Appreciated rental property. Sell or keep?

[TheBeeKeeper]

we have a rental property we bought 3 years ago for 200K$. We get for it 2K gross, but the property tax is very high in NYS! I'd say we net 14K$ per year in rental income after tax and repairs.
It can now be sold for 300K.

while the cashflow is nice, we could certainly use the money for paying off our mortgage (about 200K at 4%) and investing the rest for the long term,
but I'm not sure if it's a good idea with the capital gain tax that we will have to pay. We are in the 15% bracket.

[Drifterrider]

Do the math.  Look at the numbers (keep vs sell).

What puts you in a better position and lets you sleep better at night?

Based on the information you provided, your rental house is paying the mortgage on your residence. 

[TheBeeKeeper]

yes, the rental pays the mortgage of my residence.

if I sell I will have no mortgage :-)  + some change after tax and selling costs

Either options has its pros and cons, and also my inability to predict the future. The house is not likely to depreciate in this location , but there is maintenance and other things that could happen.. I'm on the fence!

[acroy]

I personally would take advantage of the overheated house market while it lasts, and sell! Invest the proceeds or pay off your own mortgage, whichever makes sense.
Rent home:
- Ties you down in a large illiquid investment
- Leads to 'over-exposure' in real estate from an investment perspective; unless your net worth is quite high and this is a small portion of it.
- Finally: rental properties are seldom as profitable as people hope they are....

I personally own some nice high-yield REIT. Someone else does all the heavy lifting, for which I get 8-12% return. I'm ok with that!

[zinethstache]

We own rentals and have the same quandry. Very large % of appreciation on all of them in the last couple of years. Be sure to evaluate the payoff of your home with any long term passive income goals. I am tempted to sell, but we are in a buy and hold for passive income business model AND are stock market phobic (no REITs in our future).

We did recently decide to list one property as it is very old and comes with some tenant drama we would like to not be a part of. It cash flows as well as our other properties. It hasn't sold so after 90 days we will take if off the market and will go back to buy and hold. Our plan was to combine with money from the sale of our large anti-mustachian primary residence to pay cash for something smaller and more tenant friendly as we want to RV travel when we retire. We can still accomplish that more slowly as I am still working. It felt like a great idea to try kill two birds with one stone.

I will be watching to see what you decide.

Ah and definitely do the math as the depreciation recapture is a killer. You are early in that process so now is likely your best chance to get out, after 10 or more years selling (unless you do a 1031) will come with a big tax bill.

My biggest issue is losing that monthly income. We've enjoyed our business model thus far (PM to handle tenants, DH handles all maintenance). Expenses have been low overall, with a few bumps along the way.

I am conservative which means having our residence paid off hits close to home and was how I was raised. However tying up money in our house is not the best use of the money either.

[SwordGuy]

As another poster mentioned, check out that depreciation and the tax implications!

As an alternative example, you could sell for $300,000.
Pay taxes and realtor. :(
Buy three properties and fix them up for $50,000 apiece.  That's totally doable in my city.   Rent for $750 to $850 each.
Put the rest on your own house.

Cash flow would be similar and your house would be paid off sooner.

[ShoulderThingThatGoesUp]

Aren't you exempt from long term capital gains taxation in the 15% bracket?

[MandyM]

I use this thought process with my rental: http://www.mrmoneymustache.com/2015/07/02/if-you-wouldnt-buy-it-you-should-probably-sell-it/

I know the sale price (at my current rental rate) where my property is no longer a "good investment." If it seems to appreciate above that, I'll unload it.

[TheBeeKeeper]

I use this thought process with my rental: http://www.mrmoneymustache.com/2015/07/02/if-you-wouldnt-buy-it-you-should-probably-sell-it/

that is a great article!
in my specific situation the selling price of the house is still within the range of a good investment I think..
I am leaning towards selling , but I'm not completely sure because of the cashflow, and the location . It's in a college town and super easy to find good tenants.

[TheBeeKeeper]

Aren't you exempt from long term capital gains taxation in the 15% bracket?

I don't know. I think it does not apply for real estate? will have to check this.

[clarkfan1979]

keep it.

[Telecaster]

yes, the rental pays the mortgage of my residence.

if I sell I will have no mortgage :-)  + some change after tax and selling costs

Either options has its pros and cons, and also my inability to predict the future. The house is not likely to depreciate in this location , but there is maintenance and other things that could happen.. I'm on the fence!

If I understand you correctly....

You could make $100K by selling the house, correct?   (we'll neglect taxes for the moment).    In exchange for having that $100K tied up in the house, you're netting $14K/year, or 14%. 

Or you could sell it, and use that $100K to pay off your mortgage and save 4%.   Unless I'm missing something, you would be crazy to sell the rental.   The rental is printing money.    And paying off your mortgage is a marginal proposition anyway. 

[TheBeeKeeper]

If I understand you correctly....

You could make $100K by selling the house, correct?   (we'll neglect taxes for the moment).    In exchange for having that $100K tied up in the house, you're netting $14K/year, or 14%. 

no, I sell the rental for 300K, use 200K for paying off my mortgage of my primary residence , and have 100K$ in change (excluding tax and other selling costs).

So I have 300K$ tied up in the house, which is 4.67%/year if I don't have major things to pay in fixing things that break in the rental property.

[jtriplett]

Refinance the rental property and pull out equity you can.  Plenty of places will give you 80% LTV right now at like 4% interest.

You can probably get like 60k out of a refinance.  The mortgage on the rental is still deductible of course.  Take the 60k and buy another rental property, or put it into investments to save for a few years incase there is a fire-sale of properties when the next downturn happens. 

Remember that CASH FLOW is the key to FIRE.  Your primary residence will always be a net hole to pour money into no matter what your mortgage level is.  The more CASH FLOW you have the better your FIRE will be.  I've heard a LOT of stories of RE investors that always regret selling cash flowing properties too early. 

Keep it forever.  Refinance and pull equity out, buy more properties, increase cash flow, FIRE!

[Telecaster]

If I understand you correctly....

You could make $100K by selling the house, correct?   (we'll neglect taxes for the moment).    In exchange for having that $100K tied up in the house, you're netting $14K/year, or 14%. 

no, I sell the rental for 300K, use 200K for paying off my mortgage of my primary residence , and have 100K$ in change (excluding tax and other selling costs).

So I have 300K$ tied up in the house, which is 4.67%/year if I don't have major things to pay in fixing things that break in the rental property.

Gotcha, that makes more sense, thanks for the clarification.  I see that's what you wrote originally, I should have read more carefully.   However, I agree with jtriplett below.