Rental Property - Hold or Sell

[Kian T.]

Thanks in advance for reading. I've been agonizing over this for months now, so I am hoping for some advice that may help me make the next best move (or not). In 2011, I purchased the home I grew up from in the Bay Area, California for $350,000. I moved around shortly after that for work so out of circumstance, this house became my first rental property. For the first few years, I barely covered the mortgage with rent, but now I get $2400/month (and recently refinanced to a $1,791 mortgage payment) which is better than it used to be. Now I have settled outside of Denver, CO and started my family here.

I have fantastic tenants (a family of 5) who always pay on time and even do minor fixes and repairs themselves. For that, I've kept rent a bit lower than the local rate too. When I refinanced last year, the home appraised at $800,000. For the past few years I have casually discussed the selling them the house. Selling the home to my tenants would keep me from having to put it on the market, advertise, and pay real estate agent fees, while helping these first time homebuyers too. However, they let me know recently they are not sure if they have enough for a down payment to make their mortgage as cheap as they pay in rent. Which is understandable. The cost of a mortgage would make them pay $4000+/ month for this house, which is crazy. And if I sold it on the market, they would probably have to move out and find another Bay Area home (for much more rent), or I suspect an investor would raise their rent high too, if they have to pay as much for the house. 

Yet, should I just hold on to this Bay Area real estate making modest profit? Maybe sell if/when my tenants are able to afford it? But maybe my tenants would never buy it? The main reason I even wish to sell it is not for the appraisal value, but because I would like to attain early financial freedom. I dream of a 1031 exchange, buying a couple rentals in Colorado, and letting those work for me and cover my housing; and I don't see it happening with this mortgage for the next 30 years. But pricing my tenants out of affordable housing so I can realize the profit just isn't what I want to do. Besides, I don't even know if buying 2 houses in Colorado would turn that much more profit than keeping one Bay Area house. I would pay much more in property taxes and might not get such great tenants (and that's for 2 properties).  

Thanks again for any advice or thoughts!

[John Warren]

@Kian T. if I were in your shoes I would definitely sell the home. It sounds like you have very nice tenants, and it is understandable that they would like to keep their housing costs as low as possible. With that being said, if the home is truly worth 800k, then you should access that capital and deploy it on other high quality investments that will give you a great return. It sounds like you have at least 600k in equity, so another way to look at it is to see what your return on equity is. If you rent it for 2400 and have to pay 1791 for your PITI, you most likely also have maintenance costs every month. Even if your cash flow is $400 per month you will only realize an annualized return of $4800 on a $600,000 investment. That is a .008% return.