Author Topic: When To Sell An Income Property  (Read 1904 times)

Jon Bon

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When To Sell An Income Property
« on: July 05, 2018, 06:40:05 AM »
Does anyone have a general rule on when to sell a property? I realize on some level this is trying to time the market, which is almost always a bad idea but I at least want to have the conversation.

My general rule around when to buy a rental property is usually around the 1% rule which has served me well in the past.  Now Rents in said property have increased say 10% but the value of the property has probably increased 50%. Would you guys sell? 1031? Take the tax hit?

Purchase Price:200,000
Monthly Rent: 2,000
Current Value: 300,000
Current Rent :2,200

I get cold calls every few weeks or so asking to buy, I also would have to figure out where to put the extra 100k I would be making off this ignoring taxes.

Let me know what you think!


rothwem

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Re: When To Sell An Income Property
« Reply #1 on: July 05, 2018, 07:13:32 AM »
Oddly enough, my rental property has almost the exact same numbers as yours. Are you in Raleigh?

Anyways, I wouldn’t sell yet, the 6% of sale price alone (from realtor fees) is a fifth of your profit. Then you factor in taxes, I don’t think it’s worth it.

If you really want to capture the profits, I’d do a cash out refi or a home equity loan to use as a down payment on another property. Or maybe to buy a boat/home electronics/diesel truck/diesel truck lift kit pieces.

Jon Bon

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Re: When To Sell An Income Property
« Reply #2 on: July 05, 2018, 07:47:14 AM »
Oddly enough, my rental property has almost the exact same numbers as yours. Are you in Raleigh?

Anyways, I wouldnít sell yet, the 6% of sale price alone (from realtor fees) is a fifth of your profit. Then you factor in taxes, I donít think itís worth it.

If you really want to capture the profits, Iíd do a cash out refi or a home equity loan to use as a down payment on another property. Or maybe to buy a boat/home electronics/diesel truck/diesel truck lift kit pieces.

Ha no midwest, not ACC country.

Yeah the 6% would be substantial but I can get it listed for $500 bucks on the MLS so that would be something. I feel selling a property like this you might be able to get away with a lower fee to the buyers agent? Or perhaps selling to a fellow invested where both of you handle the sale sans agent.

Taxes though.... I think I have about 20k in deprecation, so paying my marginal rate on 120k feels like highway robbery!


Yeah a loan might be an option.

CptJack83

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Re: When To Sell An Income Property
« Reply #3 on: July 05, 2018, 08:02:58 AM »
The metric I generally use when thinking about selling, is what my current return on equity is, and what other investments are currently available.  So if my property value goes up a lot, but my rents don't increase as much, my return on equity is going down.  If I feel I could find a new under valued property i'd consider selling.

Lets say you make $10,000/year on the rental.  If your original equity position in the property is $50,000, you have about a 20% return on your equity.  If the property appreciates and you now have $100,000 in equity, and your profit is now $12,000/year, you now are only returning 12% on your equity. 

If you think you could find other investment opportunities that would earn more than the 12%, it might be worth it to look into selling.  OR as the other poster recommended refinancing and tapping that equity would also boost your ROE.

Obviously you'd have to factor in all the costs of selling, taxes etc.

But to me it is really what is your opportunity cost of not selling.  What else could you invest in if you sold the property and re-invested the net equity.   I think people fall in love with their rentals and are emotional about selling them.  But at the end of the day it is just an investment decision.

Jon Bon

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Re: When To Sell An Income Property
« Reply #4 on: July 05, 2018, 08:15:50 AM »
The metric I generally use when thinking about selling, is what my current return on equity is, and what other investments are currently available.  So if my property value goes up a lot, but my rents don't increase as much, my return on equity is going down.  If I feel I could find a new under valued property i'd consider selling.

Lets say you make $10,000/year on the rental.  If your original equity position in the property is $50,000, you have about a 20% return on your equity.  If the property appreciates and you now have $100,000 in equity, and your profit is now $12,000/year, you now are only returning 12% on your equity. 

If you think you could find other investment opportunities that would earn more than the 12%, it might be worth it to look into selling.  OR as the other poster recommended refinancing and tapping that equity would also boost your ROE.

Obviously you'd have to factor in all the costs of selling, taxes etc.

But to me it is really what is your opportunity cost of not selling.  What else could you invest in if you sold the property and re-invested the net equity.   I think people fall in love with their rentals and are emotional about selling them.  But at the end of the day it is just an investment decision.

