Should I Sell Dallas Rental Condo?

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Meg77
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Should I Sell Dallas Rental Condo?

Post by Meg77 » Mon Nov 02, 2015 2:36 pm

UPDATE 8/24/16: Last year after this post, my tenant agreed to a year lease at $1400 so I kept the unit. I just sent her an email yesterday letting her know that I plan to sell the condo and won't be renewing the lease in November when it matures (I also told her if she wants to or can move sooner I won't charge her anything since I'd really rather list it sooner than later to ensure a closing by 12/31 for tax reasons).

This has been a really difficult decision since this was my first real estate purchase and big independent financial decision. Selling is a big step closer to having my finances more fully integrated with my husband but also feels like giving up a big part of my independent self.

The condo has increased in value to $185K, and I'll get about $85K out of it after sale which is almost exactly enough to pay off another rental mortgage I have at 5%. The ROE on this condo is only 2%, and appreciation will probably hover in the 2% range if I had to guess, so it makes sense to sell and pay off a 5% mortgage. Even if I owned this place free and clear the ROI would be just 3.3%. Too low to justify keeping all that cash tied up in a rental.



In early 2014 I moved down the street and converted my homestead condo to a rental. I always planned to keep the property and add it to my rental portfolio, but I couldn't resist refinancing to a 15 year loan at 3.25% in 2012 which further compressed the less-than-stellar cash flow potential. The pool was under construction along with a nearby Whole Foods when I moved though, so I wasn't going to sell at that time anyway.

Home values have continued to rise, inventory is low and new development is everywhere. Rents haven't risen much though, as new apartment buildings keep opening. I just gave my tenant notice of a rent increase to $1450 (the original amount I was seeking when I leased it), and she is pushing back. If she opts to move I am wondering if I should just go ahead and sell while the market is relatively hot.

Unit stats:
- Purchased in 2006 for $145K
- Current value $175K.
- Monthly rent $1375 current, $1450 proposed
- Fixed monthly costs $1539 ($808 mortgage, $317 property taxes, $75 insurance, $339 HOA)
- $95K mortgage balance (originated in 2012; fixed for 15 years at 3.25%, monthly principal reduction $542)
- Building is 15 years old in good condition in a great location.
- 1 bed/1 bath unit with nice view and one shared wall, 790 SF

I just put in a new HVAC this year (the only maintenance call I have gotten in 18 months), and the water heater was replaced within the last 3 years. Appliances are in good shape, so expected maintenance is really negligible until/unless the tenant moves, in which case paint touch ups and possibly new carpet in the bedroom may be needed.

Personal Tax Information:
- Converted to rental officially Dec 31, 2013, so if I sell before the end of 2016 I can avoid capital gains taxes
- MFJ tax bracket is 33% (so effective mortgage rate is more like 2.18%)
- I have 9 other rental units. We make too much to deduct the tax loss each year, but we may have other significant sources of passive income in the next few years that could be offset (we are debating some private investment opportunities).

In summary, I'll be losing around $100/mo cash flow if she accepts my new rent proposal but decreasing debt by about $555 each month. It's a low maintenance rental with average rent and capital appreciation growth potential from here. I'd net around $68K if I sold which I could use to repay another rental mortgage that's 30 year at 5% - or dump in the stock market near all time highs.

What would you do?
Last edited by Meg77 on Wed Aug 24, 2016 1:13 pm, edited 1 time in total.
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Carefreeap
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Re: Should I Sell Dallas Rental Condo?

Post by Carefreeap » Mon Nov 02, 2015 2:58 pm

With a lot of new development in the area I would guess that both appreciation as well as rents are not going to rise. With that in mind the favorite question around here is if you had $175k would you buy this condo again?

You really don't have that much of a gain and you will be able to off-set some of the carry forwards you haven't been able to use. I only mention that if you think you might want to use the homeowner exclusion within the next two years for your current residence.

ddurrett896
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Re: Should I Sell Dallas Rental Condo?

Post by ddurrett896 » Mon Nov 02, 2015 3:46 pm

Meg77 wrote: I just gave my tenant notice of a rent increase to $1450 (the original amount I was seeking when I leased it), and she is pushing back. I


I don't blame her - a 5% raise is pretty harsh (coming from another landlord)

The way I see it is the increase of $75/month or $900/year isn't worth the risk or losing the tenant UNLESS you think you can get someone in there right away. If not, having the unit sit for 1 month puts the loss greater than the $900 you would have lost if the rent stayed the same.

