Case Study: Sell rental properties?

[CptJack83]

I own 3 properties in the city that I live in.  2 Duplexes I rent out and 1 single family home (my primary).   My net cash flow on the two duplexes ($2,150/mn) more than covers the mortgage on my current home ($1,750/mn).   So essentially I am living rent/mortgage free while I maintain the 3 properties.  (taxes and insurance included in all quoted payments)

Both Duplexes have appreciated nicely since I've purchase them.  I could sell them both right now and my net proceeds would be enough to payoff the mortgage on my current primary residence.   If I did this I would then have to pay my property taxes and insurance out of pocket (~$650/mn), so my cash-flow situation would worsen, however I'd be eliminating $625,000 of debt from my balance sheet and be left with a free-and-clear primary residence.  I have about $120,000 of principal invested in the 3 properties, not including the rental profits from the last 4 years.

The rental properties have been great and I've had very few issues while having good quality tenants.  But with the valuations being so high, and economic uncertainly potentially on the horizon the idea of shifting to a much less risky balance sheet is intriguing.  My long term plan was always to rely on those two properties to provide reliable cash-flow to my FIRE master plan, but parlaying a $120k total investment into a free-and-clear $350,000 home is cool to.

Duplex 1:
200K loan @ 4.875% - $1,650/mn mortgage
Gross Rent - $2,800
Net Rent - $1,050 after utilities
Estimated Value $325,000

Duplex 2:
175K Loan @ 4.875% - $1,500/mn
Gross Rent - $2,700
Net Rent - $1,100
Estimated Value - $310,000

Primary:
250K loan @3.00% (ARM adjusts 1/1/2023)
$1,750/mn
Estimated Value $350,000


My gut is to continue renting them, but I think its an interesting case study and am curious to see what others think.

Other data points:
35yo
$0.00 other debt
$300K - IRA+401k
$50k - cash
2 other rental properties, $24,000/yr in NRI combined

 

[waltworks]

I would sell both. I bet including set-asides for Capex and maintenance, and paying yourself something reasonable to manage, you're slowly losing money renting them.

-W

[CptJack83]

I would sell both. I bet including set-asides for Capex and maintenance, and paying yourself something reasonable to manage, you're slowly losing money renting them.

-W

this year on Duplex 1, before accounting for the items you mentioned, I had a gross profit of $15,823 ($4,491 principal + $11,331 cash flow). Tenants cut grass and shovel snow as part of the rent.  I live less than 1 mile and have a very flexible work schedule so I don't mind doing the routine maintenance, Setting aside 1% of property value for CapX ($3,250), I'm far from losing money, unless i'm missing something.   

[tralfamadorian]

I would keep them. They're cash flowing and providing tax benefits. Why throw that away for a 3% return?

[waltworks]

I would sell both. I bet including set-asides for Capex and maintenance, and paying yourself something reasonable to manage, you're slowly losing money renting them.

-W

this year on Duplex 1, before accounting for the items you mentioned, I had a gross profit of $15,823 ($4,491 principal + $11,331 cash flow). Tenants cut grass and shovel snow as part of the rent.  I live less than 1 mile and have a very flexible work schedule so I don't mind doing the routine maintenance, Setting aside 1% of property value for CapX ($3,250), I'm far from losing money, unless i'm missing something.

I think I just use more conservative assumptions (don't count mortgage paydown, 10% for vacancy, 10% for a manager/$100 an hour for me management, quite a bit more than 1% for Capex and maintenance, etc). The shit-hits-the-fan factor is captured (for me) by those conservative numbers. But if you have good luck (no bad tenants, natural disasters, lawsuits, etc) you can certainly cash flow on what you have.

I also didn't figure out for a second that you're on 15 year loans, which does make a difference in your favor.

I'd want (after accounting for all expenses including capex/oh shit fund) to cash flow at least $10k a year for that property. Otherwise I'd just dump the $100k in stocks and not have to do anything.

-W

[calimom]

I'm in the "keep" camp. But I'm fond of real estate and co-own a duplex that cash flows nicely with good tenants so I'm biased.

You sound like a good, reasonable landlord and these properties sound good quality and not high maintenance in any way. Out of curiosity, what are the other two rentals?

Any reason you can't divert more of the profit into non or taxable accounts monthly?

[cchrissyy]

Those are good rentals and things are going smoothly. I'd keep everything they way it is and reevaluate in a few years. The only thing that concerns me in your situation is the ARM on your primary residence but you have time to either pay it down, sell it, or sell a duplex later if you want.

[CptJack83]

Both investment properties are on a 30 year fixed, not a 15.

I max out all my available tax advantaged accounts, 401k, HSA, IRA.   I don't own any taxable investment accounts, I've always considered real estate to be my taxable investments.   I essentially try and live with as low spending as possible and divert all excess funds to investments.  My goal with the ARM was to have it significantly paid down/off by the time it resets.  My savings buckets being, Tax Advantaged Investment Accounts, Investment Real Estate, Primary residence home equity. 

The other two rentals are single family homes I rent out to college students near my alma mater.  The returns are fabulous and its a fun way to stay connected to the university.   My fortunes there are tied to the overall heath of the university, so I've hedged slightly by owning more stable rentals in my home town.

[Another Reader]

I'm kind of meh on the rentals, but I would look at how well you are protected in the event the economy goes south.  You need to make the payments on the primary, and I would run some numbers with the highest allowed adjustments to see how much of a bind you could be in if that happens and some of your other assumptions turn out to be overoptimistic.