Selling rental property or look for a next tenant?

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Core13
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Joined: Sat Jan 25, 2020 8:57 am

Selling rental property or look for a next tenant?

Post by Core13 »

Hi,

I am new to this forum and I would like to have your inputs on whether to keep or sell my current rental property, and whether there are any tax implications if I decide to sell this place. Your thoughts are highly appreciated. Here are the numbers:

Original purchase price bought in 2005: $235,000
Current market value: $235,000 (estimated)

Cash sunk in to remodel it over the years: $15,000
Refinanced in 2013: 30-year @ 3.625%
Outstanding loan balance: $160,000
Monthly mortgage w/escrow =$1,200 (Principle and interest $830/month +Taxes and Insurance: $370/month)
Remaining years left on the loan: 24

Monthly gross rental income: $1,600/month (renter pays their own utilities)
Estimated Maintenance fee: $150/month
Monthly vacancy $1600/12=$133
Property management: self- management

The house that I lived in that is detailed above, I later refinanced and turned into a rental. The purchase price was $235,000, I sunk in about another $15,000 cash to remodel this place. After living in there about 9 years , we refinanced this property to a 30-year term mortgage at 3.625% , I have been renting it out to the same tenant for almost 5 years now, we currently charge her $1,600/month, and the lease is due in April. Now she decides to move out. That leaves us either to have sell this place or to look for another tenant in hope the next one is just as good as her:

Option 1: Listing for sale: The thing is that since we bought the house in 2005, the property value hasn’t gone up at all. I doubt it will go up much in value in the next 10 years. I will be lucky if I can sell it for the same price I bought it for, plus I may have to spend an additional $10,000 to $15,000 to fix this place up, and I will have to pay about $14,100 in closing costs (say a 6% commission rate). Would it make sense to sell it, write off the losses and invest my $1200/month in index funds to have a better return and I don’t have to deal with any tenants? Also, will there be any tax liabilities on the sale?

Option 2: If I continuously rent out this place, assuming I still charge $1600/month, with a $1200/month mortgage (escrow included), let’s say $150/Month estimated maintenance fee with factoring in 1 month vacancy $1600/12=$133, if I did my math correctly my ROE would be (1600-150-133-1200)/1200=9.75%. The property does generate some positive cash flow for us and it has been low maintenance overall. However, with the current tenant moving out after living in there for five years, I am expecting I’ll have to spend a couple of thousand to refresh the place up so it’s will be ready for the next tenant, which will eat my ROE as well. Important to note, this house is rather old (built in the 1950’s). I think we will have to sink a bit of money into it in the coming years due to this.

What do you think is a better choice? I appreciate your feedback.

Thanks again,
LVInvestor
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Re: Selling rental property or look for a next tenant?

Post by LVInvestor »

Another option is to try and find a rent to own tenant. Consider a 3 year lease where the tenant would get option to buy with 20% of accrued rent going toward purchase price. For example if rent is $1600 per month total rent per year would be $19,200. So if tenant was to purchase after one year they'd get a $3840 off assessed price. Much better for both owner who'd be paying roughly 5.5% to 6% to agent and tenant who gets a price break. After 3 years the accrued discount would be $11,520. That is still less than the broker/agent fee you'd pay plus you get the rental income for the previous 3 years and chance of some property appreciation.

You can set terms where the value of the property at point of sale cannot be below what you paid and will be determined by an appraiser by each owner and tenant. If there is a vast difference then the tenant and owner would hire an independent appraiser.

You can probably find a real estate agent to handle the sale for $1000 to $2000 if it simply a sale between you and your tenant.
Lafder
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Re: Selling rental property or look for a next tenant?

Post by Lafder »

You can always let the market decide by doing some fixing and cleaning up when the current tenant moves out, then list it at a higher rental price as well as a for sale price and see who grabs it first!

Updates may allow you to raise the rent.

I agree a steady easy tenant makes being a landlord easy.

How much stress does being a landlord cause?

lafder
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Watty
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Re: Selling rental property or look for a next tenant?

Post by Watty »

Even though the price has not gone up you would have still be taking depreciation so you could still have some capital gains if that was more than the improvements you have done. It would be good to do a dummy tax return to see if you would need to pay any taxes on the sale.
Core13 wrote: Sat Jan 25, 2020 10:00 am Property management: self- management
One of the reasons I do not own any rental properties is that I do not want to have to deal with them when I am 75+ and may be less capable. My wife sure as heck does not want to have to deal with one if I am not able to.

You can hire property management companies but you still will need keep on top of them and even if you find someone that is fantastic they will eventually retire, die, change jobs, etc. and you will periodically need to find new people to manage the property. I also do not want to deal with selecting property management companies when I am elderly.

One other problem if you keep the rental for the rest of your life is that your heirs will need to deal with it when they inherit it. They will likely not be able to sell it until the current lease is up and then they could be faced with trying to sell it in a bad housing market when it might take a long time to sell. Owning a rental property could mean that it could take a long time to settle your estate.

Most housing markets are still strong so you may be able to easily sell it now.

Not only do the numbers need to be good, but it also should be something that fits into your big plans.
CurlyDave
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Re: Selling rental property or look for a next tenant?

Post by CurlyDave »

1. Your ROE should also include pay down of the mortgage -- this really does increase your equity in the building every month.