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Re: Should I Sell Dallas Rental Condo?

Post by renue74 » Mon Nov 02, 2015 3:50 pm

Average rent increases (according to biggerpockets) is 2-3%. I agree, the vacancy in one month would kill your increase.

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Re: Should I Sell Dallas Rental Condo?

Post by Carefreeap » Mon Nov 02, 2015 3:56 pm

It depends on what the going market rate is. I'll be doing another $200 (6%) increase this year for my condo in San Diego but I'll still be at 85% of market rate. I had to do an eviction in early 2013 and was too early for the summer market (beach location).

If Meg has a lot of competition from new construction then I would agree that it doesn't make sense to raise the rent on a good tenant.

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Meg77
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Re: Should I Sell Dallas Rental Condo?

Post by Meg77 » Mon Nov 02, 2015 4:49 pm

ddurrett896 wrote:
Meg77 wrote: I just gave my tenant notice of a rent increase to $1450 (the original amount I was seeking when I leased it), and she is pushing back. I


I don't blame her - a 5% raise is pretty harsh (coming from another landlord)

The way I see it is the increase of $75/month or $900/year isn't worth the risk or losing the tenant UNLESS you think you can get someone in there right away. If not, having the unit sit for 1 month puts the loss greater than the $900 you would have lost if the rent stayed the same.


I agree it is a stiff increase, and I was open with her about why I was raising it (property tax assessment went up 25% last year for one) and the fact that I do NOT plan to raise it as much going forward. I even offered to lock in a longer than one year new lease term if she wanted to. In reality she's been benefiting from a discount due to the fact that she didn't have full access to the pool and gym at the building for much of the lease term. I did research before the new proposal and I think $1450 is fair. She may be able to find $1375 but with a smaller unit - plus the cost and hassle of moving. But I did ask her to let me know if she found much better deals and my market analysis is off. I also offered to waive any additional pet deposit if she buys a dog which she said she was considering.

If she pushes back I'll cave, but I am also pretty sure she has some family support and doesn't give a hoot about an extra $50 or $75 a month. She drives a fancy SUV and her fridge is littered with invitations to charity balls and weddings abroad. She's 23 and makes under $50K so no way she's footing all her own bills. She made the mistake of telling me that her parents have been wanting her to get a place with a small yard if she gets a dog (which would be WAY more expensive) but that they were coming for Thanksgiving and she was hoping they'd see why she likes where she is once they've seen the condo.

Bottom line it's not so much about $25-$75 more a month that I'm worried about. Really I'd have drug my feet increasing rent at all if it weren't for my husband wagging his finger at me for having a month to month lease. I'm more concerned about whether hanging onto this property with a negative cash flow is worth it long term just for the equity buildup. In reality I would not buy this as a rental today at today's prices. I'm just keeping it because it's easy and somewhat sentimental.
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Re: Should I Sell Dallas Rental Condo?

Post by Valuethinker » Mon Nov 02, 2015 4:55 pm

Meg77 wrote:.

Bottom line it's not so much about $25-$75 more a month that I'm worried about. Really I'd have drug my feet increasing rent at all if it weren't for my husband wagging his finger at me for having a month to month lease. I'm more concerned about whether hanging onto this property with a negative cash flow is worth it long term just for the equity buildup. In reality I would not buy this as a rental today at today's prices. I'm just keeping it because it's easy and somewhat sentimental.


I think then you have answered your own question.

It's not an investment you would make now. It's not paying good cash flow. Prospects for appreciation appear to be limited by new supply coming on.

If you have one bad tenant you will regret owning this property. Rental landlording can be a world of pain. Anything (even sub market rent) for a tenant who doesn't give you hassle.

The only thing that sounds good about this property is a good location.

It seems to me you have the perfect reason to sell, and it's a good time. But all I am doing is mirroring back to you what you have told us.

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Re: Should I Sell Dallas Rental Condo?

Post by patriciamgr2 » Mon Nov 02, 2015 5:12 pm

some thoughts for your consideration:

1. Based on your own criteria & expectations of property appreciation, you stated that you wouldn't buy this property as an investment today. [I've always thought the availability of land in Dallas area puts a damper on outsize appreciation of rental units. Also, YMMV. but I've always felt 1/1 units a bit more difficult to rent/sell.] Having your tenant on a month-to-month lease currently makes the unit easier to sell.

