Investment Property - sell or keep?

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Psypher_sl

shitlord
83
0
So a house I bought about 12 years ago new and lived in is currently a rental property. I lived in it for 2 out of the last 5 years, so if I sell it I won't have to pay capital gains. I'm trying to decide whether I should keep renting it or sell it while I can avoid the capital gains. I would have to sell it within the next 18 months.

Paid 192K of which I currently owe 150K. Current market value is about 260K based on recent sales. Rental income is $2K of which after paying the mortgage, insurance, taxes and HOA I'm left with about $150 which basically goes towards maintenance and repairs. The renters are basically paying down about 5K a year on the mortgage. If I sell it in the next 18 months, I'll clear at least 100K after paying the commission and part of the closing costs. Since I would have lived in it for 2 years our of the last 5 years, by IRS rules I would be exempt from capital gains.

If I sell now, I get 100K. Otherwise, I'll have to keep it rented for another 5 years just to recover the amount lost by capital gains so in reality, in order to make any more on it, I would have to keep it for like another 10 years. Keeping it that long, I'll just run into more losses in repairs as well as dealing with the roof, aging appliances, increased taxes, etc...

Also, some history regarding the decision to rent it out. The idea was to keep it as an investment property because it's a great property and a great location. It rents pretty fast, the last tenant took less than 2 weeks. Also, it's value got take back down to 190s, so it wasn't worth selling. It's recovered since then. The plan was to keep it rented until some time after the first kid graduated. So we'd be looking to keep it rented for another 10-12 years.

Now my thinking is, that keeping it rented for another 10-12 years might only net us another 15-20K if that. Also, selling it now would create a nice fund for future investments without having to touch any of existing funds.

So, what do you guys think? Sell or keep? any other factors to consider in deciding to sell or keep?
 
S

splorge

Silver Knight of the Realm
235
172
This question boils down to the fundamentals of property investment and investment decision making in general. Here is my 2cents:

It depends on how the property fits into your portfolio. If that 100k represents 50% of your net worth, then i suggest selling it (too risky to keep). If that 100K represents 10% of your net worth, then its not so cut and dried. This is a risk management consideration. Is this property the only rental in your portfolio? If so, then you are divesting fully from property. what will you do with the 100k if you sell? (what is your opportunity cost and how much will that investment earn?). Do you have a favourable mortgage with this property, and if you decide to buy later will you be able to obtain and equally favourable rate?

I do not understand your calculation for 15-20k extra after 10 -12 years. If the property is worth 260k now and you owe 150k, in 10 years we can assume if the property increases in value at 3% per year (historical average) it will be worth roughly 350k, and if the renters are paying down 5k/year then you will owe roughly 100k. That means in 10 years you would receive 250k in non inflation adjusted dollars (worth 185k today after adjusting for assumed 3% inflation). Then you need to consider the opportunity cost of what you will do with that 100k over the next 10 years. If we benchmark it against a safe 3% bond, then that 100k will total 134k after ten years, which basically means it has the same purchasing power in 10 years as today after adjusting for inflation. In order to equalize the investments, you would need to be earning a CAGR of 11% with that 100k over 10 years to match the property investment without accounting for the difference of the capital gains tax. Even so, thats a daunting number to hit if you sell without the benefit of the leverage provided by the mortgage.

Will property continue to rise at the historical average, or grow slower or faster?
Will you earn at least 11% with that 100k for ten years?
How does the property fit into your overall portfolio?
Can you manage risk effectively, or need to sacrifice diversification in order to achieve that yield?

These are the basic questions you need to consider before making any investment decision really.

Good luck with whatever you decide.
 
Joeboo

Joeboo

Molten Core Raider
8,157
140
Also, how stable have the renters been? If you're turning the place over every other year and possibly going a month or two in-between with no rental income, that throws off all the numbers quite a bit.
 
Tmac

Tmac

Adventurer
<Gold Donor>
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Psypher_sl said:
Also, some history regarding the decision to rent it out. The idea was to keep it as an investment property because it's a great property and a great location. It rents pretty fast, the last tenant took less than 2 weeks.
Click to expand...
^
 
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Psypher_sl

shitlord
83
0
Hey Splorge, just wanted to let you know I read your response and really appreciate it. It definitely gives me a better direction in what to look at. I'll work on getting some real numbers together.
 