2. Have you been depreciating the building on your taxes? If you sell you will have to pay tax on the recapture.

3. Instead of flying by the seat of your pants on what market rent might be, why don't you do your own rent survey? Use Craigslist and Facebook to find similar rentals in your area and take a morning to drive by a half dozen of them. You don't have to make appointments or go inside, just drive by and realistically evaluate the neighborhood of the comparable rentals you find.

4. There is a trade-off between charging market rent and vacancy allowance. You have gone 5 years with no vacancies and yet are allowing for 1 month/year in your analysis. Decide if you want to be slightly below market or if you want to be at market and accept vacancies.
Last edited by CurlyDave on Sat Jan 25, 2020 11:22 am, edited 1 time in total.
CurlyDave
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Re: Selling rental property or look for a next tenant?

Post by CurlyDave »

Watty wrote: Sat Jan 25, 2020 10:51 am
...One other problem if you keep the rental for the rest of your life is that your heirs will need to deal with it when they inherit it. They will likely not be able to sell it until the current lease is up and then they could be faced with trying to sell it in a bad housing market when it might take a long time to sell. Owning a rental property could mean that it could take a long time to settle your estate...
Of course your heirs get a step up in basis when they inherit. This takes a lot of the sting out of these potential problems. And, these are only potential problems. They could inherit in a strong housing market.

Any of my heirs who don't like the prospect of dealing with rentals is perfectly free to cede their share of the properties to the other heirs. So far, no one has evidenced any desire to do this. They would be leaving a lot of money on the table.
onourway
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Re: Selling rental property or look for a next tenant?

Post by onourway »

Your calculations don't yet include any maintenance which could be substantial. It also assigns a zero dollar value to any time you spend on this. As with most SFH's this seems really marginal as a rental. Unless you intend on making this your job and picking up a whole bunch more rentals to go with it, I'd sell it and focus your time and capital on something more productive.
Derby
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Re: Selling rental property or look for a next tenant?

Post by Derby »

You're barely cash flowing as it is, with zero appreciation. How many years of cashflow will a new water heater or furnace or roof set you back?

Plus, you don't seem that enthused about it, and you probably won't get so lucky with tenants next time. I'd sell. If you want to own rentals, you should buy a house just for that reason. The "accidental landlord" houses generally don't work out as well.
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Sandtrap
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Re: Selling rental property or look for a next tenant?

Post by Sandtrap »

Given the data provided and the "tone" of your missive, including input from others, this would be a good time to sell, walk away with your money, then reinvest it into your portfolio.
Why?
1. Your returns are not all that great.
2. The home is old, will require more work = more and higher expenses.
3. Value of the home is the "same", so not in an area of high appreciative value. So, it may have been a poor purchase from the start, unless it was your primary home at some time.
4. Yes, you make take some losses. Sell and walk away. The price you get might be the best in many years.

j :happy
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StealthRabbit
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Re: Selling rental property or look for a next tenant?

Post by StealthRabbit »

^^ agree... Sounds like a good time to sell it FAST. A bad market could have you stuck with it for another decade.

I am running the numbers on selling a few of my rentals at the moment.

Some are not worth keeping as I projected 5, 10, 15 yrs with anticipated returns / repairs, market change.
ALL had declining annual % going out 10 yrs, as I make most my appreciation gains on the purchase price and initial tenant.

I still operate on the 1% monthly rents minimum of Capital investment. thus a $235k property MUST at least gross $2350 / month or I don't buy it. Will not even look twice.

There are easier ways to make a buck (and lose a buck).

I plan to grab some more NNN commercial properties in the next downturn (or not).
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Sandtrap
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Re: Selling rental property or look for a next tenant?

Post by Sandtrap »

StealthRabbit wrote: Sun Jan 26, 2020 3:57 am ^^ agree... Sounds like a good time to sell it FAST. A bad market could have you stuck with it for another decade.

I am running the numbers on selling a few of my rentals at the moment.

Some are not worth keeping as I projected 5, 10, 15 yrs with anticipated returns / repairs, market change.
ALL had declining annual % going out 10 yrs, as I make most my appreciation gains on the purchase price and initial tenant.

I still operate on the 1% monthly rents minimum of Capital investment. thus a $235k property MUST at least gross $2350 / month or I don't buy it. Will not even look twice.

There are easier ways to make a buck (and lose a buck).

I plan to grab some more NNN commercial properties in the next downturn (or not).
+1
Outstanding!
This is the first time I've read it put that way.
I've always done it this way and it has worked out fairly okay for me.

j :happy

*PM me so the thread isn't off topic.
What are NNN Commercial Properties?
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togb
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Re: Selling rental property or look for a next tenant?

Post by togb »

You don't sound very enthusiastic about the rental property, and the numbers don't seem to be compelling....

I"m going through the same thought process, with my (one) rental property. But I bought it for $171K, rent it for $1750 (thus meeting the 1% rule). It was brand new so my maintenance/repairs have been limited to AC filters and replacing the garbage disposal. I have reserved some of the cashflow so that I have $5K for repairs plus 2 months worth of mortgage payment "just in case", so at this time I'm getting more than $500/month cashflow.

It's now worth $235, and I'd have to pay capital gains. And $22.5K of depreciation would be recaptured as ordinary income..... So I'm leaning towards finding the next tenant.

If your property penciled out more like mine does, it would make sense to keep it. Have you validated a fair market rent for the house? Can you raise the rent to make it cashflow better?

If not, just be sure you consider the tax implications of selling it-- sounds like you won't have capital gains but my understanding is you MUST recapture depreciation even if you did not take it. (I'm not an expert, that's just my understanding)
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