Author Topic: Keep or Sell a duplex in order to FIRE in the next few years  (Read 2246 times)

Landlady

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Keep or Sell a duplex in order to FIRE in the next few years
« on: March 31, 2017, 02:19:25 PM »
I own a duplex and triplex in Seattle's core neighborhoods. I've lived in the duplex 4 of the last 5 years, and am thinking it might make sense to sell to avoid capitol gains. Most of my net worth is in the real estate sector so selling would be a diversification opportunity.

Is it a no-brainer to sell now or should I hold and continue getting better rental profit?

Purchase price (2012): $373,000
Loan balance: $318,000, 26 years left, 3.25% assumable FHA mortgage
Monthly rents: $2,300 & $2,200
Net annual profit (after taxes, mortgage, maintenance, insurance): $20,844

Estimated market value: $850,000 - $1,000,000
Estimated selling costs: $55,860
Estimated $ in my pocket after sale: $576,140


I raise the rent on each unit by ~3% a year and the rents are at a fair market value. The house is well maintained. The lot is 4,000 sqft and zoned low rise which means a developer may be interested in building two structures even though the house is already a good investment property. It's also a desirable option for owner occupied because of the floor plan.
I would be selling without an agent so my estimated selling costs are based on the buyer's agent commission, excise tax, title ins. and escrow fees.

My selling hesitation is that property values and rents will continue to rise in Seattle and I will have missed an opportunity by selling too soon. Also I know that I'll get a set income with the monthly rents, but the stock market fluctuates. I do not mind being a land lord and have imagined doing it into old age. I'm 34 now.

My goal is to semi-fire in the next few years.

Thanks in advance for reading and offering your insights!

rachael talcott

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Re: Keep or Sell a duplex in order to FIRE in the next few years
« Reply #1 on: March 31, 2017, 04:40:26 PM »
Robert Shiller published a paper awhile back analyzing RE as an investment over the long term, and he found that although RE fluctuates over decades, over the long term prices are flat once adjusted for inflation. So in my own analyses, I assume no real price appreciation of my properties. 

If you put $576K in the stock market you would only need to withdraw ~3.5% to get the $20K profit that you're now getting from rent.  (I'm assuming you've already taken out capital gains taxes)

If I were you, I'd sell.




ClovisKid

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Re: Keep or Sell a duplex in order to FIRE in the next few years
« Reply #2 on: April 02, 2017, 08:32:11 PM »
So, this is a tricky one for me to answer because I am a landlord who thinks real estate is a terrible investment versus the stock market over the long run.  Each individual situation is different, so let me share my thoughts on yours based on what you shared.

The stock market is high right now.  It could go higher, but probably not by a huge amount.  Earnings simply can't keep up.  It could also go suddenly lower.  Seattle real estate is hot right now.  It just hit an all-time high based on the Case-Schiller index.  Real estate is a momentum play.  It takes a relatively long time to go up, and usually doesn't fall suddenly.  I think Seattle real estate has room to go higher over the next few years.  You are leveraged at 3.25% -- super low for a partial rental.  You cannot avoid capital gains tax over the homeowner exemption limit, but it's only 15% anyways.  Not bad.  Right now, your asset is appreciating tax free and you have room to raise rents.  You are young and being a landlord doesn't bother you.  I'd keep the property and keep riding the real estate wave in your part of the country.  The local employment there is strong and continues to grow.  Real estate is driven by employment.  You can time your sale better.  Keep it for a few years.  If the stock market tanks 25%, put it up for a quick sale and invest the proceeds in the market.  Just be prepared to price it to unload it quickly.  You don't ever have to try to time the exact top.  You rarely/never will.

Congrats on the timing of your purchase and the awesome appreciation you've gotten.  Keep it insured, and enjoy the ride!   

frugal_c

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Re: Keep or Sell a duplex in order to FIRE in the next few years
« Reply #3 on: April 02, 2017, 08:46:16 PM »
I would be very tempted to keep it.  ClovisKid provides a good summary of the situation and I agree with it.

The only thing I will add is that you should be including principal payment in your profit.  I am not sure if you are or not.  If not your profit is even higher than listed which will tilt things even more heavily towards the RE.

I would watch the market, read real estate blogs, talk to people and wait for some build-up in inventory before you get out.  RE isn't like the stock market where it just starts randomly plummeting.  Well not usually anyways, not from what I have seen.  Usually you will see inventory build-up substantially then prices stall and then they fall.  If you are paying attention and are ready, you should be able to get out if you need to.

Cwadda

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Re: Keep or Sell a duplex in order to FIRE in the next few years
« Reply #4 on: April 02, 2017, 09:00:17 PM »
Cash out refinance, get rid of PMI, and dump the cash into the stock market? Then collect rent to pay off new 30 year mortgage?

Landlady

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Re: Keep or Sell a duplex in order to FIRE in the next few years
« Reply #5 on: April 10, 2017, 12:23:08 PM »
I thought I could avoid capitol gains altogether by having lived in the property at least two of the last five years. Is this not true?

Thanks for the thoughtful replies. I guess it's not a "no-brainer" as I was hoping. :)

I do like the idea of holding a bit longer and keeping tabs on an increase in inventory on the market. I do not think Seattle's market will break (maybe plateau), especially in core neighborhoods. Expedia is moving next door so I think the house will be in a great position to continue as a rental for many years.