2. Your tax situation (ability to avoid cap gains tax) gets worse in the foreseeable future. Pet damage (not covered by any deposit) from a pet left indoors all day is a risk. Your tenant is already getting advice to move to a more pet-friendly type of housing, so the worse case (pet damage followed by a vacancy) is not unthinkable.

I have found that tenants often don't treat pet stains on carpeting promptly enough to avoid pets focusing on a particular area & causing serious damage to the padding--so the costs associated with pet damage can be substantial. Of course, your family are experienced landlords, so I'm sure you have experience with this.

I'd sell just based on #1 above--trust your own analysis. Good Luck.

/edited to correct typo/

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Re: Should I Sell Dallas Rental Condo?

Post by JGoneRiding » Mon Nov 02, 2015 8:56 pm

Since you did a 15 yr mortgage instead of 30, I don't really think it should be considered negative cash flow. You are getting 500+ a month in principal reduction. N while it might not appreciate much it doesn't sound likely to depreciate at this point. Personally I would keep it another year as long as this tenant stays. List if she doesn't. I don't know enough about tx real estate, when is your selling season?

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Re: Should I Sell Dallas Rental Condo?

Post by Crimsontide » Mon Nov 02, 2015 9:23 pm

Like you said, our DFW real estate market is pretty much on fire right now. In my area of the metromess rents are way up right along with property values. I would sell now while the market is hot. Either that or raise the rate and let the next tenant pay, because they will...

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TxAg
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Re: Should I Sell Dallas Rental Condo?

Post by TxAg » Mon Nov 02, 2015 9:52 pm

I don't like hassles. I would probably sell while the getting is good.

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Re: Should I Sell Dallas Rental Condo?

Post by tj » Mon Nov 02, 2015 10:26 pm

I hated being a landlord, but you're a pro at it. Based on your numbers, It doesn't seem like it's that great of an investment.

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Re: Should I Sell Dallas Rental Condo?

Post by denovo » Tue Nov 03, 2015 12:12 am

I personally dislike renting something like a 1 bedroom. You're mostly going to get single people with a lot of high turnover in the long-run. Also the conventional wisdom is that one-bedrooms don't appreciate as much. I also hate condos since there's an outside party that controls a large part of the decisions surrounding your investments. I'D SELL!

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Re: Should I Sell Dallas Rental Condo?

Post by southbay » Tue Nov 03, 2015 12:24 am

I would sell.

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Re: Should I Sell Dallas Rental Condo?

Post by magneto » Tue Nov 03, 2015 6:55 am

Hi Meg

Thought you were a determined Real Estate Investor (based on previous posts). :)

A quick calc ignoring the leverage suggests you are getting a yield of 4.4% real on the investment.
Cannot immediately think of another asset class in the present climate giving that kind of real yield. :(

The leverage at 3.25% - infl (say 1.5%?) = 1.75% real, can be considered the cost of leverage applicable to the whole portfolio.
That 1.75% real is then the real yield benchmark to beat.
Stocks presently 2.1% real, bonds 2.03 - infl = 0.53% real.

Being all for balanced portfolios; sugggest decision should be based on what the rest of the portfolio looks like.
You do seem heavy on real estate!.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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Re: Should I Sell Dallas Rental Condo?

Post by Meg77 » Tue Nov 03, 2015 3:58 pm

Thank you all for the responses! I'm still waiting to hear back from the tenant regarding locking into another 1 year lease, so for now I will just see what she says. If she's willing to renew or if I can lease it quickly I will probably keep this for another year and re-evaluate. Yes, it's not the highest yielding rental property but it also is relatively low maintenance (which is why I still manage it myself), and it's financed by one of my cheapest (and smallest) loans.

I talked it over with my husband last night, and if we are going to sell any of the rentals I would almost rather sell some of the higher maintenance and potentially higher liability units - which also have more expensive mortgages - even though they technically look better on paper from a cash flow perspective. I guess it's just a matter of lifestyle and goals preference which is why I struggle with the decision a bit. Sometimes I get the overwhelming urge to simplify our finances, and other times I'm fine with complexity if it boosts returns. I'm probably in a bit more of a conservative RE mindset this month since we found out we may need a new roof on our homestead that insurance won't cover... :annoyed
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Re: Should I Sell Dallas Rental Condo?

