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  • Rental property: status quo, pay off or sell

    after getting my investments in order I’m now critically evaluating my rental property.  Background: early 40s, maxing retirement and large taxable acct.  allo 80:20.

    rental has 5 yrs left on loan; $62k at 4.625%

    tenant just told me she’s moving out in august

    i calculated CAP around 5-6% (property value ~$300k)

    ive had it for 15 years and managed myself long distance....

    so, just keep on keeping on?  Cont renting and pay off loan?  Or sell and put $ in taxable?

    thanks for your thoughts

     

  • #2
    The most amazing thing here is that you’ve had it for 15 years and are managing it long distance. I’d sell. Get the equity out.

    Comment


    • #3
      What would be your capital gains? What do you rent it for? How much maintenance do you have to do yearly? Any anticipated repairs? How much is insurance?

      Comment


      • #4
        SLC OB has some good questions to help weigh the decision. The choice likely comes down to your willingness to manage the property long distance versus the value of having the diversified asset. However, I can see at least three major viable options that you did not put on the table. First, depending on cash flow, hire a local management company. Second, do a tax deferred exchange and buy a property more accessible to where you are now. Note, in this case you can play the real estate game and leverage up (e.g., buy multiple units, a small apartment building, etc.), or perhaps buy a place you intend to eventually convert to a vacation property (be careful here - needs to be rented out first). Third, pull money out via refinance in order to avoid depreciation recapture and capital gains taxes.

        All that said, back to your original question, if you are neutral on the hassle, I would keep it as a diversification play as long as the property is cash flow positive. If it has become an annoyance, well, you have a lot of equity tied up and can leverage LTCG rates to cash out.

        Comment


        • #5
          There's about $160k of gains on the house--so there'd be a bit of LT gains to pay (i'm in 30-35% bracket).  It's been positive cash flow--right now rents for $1800/mo, taxes+HOA $310/mo, other maintenance/repairs have generally been around 1000/year.

          Good question about future repairs--not sure off hand.

          La




          SLC OB has some good questions to help weigh the decision. The choice likely comes down to your willingness to manage the property long distance versus the value of having the diversified asset. However, I can see at least three major viable options that you did not put on the table. First, depending on cash flow, hire a local management company. Second, do a tax deferred exchange and buy a property more accessible to where you are now. Note, in this case you can play the real estate game and leverage up (e.g., buy multiple units, a small apartment building, etc.), or perhaps buy a place you intend to eventually convert to a vacation property (be careful here – needs to be rented out first). Third, pull money out via refinance in order to avoid depreciation recapture and capital gains taxes.

          All that said, back to your original question, if you are neutral on the hassle, I would keep it as a diversification play as long as the property is cash flow positive. If it has become an annoyance, well, you have a lot of equity tied up and can leverage LTCG rates to cash out.
          Click to expand...


          For #1--i have some help from a cousin who manages property--so he can help with a renter turnover.  For #2, i'll be moving in 2-3 years so don't know where i'm going to settle yet.  #3 is very interesting option i hadn't thought of...

          Comment


          • #6
            I struggle with this every time a tenant gives notice and the RE sale climate is decent. What stops me from selling is that although it takes some babysitting, which in your case sounds manageable, is the cash flow and diversification aspects.

            Although I've come on board with VTSAX for a large chunk of my holdings thanks to my WCI gurus I still recall what I have seen in the market over the years. In my particular case, mid 50's, I'm not sure I'd have the time or stomach to weather living through a total market tank and correction if I didn't have my real estate holdings.

            Comment


            • #7




              I struggle with this every time a tenant gives notice and the RE sale climate is decent. What stops me from selling is that although it takes some babysitting, which in your case sounds manageable, is the cash flow and diversification aspects.

              Although I’ve come on board with VTSAX for a large chunk of my holdings thanks to my WCI gurus I still recall what I have seen in the market over the years. In my particular case, mid 50’s, I’m not sure I’d have the time or stomach to weather living through a total market tank and correction if I didn’t have my real estate holdings.
              Click to expand...


              This is where I am as well with two properties (one paid off an done close) and late 50s. But as I get closer to actual retirement, I am more actively considering whether or not to exchange the properties for the "dream home" that we might eventually move into.

              Comment


              • #8
                What is the location? I'm in a similar position. Late 40's. Have four long distance. Have a PM who's been managing them for 15 years. One paid off. Aggressively paying down a second, then dave ramsey snowball etc... Planning to use them as income stream down the line.

                Comment


                • #9




                  What is the location? I’m in a similar position. Late 40’s. Have four long distance. Have a PM who’s been managing them for 15 years. One paid off. Aggressively paying down a second, then dave ramsey snowball etc… Planning to use them as income stream down the line.
                  Click to expand...


                  It's greater DC--near metro so pretty high demand rental area--that's why part of me feels inclined to keep it.







                  I struggle with this every time a tenant gives notice and the RE sale climate is decent. What stops me from selling is that although it takes some babysitting, which in your case sounds manageable, is the cash flow and diversification aspects.

                  Although I’ve come on board with VTSAX for a large chunk of my holdings thanks to my WCI gurus I still recall what I have seen in the market over the years. In my particular case, mid 50’s, I’m not sure I’d have the time or stomach to weather living through a total market tank and correction if I didn’t have my real estate holdings.
                  Click to expand…


                  This is where I am as well with two properties (one paid off an done close) and late 50s. But as I get closer to actual retirement, I am more actively considering whether or not to exchange the properties for the “dream home” that we might eventually move into.
                  Click to expand...




