To Sell and Make $100K or Not to Sell

[joshbrand111]

I am new to this whole mustachian lifestyle and hoping for some guidance as we work hard to become debt free and minimize our monthly expenditures.  As I work towards this new lifestyle  I am debating whether or not to sell a rental property to pay down personal debt or keep it as a long term investment.  We make a healthy profit on the monthly rent so I am in a bit of a dilemma.  So here is the breakdown and I would appreciate all of your inputs and guidance on the best approach.

Townhome: Currently, I rent our townhome for $1,750/month.  After paying all the bills associated with the property (mortgage, HOAs, etc.) it nets approx $750/month.  I could sell the townhome and make approx $100K on the property.  I have only rented it a year and would not have to pay any capital gains tax on the profit.  The outstanding balance on the rental property is approx $130K at 3.75% interest.

Personal debt:
Primary mortgage: $280,000
Car:  $22,000 total for two cars.  We purchased luxury cars a few years back because we felt we deserved it since we both had long commutes and worked hard for our money (LOL here).  Interest is only 1% on the loans.  I don't think selling them is the best approach right now as I can't get two reliable cars needing little maintenance for less than $11K/each.
Student Loans:  $50K.  Approx.

So here is the dilemma.  Do we sell the townhome and pay off all of our debt minus our primary mortgate or keep the rental property and apply the monthly profits to pay off our debt (cars, student loans, mortgages).  I think short term it makes sense to sell the townhome, but longterm it seems it may be a better option to keep since the profit margin is high.

Looking forward to hear all your inputs as to what you would do in my situation.  If you need more specific information let me know!!

Thanks

Josh.

[mom2_3Hs]

So $750/month = 9,000 per year, with some repair, maintenance, and headache costs.  That is equivalent to earning 9% on your 100K.  Got any guaranteed 9% interest investments?  Those are hard to find, and I'm willing to bet that you are paying less than that rate on your loan.  There is the confounding variable of paying income tax on that $9,000, but if you have your depreciation and deductions set up correctly, it should still come out ahead.  BUT you MUST be religious about putting that money towards your debt, not living off of it.

[Axecleaver]

You might want to crosspost this in the real estate forum. There are some people there who do this as their primary occupation and might be able to advise you better. Also take a look at biggerpockets.com.

But on the surface, it sounds like you have a nice, cash-flow positive investment that is generating some passive income for you. Those are hard to find!

When you look at what you're making from the property, don't forget to include your mortgage principal payments. So you're netting $750 in cash, plus maybe ~$300 in mortgage principal every month (I'm guessing, depends where you are in the amortization schedule). That's about 10% a year on a cash-out of 100k equity. Doesn't make a whole lot of sense to pay down a 4% mortgage with that.

As the money comes in, throw it at your highest-interest debt first, and do what you can to keep your expenses down.

[historienne]

Your logic on the cars doesn't make sense to me. How much would they sell for?  Unless you owe more than they are worth, you can sell the cars, buy cheaper replacements, and come out ahead. 

[humbleMouse]

Personal debt:
Primary mortgage: $280,000
Car:  $22,000 total for two cars.  We purchased luxury cars a few years back because we felt we deserved it since we both had long commutes and worked hard for our money (LOL here).  Interest is only 1% on the loans.  I don't think selling them is the best approach right now as I can't get two reliable cars needing little maintenance for less than $11K/each.
Student Loans:  $50K.  Approx.

I think you should keep the rental property and put all of the profit from it towards student loan debt. 

Also, it is very possible to find reliable low-maintenance cars for under 11k/each.  I drive a 99 camry with 150k miles that requires oil changes and new tires once and a while.  It is insanely cheap to insure/maintain.   

[RWD]

Personal debt:
Primary mortgage: $280,000
Car:  $22,000 total for two cars.  We purchased luxury cars a few years back because we felt we deserved it since we both had long commutes and worked hard for our money (LOL here).  Interest is only 1% on the loans.  I don't think selling them is the best approach right now as I can't get two reliable cars needing little maintenance for less than $11K/each.
Student Loans:  $50K.  Approx.

I think you should keep the rental property and put all of the profit from it towards student loan debt. 

Also, it is very possible to find reliable low-maintenance cars for under 11k/each.  I drive a 99 camry with 150k miles that requires oil changes and new tires once and a while.  It is insanely cheap to insure/maintain.

Agreed. There are new cars with a MSRP of around $12k, so it should be trivial to find a reliable used car for under $11k.

[Jeremy E.]

When dealing with Rental Properties you have to take into consideration the fact that you won't always have tenants, and that you'll have to do maintenance. A lot of people will use the 50% rule, which means 50% of the income from the rental house will be used for expenses (not including the mortgage). I think that rule is a bit extreme, as it would suggest you would be losing $125/month. If you are a good landlord and have a desirable house, you can probably keep tenants slightly better, and if you do the maintenance yourself, and replace unfixable appliances with used rather than new appliances, you should make good profit from it. I would keep the rental if you don't mind the work. Either way good luck!