@CptJack83 you are good at the maths.............. :)

Yeah those numbers stack up and I agree with your theory. I very much agree about people holding onto rentals way past time of selling them. Yes 12% return is good, but beating that is not easy.  I have relative certainty that the 12% return is going to continue, I have zero certainty that I would get that return in the S&P or any other index.

I guess the broader observations is that the prices I got to experience during the great recession have ruined me to what things cost today. I am like a grandpa talking about how a candy bar used to cost 10 cents!


CptJack83

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Re: When To Sell An Income Property
« Reply #5 on: July 05, 2018, 10:20:16 AM »
Please note, the "12% Return" is just a hypothetical.  Not an actual calculation based on the numbers you provided.  You'd have to analyze your property to determine what your returns are.

AccountingForLife

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Re: When To Sell An Income Property
« Reply #6 on: July 10, 2018, 06:27:02 PM »
Ask yourself - would you buy that property today if you didn't own it?

Fishingmn

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Re: When To Sell An Income Property
« Reply #7 on: July 10, 2018, 07:09:28 PM »
Yeah the 6% would be substantial but I can get it listed for $500 bucks on the MLS so that would be something. I feel selling a property like this you might be able to get away with a lower fee to the buyers agent? Or perhaps selling to a fellow invested where both of you handle the sale sans agent.

Taxes though.... I think I have about 20k in deprecation, so paying my marginal rate on 120k feels like highway robbery!

You might want to talk to an accountant. Typically, the taxes aren't at your marginal rate. The 20k in depreciation recapture would be at 25% no matter your tax bracket and the capital gains (assuming long you've held more than a year) would be at 15%.

tralfamadorian

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Re: When To Sell An Income Property
« Reply #8 on: July 10, 2018, 07:28:59 PM »
Yeah the 6% would be substantial but I can get it listed for $500 bucks on the MLS so that would be something. I feel selling a property like this you might be able to get away with a lower fee to the buyers agent? Or perhaps selling to a fellow invested where both of you handle the sale sans agent.

Taxes though.... I think I have about 20k in deprecation, so paying my marginal rate on 120k feels like highway robbery!

You might want to talk to an accountant. Typically, the taxes aren't at your marginal rate. The 20k in depreciation recapture would be at 25% no matter your tax bracket and the capital gains (assuming long you've held more than a year) would be at 15%.

This is actually a common misconception. The depreciation recapture is taxed at your marginal rate or 25%, whichever is less. (Unless this was changed in the new tax bill but I don't believe it was).

Fishingmn

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Re: When To Sell An Income Property
« Reply #9 on: July 11, 2018, 09:43:13 AM »
Yeah the 6% would be substantial but I can get it listed for $500 bucks on the MLS so that would be something. I feel selling a property like this you might be able to get away with a lower fee to the buyers agent? Or perhaps selling to a fellow invested where both of you handle the sale sans agent.

Taxes though.... I think I have about 20k in deprecation, so paying my marginal rate on 120k feels like highway robbery!

You might want to talk to an accountant. Typically, the taxes aren't at your marginal rate. The 20k in depreciation recapture would be at 25% no matter your tax bracket and the capital gains (assuming long you've held more than a year) would be at 15%.

This is actually a common misconception. The depreciation recapture is taxed at your marginal rate or 25%, whichever is less. (Unless this was changed in the new tax bill but I don't believe it was).

I believe you are incorrect. Here are 2 articles saying it's 25% even if your marginal rate is less than 25% -

https://www.biggerpockets.com/renewsblog/2015/08/23/depreciation-bite/

https://www.katehorrell.com/understanding-depreciation-recapture-taxes-on-rental-property/

CareCPA

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Re: When To Sell An Income Property
« Reply #10 on: July 11, 2018, 10:35:24 AM »
Yeah the 6% would be substantial but I can get it listed for $500 bucks on the MLS so that would be something. I feel selling a property like this you might be able to get away with a lower fee to the buyers agent? Or perhaps selling to a fellow invested where both of you handle the sale sans agent.

Taxes though.... I think I have about 20k in deprecation, so paying my marginal rate on 120k feels like highway robbery!

You might want to talk to an accountant. Typically, the taxes aren't at your marginal rate. The 20k in depreciation recapture would be at 25% no matter your tax bracket and the capital gains (assuming long you've held more than a year) would be at 15%.

