Should We Sell or Hold our former home?

Question

Hello BP! First post (hopefully first of many).

So I am helping my parents take care of a property that now serves as an investment property in New Jersey. We initially bought it in 2005 and lived there till about 2014, at which point we moved to our current residence. Have been renting it out since then. Now we are considering moving on and selling it but as I want to consider real estate investment in the future, wanted your opinions on whether it may be worth a hold or not!

Details

Purchase Price - 330K

20% down + another 15K (probably more) put in for improvements

Total Expenses - 11200 annually (Tax, Insurance, Maintenance, Advertising)

Rental Income - 25800 Annually

Cap Rate - 4.4% (if I did this correctly)

Cash Flow - 3600 annually based on 20 year Mortgage

Very VERY new to all this so appreciate any input.

Initial thoughts were that I generally see cap rates around at least 7-8% on here. And quick search of cap rates around Jersey suggest as much or more. My thinking was that parents can hold if its a decent investment but would rather be free of the hassle of having to care for it at this point. I am leaning towards telling them that they should probably sell it with the way the market has trended up, the seemingly "meh" returns, and their want to be hands off. But I again wanted your opinions so that those more experienced may correct me if my calculations are way off!

Thank you

-Mrinal

Mrinal A. · Answer

Hey @James Masotti and Account Closed thanks for the reply! I had not considered that at all. Again showing my very beginning into this field. Sadly, I doubt capital gains tax will be much of a problem for us. A quick read shows me that Capital Gains tax is based on, in simple terms, the difference between the purchase price and sale price. In our case, we may end up selling the house at a minimal amount of profit. Property in the immediate area has not appreciated at all. Also, I will certainly look into 1031 exchanges as a learning point for. Aside from that, what are you opinions on the returns or my calculations? I know opinions on return likely depends on the investor themselves but just wondering what you all thought.

Account Closed · Answer

What you should do immediately is determine whether they have lived in the property as their primary residence for two of the last five years, and whether they still have the option of excluding the capital gains under Section 121.You gave the years, but not the dates.

Mrinal A. · Answer

Thank you all for your comments! Interest rate is 3.8% right now. Yup equity is about 50%. I will talk to my parents and let you guys know what we decide. Property management is also def an option.

Brent Austin · Answer

If I recall, interest rates were when this home was purchased was around 6% to 8%. On a 20 year loan this should be about half way paid off.If this is true you could probably refinance and cut your interest rate in half, move into a 30 year loan and increase your cash flow greatly. It really depends on your goals with this one and more info on the current loan would be needed to better assess the different options available to you. What is the current interest rate on the loan?What is the balance on the mortgage?What is the current value on the home?If you are opposed to landlording, for 10% of the rent you can hire a property manager.

Thomas S. · Answer

Equity will only reduce your "actual" cash flow. Rental rate to home value is not in line, far to low. Not worth tying up your cash or time for what will eventually turn to negative cash flow if not already. Sell, it is not a good investment as a income property.

James Masotti · Answer

@Mrinal A. - As far as returns go they aren't that great...but NJ is nearly impossible to make anything cashflow without significant down payments. Therefore the fact that you have any returns at all is pretty good. Unless your parents refinanced the property they should have ~50% equity in it even if the prices didn't appreciate at all.

James Masotti · Answer

@Mrinal A. - If your parents sell the house at this point they will have to pay long term capital gains tax, if they can then deploy this capital into another investment channel that will generate higher returns this may not be a bad thing. They may be better off trying to hold onto it for awhile and identifying another real estate investment they'd like to make and then do a 1031 exchange so that they can defer the taxes. Additionally holding the property has the advantage of generating real cashflow while generating rather significant paper losses to reflect on tax returns...so it's a win win all around to hang onto it for the long haul or try to 1031 into something else. Just my .02 as requested