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Psypher_sl

shitlord
83
0
joeboo_sl said:
Also, how stable have the renters been? If you're turning the place over every other year and possibly going a month or two in-between with no rental income, that throws off all the numbers quite a bit.
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The first renters had to leave the country after like 2 months, so I kept their security deposit. The 2nd renter has been great. They renewed, so are on their 2nd year. They want to stay there long term, even offered to buy the place.
 
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Gadrel_sl

shitlord
465
3
If you have break-even cash flow, which you seem to have, then you need to sell asap. You should never keep a real estate investment on the books, with less than positive cash flow, when you can sell it at a profit. Depreciation, over the very long run, typically eliminates any gains from increasing market price. Further, you are expending many hours of your own time to manage a property with poor cash flow.

Get out now.
 
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Psypher_sl

shitlord
83
0
Gadrel_sl said:
If you have break-even cash flow, which you seem to have, then you need to sell asap. You should never keep a real estate investment on the books, with less than positive cash flow, when you can sell it at a profit. Depreciation, over the very long run, typically eliminates any gains from increasing market price. Further, you are expending many hours of your own time to manage a property with poor cash flow.

Get out now.
Click to expand...
After paying everything, I have about $150 left over. Part of this is also my fault. I was caught up with purchasing a new house during the renewal so didn't raise their rent which is about $50-100 lower than it should be. The first year I didn't keep anything because I had to replace the AC unit. But yeah, I don't think that's enough to keep it. I could use the money on another property that would bring more cash flow.

As for the time managing the property, I don't really do anything. It's only 11 years old, so it's not like something is constantly breaking.
 
T

Trommer_sl

shitlord
6
0
Too much conversation are there, but the main question is that either peopery sell or keep it....
Dear property is the only assets of which prices are increasing with the passage of time. You not need to sell it until you have a serious problem with it.
 
G

Gadrel_sl

shitlord
465
3
AliciaGeli_sl said:
I personally feel that if the property is situated at a good location you must keep it for future investment.You should not sell it until and unless you need the money really hard.The final decision will be yours but just consider this before you reach any decision.
Click to expand...
^ #2 bot of 2013.
 
Tmac

Tmac

Adventurer
<Gold Donor>
9,372
15,921
AliciaGeli_sl said:
I personally feel that if the property is situated at a good location you must keep it for future investment.You should not sell it until and unless you need the money really hard.The final decision will be yours but just consider this before you reach any decision.
Click to expand...
Well said! I'd only suggest spaces after your punctuation.
 
Titan_Atlas

Titan_Atlas

Deus Vult
<Banned>
7,883
19,909
splorge_sl said:
This question boils down to the fundamentals of property investment and investment decision making in general. Here is my 2cents:

It depends on how the property fits into your portfolio. If that 100k represents 50% of your net worth, then i suggest selling it (too risky to keep). If that 100K represents 10% of your net worth, then its not so cut and dried. This is a risk management consideration. Is this property the only rental in your portfolio? If so, then you are divesting fully from property. what will you do with the 100k if you sell? (what is your opportunity cost and how much will that investment earn?). Do you have a favourable mortgage with this property, and if you decide to buy later will you be able to obtain and equally favourable rate?

I do not understand your calculation for 15-20k extra after 10 -12 years. If the property is worth 260k now and you owe 150k, in 10 years we can assume if the property increases in value at 3% per year (historical average) it will be worth roughly 350k, and if the renters are paying down 5k/year then you will owe roughly 100k. That means in 10 years you would receive 250k in non inflation adjusted dollars (worth 185k today after adjusting for assumed 3% inflation). Then you need to consider the opportunity cost of what you will do with that 100k over the next 10 years. If we benchmark it against a safe 3% bond, then that 100k will total 134k after ten years, which basically means it has the same purchasing power in 10 years as today after adjusting for inflation. In order to equalize the investments, you would need to be earning a CAGR of 11% with that 100k over 10 years to match the property investment without accounting for the difference of the capital gains tax. Even so, thats a daunting number to hit if you sell without the benefit of the leverage provided by the mortgage.

Will property continue to rise at the historical average, or grow slower or faster?
Will you earn at least 11% with that 100k for ten years?
How does the property fit into your overall portfolio?
Can you manage risk effectively, or need to sacrifice diversification in order to achieve that yield?

These are the basic questions you need to consider before making any investment decision really.

Good luck with whatever you decide.
Click to expand...
Very good advice, depending on area my guess is historical average is going down. 1.5% is more likely, we are not gaining a 3rd income to raise reality. Also wages havn't been increasing either we are still 15% below 2007 avg. If people don't make more they can't spend more.
 
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