2,300 on a $500K property confirms why I don't invest in rentals here. Of course you have done very well with appreciation during your hold period, so it has been a been a great investment up to this point, turning your $60K into roughly $250K in 12+ years. That's great by any standard. 

But if I were in your position I would ask if you can continue to bank on the same type of appreciation in the next 12 years. Maybe, maybe not. Also, it seems that over those 12 years you have seen very little, if any, cash flow from your investment. That is not likely to change much in the future. Your property is WORTH a whole lot more, but that only materializes if you sell. 

I am in the camp that preaches cash flow first. I think the ideal portfolio (and one that my partner and I are attempting to build) would contain a mixture of Class A, B, and C properties, Class A because they tend to appreciate with or above the overall market (but we ONLY buy if they cash flow around 8-10% CoC after financing.) Class C because, if purchased wisely and managed well, they can cash flow ridiculously well, and they tend to avoid the wild fluctuations that affect higher-priced properties. And Class B because they capture a nice balance between the two.

To me, investing strictly for appreciation is more speculating than investing. Many will argue this with the cold, hard facts of actual investment results, and I won't attempt to put up a fight. In fact, I have enjoyed the same wild gains on my personal residence over the past 15 years. But being an accountant by trade, it's very hard for me to project any kind of anticipated ROI based on something that varies so dramatically from year to year and decade to decade. Rents are generally stable and trend up at a rate that AT LEAST keep up with expenses. So as long as you can solve the management riddle (and that's easier said than done if not self-managing) the projections show a much clearer picture of expectations.

These are just my opinions, but I give them because you asked. Let us know what you decide to do, and good luck!