Post by furnace » Tue Nov 03, 2015 4:16 pm

It's so easy to build in Texas. I don't know how Texas housing can even appreciate :confused

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Re: Should I Sell Dallas Rental Condo?

Post by Meg77 » Wed Aug 24, 2016 1:13 pm

UPDATE 8/24/16: Last year after this post, my tenant agreed to a year lease at $1400 so I kept the unit. I just sent her an email yesterday letting her know that I plan to sell the condo and won't be renewing the lease in November when it matures (I also told her if she wants to or can move sooner I won't charge her anything since I'd really rather list it sooner than later to ensure a closing by 12/31 for tax reasons).

This has been a really difficult decision since this was my first real estate purchase and big independent financial decision. Selling is a big step closer to having my finances more fully integrated with my husband but also feels like giving up a big part of my independent self.

The condo has increased in value to $185K, and I'll get about $85K out of it after sale which is almost exactly enough to pay off another rental mortgage I have at 5%. The ROE on this condo is only 2%, and appreciation will probably hover in the 2% range if I had to guess, so it makes sense to sell and pay off a 5% mortgage. Even if I owned this place free and clear the ROI would be just 3.3%. Too low to justify keeping all that cash tied up in a rental.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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Re: Should I Sell Dallas Rental Condo?

Post by goodenyou » Wed Aug 24, 2016 7:45 pm

Maybe Mommy and Daddy will buy it for her. You can discount the price 6% by having no realtor fees. All you need is one repair (and hope it is not a major one) for you to be really underwater. Sell it is a great idea.
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Re: Should I Sell Dallas Rental Condo?

Post by nolapepper » Wed Aug 24, 2016 8:38 pm

My experience: if you do not plan to hold something, sell it early or when it is hot. You never know what is going to happen. We waited one year to sell our small business and lost tens of thousands of dollars. Also, emotion in investing is a dangerous thing.

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Re: Should I Sell Dallas Rental Condo?

Post by Carefreeap » Thu Aug 25, 2016 10:24 am

Meg77 wrote:UPDATE 8/24/16: Last year after this post, my tenant agreed to a year lease at $1400 so I kept the unit. I just sent her an email yesterday letting her know that I plan to sell the condo and won't be renewing the lease in November when it matures (I also told her if she wants to or can move sooner I won't charge her anything since I'd really rather list it sooner than later to ensure a closing by 12/31 for tax reasons).

This has been a really difficult decision since this was my first real estate purchase and big independent financial decision. Selling is a big step closer to having my finances more fully integrated with my husband but also feels like giving up a big part of my independent self.

The condo has increased in value to $185K, and I'll get about $85K out of it after sale which is almost exactly enough to pay off another rental mortgage I have at 5%. The ROE on this condo is only 2%, and appreciation will probably hover in the 2% range if I had to guess, so it makes sense to sell and pay off a 5% mortgage. Even if I owned this place free and clear the ROI would be just 3.3%. Too low to justify keeping all that cash tied up in a rental.


Congratulations on making this difficult decision. :sharebeer

People have a hard time understanding how real estate professionals can get emotionally attached to their properties.

I'll confess to chickening out earlier this year on the sale of my mom's condo in San Diego. It's increased in value by about $200k-$250k since I took over the payments in a short sale from her estate in 2008 but it barely cash-flows. I've paid off about $100k of the original loan so there's a fair amount of equity.

We sold another property instead. But I'm going to have re-assess if the new tenant leaves in June 2017 (and I think he will to buy a house). My husband and I have agreed that we want to simplify our lives. And while most of our real estate has been good to us, we realize that as small LLs we are at the mercy of our tenant's lives!

tj
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Re: Should I Sell Dallas Rental Condo?

Post by tj » Fri Aug 26, 2016 12:22 pm

Congrats!

I sold my condo around this time last summer and when I checked ZIllow the other day, the Zestimate is only a few thousand higher than I sold it for, but the stock market has been on fire. Looks like I made the right call (got lucky).

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badbreath
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Re: Should I Sell Dallas Rental Condo?

Post by badbreath » Fri Aug 26, 2016 5:53 pm

Yes sell
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