This is actually a common misconception. The depreciation recapture is taxed at your marginal rate or 25%, whichever is less. (Unless this was changed in the new tax bill but I don't believe it was).

I believe you are incorrect. Here are 2 articles saying it's 25% even if your marginal rate is less than 25% -

https://www.biggerpockets.com/renewsblog/2015/08/23/depreciation-bite/

https://www.katehorrell.com/understanding-depreciation-recapture-taxes-on-rental-property/
No, he clarifies two years later in the comments:
"BRANDON HALL on SEPTEMBER 17, 2017 4:27 PM
@ Mike

You didnít get a reply because I didnít see your comment 🙂

If you are in the 10% bracket, your depr recap rate is 10%. If in the 15% bracket, your depr recap rate is 15%. If in the 25% bracket or above, you pay a 25% rate.

HOWEVER Ė keep in mind that the depreciation erodes the basis in your property, meaning it increases your gain which increases your taxable income. You can be happily sitting in the 10% or 15% tax bracket, sell a property, only to find that because you held it for so long your basis erosion from depreciation produces a large gain placing you firmly in the 25% tax bracket.

I have seen investors sell property at a loss yet still report a taxable gain due to basis erosion via depreciation. Example:

Buy a property for $100k, sell for $95k, but you took $15k of depreciation during the hold, thus your basis is $85k, so you actually have a $10k GAIN ($95k selling price Ė $85k basis).

When you look at the Sch D worksheet, youíll notice it focuses on taxable income. In my 15% taxpayer example in the article, you will notice that the depreciation over the hold period was $32,730. The property was held for ten years. Assuming, though unlikely, the net gain was $0 AND the taxpayer had $0 of other income, the taxpayer would only pay 15% on the $32,730.

However, thatís unrealistic, so I calculated at the 25% rate as the taxpayer likely has other income and capital gain on the 10 year hold.

Apologies for not explicitly explaining that."

Depreciation recapture at lower of 25% or marginal rate.
Often, the sale of a property will push you into the 25% rate, which is why it's used for estimates.

Teri

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Re: When To Sell An Income Property
« Reply #11 on: July 22, 2018, 01:22:34 PM »
Oddly enough, my rental property has almost the exact same numbers as yours. Are you in Raleigh?

Anyways, I wouldnít sell yet, the 6% of sale price alone (from realtor fees) is a fifth of your profit. Then you factor in taxes, I donít think itís worth it.

If you really want to capture the profits, Iíd do a cash out refi or a home equity loan to use as a down payment on another property. Or maybe to buy a boat/home electronics/diesel truck/diesel truck lift kit pieces.


I have a question related to this: If you were to refinance or take out a home equity loan as you suggest, would that increase your expenses (ie. interest on the loan)? The reason I am asking is I have a few revenue properties (one will be paid off in 4-5 years) and the other two I bought about a year.  The issue is that this year I made a profit on the properties which was added to my overall income (I work full-time). I am concerned that the income generated from the rental properties, added to income from work, will put me in a higher tax bracket. I am looking for ways to not have much "income" from the rentals.  I want it there when I retire but not now! Make sense?

Kierun

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Re: When To Sell An Income Property
« Reply #12 on: July 23, 2018, 01:49:35 PM »
Have you considered a 1031 exchange?

clutchy

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Re: When To Sell An Income Property
« Reply #13 on: July 26, 2018, 06:47:35 AM »
I tend to hold RE for long periods just b/c the associated transaction costs are so high. 


I'm currently sitting on $180k gain in socal and I can't bring myself to sell it...

YoungStache

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Re: When To Sell An Income Property
« Reply #14 on: July 28, 2018, 01:24:09 PM »
Are 1031 exchanges possible with rent-to-own lease options?

K-ice

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Re: When To Sell An Income Property
« Reply #15 on: July 30, 2018, 09:09:10 PM »
I would sell if managing it becomes a pita.  Or perhaps if you plan on investing in another property. For example selling a single family home to buy a 4-plex. Selling a 4 plex for a deposit on a 12-plex etc.

I am very biased, as my partner and I have never sold RE. Just continue to accumulate but lately I am focusing on other investments.

Also, I come from a family that used to own property in Vancouver (probably the most expensive place for RE in Canada and some argue the world). The last piece of which sold in the early 90's. I can't imagine the multi millions our family would have if we still owned the property my grandfather had in the 60's. Hearing my grandmother curse about the lost potential makes me never want to sell RE.