                  Third, pull money out via refinance in order to avoid depreciation recapture and capital gains taxes.
                  Click to expand...


                  So what would push one into this option in general?  What should be considered?   On another note, as i read more about calculating rental CAP rate, what do people use as a denominator?  Original value, current value, or current equity?  If it's current value and prices have increased beyond rents, at some point it would drive CAP rate <<5% perhaps pushing one to sell.

                  Comment


                  • #10


                    It’s greater DC–near metro so pretty high demand rental area
                    Click to expand...


                    Whoa, this change the picture substantially. Your monthly rent is sort of variable too. It sounds like you haven't "updated" substantially. Don't over do the neighborhood, but if your falling below midpoint, time to invest using the equity. 5-6% CAP is fine. No reason to give a slice to the government, collect your too from a government employee.

                    You can do a 1031 like kind exchange in your "new location" when that pans out. Leverage it and gain some tax loss possibly.

                     

                    Comment


                    • #11







                      What is the location? I’m in a similar position. Late 40’s. Have four long distance. Have a PM who’s been managing them for 15 years. One paid off. Aggressively paying down a second, then dave ramsey snowball etc… Planning to use them as income stream down the line.
                      Click to expand…


                      It’s greater DC–near metro so pretty high demand rental area–that’s why part of me feels inclined to keep it.







                      I struggle with this every time a tenant gives notice and the RE sale climate is decent. What stops me from selling is that although it takes some babysitting, which in your case sounds manageable, is the cash flow and diversification aspects.

                      Although I’ve come on board with VTSAX for a large chunk of my holdings thanks to my WCI gurus I still recall what I have seen in the market over the years. In my particular case, mid 50’s, I’m not sure I’d have the time or stomach to weather living through a total market tank and correction if I didn’t have my real estate holdings.
                      Click to expand…


                      This is where I am as well with two properties (one paid off an done close) and late 50s. But as I get closer to actual retirement, I am more actively considering whether or not to exchange the properties for the “dream home” that we might eventually move into.
                      Click to expand…




                      Third, pull money out via refinance in order to avoid depreciation recapture and capital gains taxes. 
                      Click to expand…


                      So what would push one into this option in general?  What should be considered?   On another note, as i read more about calculating rental CAP rate, what do people use as a denominator?  Original value, current value, or current equity?  If it’s current value and prices have increased beyond rents, at some point it would drive CAP rate <<5% perhaps pushing one to sell.
                      Click to expand...


                      If it's not too much of a headache, you're not relying on it's equity for survival, it's cash positive, and you're still investing in equities, why do you have to sell it?

                      Comment


                      • #12
                        To play devil's advocate, do you need it to reach your financial goals?

                        I recently sold my rental property which has been a great investment, but I can't put a price on how much mental bandwidth it has freed up (and it was a super easy rental).  If it is a stressor at all to you, that might be worth it alone for you to sell it.

                        Comment


                        • #13







                          What is the location? I’m in a similar position. Late 40’s. Have four long distance. Have a PM who’s been managing them for 15 years. One paid off. Aggressively paying down a second, then dave ramsey snowball etc… Planning to use them as income stream down the line.
                          Click to expand…


                          It’s greater DC–near metro so pretty high demand rental area–that’s why part of me feels inclined to keep it.

                           
                          Click to expand...


                          Generally speaking if it is a decent DC area the property values continue going up and finding quality tenants shouldn't be difficult. I'd be inclined to keep it for cash flow and future equity especially since it doesn't sound like a time suck.

                          Comment


                          • #14







                            What is the location? I’m in a similar position. Late 40’s. Have four long distance. Have a PM who’s been managing them for 15 years. One paid off. Aggressively paying down a second, then dave ramsey snowball etc… Planning to use them as income stream down the line.
                            Click to expand…


                            It’s greater DC–near metro so pretty high demand rental area–that’s why part of me feels inclined to keep it.







                            I struggle with this every time a tenant gives notice and the RE sale climate is decent. What stops me from selling is that although it takes some babysitting, which in your case sounds manageable, is the cash flow and diversification aspects.

                            Although I’ve come on board with VTSAX for a large chunk of my holdings thanks to my WCI gurus I still recall what I have seen in the market over the years. In my particular case, mid 50’s, I’m not sure I’d have the time or stomach to weather living through a total market tank and correction if I didn’t have my real estate holdings.
                            Click to expand…


                            This is where I am as well with two properties (one paid off an done close) and late 50s. But as I get closer to actual retirement, I am more actively considering whether or not to exchange the properties for the “dream home” that we might eventually move into.
                            Click to expand…






                            Third, pull money out via refinance in order to avoid depreciation recapture and capital gains taxes.
                            Click to expand…


                            So what would push one into this option in general?  What should be considered?   On another note, as i read more about calculating rental CAP rate, what do people use as a denominator?  Original value, current value, or current equity?  If it’s current value and prices have increased beyond rents, at some point it would drive CAP rate <<5% perhaps pushing one to sell.
                            Click to expand...


                            Refinance if you want to retain the property but pull out cash for another purpose. Many investors refinance in order to buy additional properties, but obviously it can just be to improve return on equity by reducing cash invested in the property (ROE=cash flow after financing/cash invested).

                            Cap rate  typically uses market value as denominator, divided into cash flow from operations. If you use purchase price it is similar but usually called return on assets

                            Comment


                            • #15


                              On another note, as i read more about calculating rental CAP rate, what do people use as a denominator?
                              Click to expand...


                              Its always just your purchase price. So your CAP rate should increase over time as rents increase, I'd imagine this is very likely in DC.

                              Comment

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