To sell to make a profit or to keep rental property??

Question

Good evening BP family!

I have a dilemma on my hands and would like some advice and input as to how I should proceed.

I was currently approached by a realtor who was showing clients around the area in which my single family rental property is located. She approached my tenant and gathered my information from her. In conversation with her she told me that the clients love the neighbourhood and would really like to make an offer on the property.  The background on the property is that it was purchased 2 years ago for $370 000,  the offer was for $450 000 (she said it would be subject to negotiation once the clients were able to view the property). On the outset, that looks like a great deal for me, after real estate commission, I would be walking away with around $57 000.

The issue is that I have it currently tenanted at a cash flow of $1300 a month.  The tenants will be with me for the next two years at least, if not longer.

So now I am here wondering what the best decision would be for my financial health? Should I take the profit and re-invest it in another property? Should I keep the tenants and collect $15 600 yearly and then sell the property if and when they move out?

Please let me know what you think!

Cindy Szponder · Answer

Not sure if you have something similar to our 1031 exchange program that allows you to take your profit and put it into a new property while avoiding the capital gain tax hit. What is your goal for having this property. Was it an entry-level rental for you and you're ready to move to a multi-family unit, or were you an accidental landlord?

Does the property cashflow $1300 per month after all expenses or is it rented for $1300? Big difference and would require different analysis. I see you don't have a Pro account, but you should still have limited access to the property analysis software under the Tools tab at the top of the page. Run some scenarios in there. The reports are very detailed and should give you great information for making the best decision.

Luc Boiron · Answer

I think you're making the right choice! There are so many transaction costs here that you wouldn't do any better buying somewhere else. If you were to sell this and then buy another place, you would need to pay agent commissions, which you took into account. You would also have legal fees on the sale, and the purchase. You would need to pay land transfer tax as well when you buy, which would be in the $5,500-6,000 range. You would also need to pay capital gains on your gains, as we do not have a 1031 exchange equivalent here in Canada.

In addition, it is likely that the buyers are not offering much above market value, if at all, so their offer is likely around what your house is worth. They means properties in your area are more expensive, so you would need to pay more to buy the next one as well. The only benefit is that you would have more capital to lever up to buy another.

So, good choice!

Robin Valadares · Answer

Thanks for the responses so far guys. I appreciate the input. I have decided to keep the rental property and not to sell it. Thomas S., I've debated many times in my head to pick up shop and head down to the Southern US to continue my real estate investment! @Crystal Smith, the tenants have expressed that they will be staying at the property for another 2 years minimum, so at least I will hopefully insure $31200 in the next two years.

Unfortunately after reading more and more about  whether there is a Canadian equivalent to a 1031, I haven't found anything that would allow me to protect my capital gains until another investment property has been purchased.

Steve B. · Answer

@Crystal Smith  the bigger issue than the cost of money is his opportunity cost redeploying the capital at a higher ROI at the same risk level

Kurt Gardner · Answer

@Christina Hall - haha, me too here in the Midwest!

@Cindy Szponder @Huiping Sheng - I do not see how going through the trouble of a 1031 and then finding another money making property would really be worth giving up this cash cow.

@Mike Hanneman @Crystal Smith - I agree with you...this is a pretty sweet deal and one I'd love to see in my portfolio.

@Robin Valadares - Let this one keep cooking!

Thomas S. · Answer

You will get responses both for and against selling based on the business practices of the individual providing the advice.

Not knowing your experience level I have no confidence in evaluating your cash flow statements being accurate or not but my calculations would have you receiving about $3500/month (plus the amount your are paying in principal monthly) in rent to be cash flowing $1300. If that is a accurate number then it is a good investment property and depending on your income priorities is worth keeping.

Crystal Smith · Answer

If you ignore the cost of money (i.e. inflation & what return you get from investing the $15.6K per year cash flow; taxes, value of your property increasing....) the break even point if you keep the property is 3.65 Years (Simple math $57K/$15.6K).  For our business hurdle rates & time horizons we'd hold on to the property unless we had another deal sitting in front of us that could provide more or more stable returns & we could use the $57K to solidify the deal.

Christina Hall · Answer

First I have to say WOW on how much property is in your area. I guess I really am just a Hillbilly from WV. I could take that same investment here and buy 12 houses with a income of $8,500 a month!

I would have to say unless you are in a spot where you need the money let the rental play out longer. What you can make on it now will be that much more later.

Mike Hanneman · Answer

A SFR that cash flows that much would be my dream in my area. I would look at what my potentially upcoming capital expentures are, i.e. a new roof soon, siding, any other big ticket stuff. If there's not to much of a worry about then I would keep it. To me $57,000 isn't that much for my profits, and it won't be that much as there will be a capital gains on it as you were using it as an investment property.

Also what is market value for a house like yours in that area? Is their offer close to that?

To sell to make a profit or to keep rental property??

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