Author Topic: Circumstances have changed for rental property - Sell or Stay The Course?  (Read 943 times)

Ty Webb

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One of my rental properties is right downtown in a prominent location in my city. The area has seen a dramatic rise in real estate prices and lots of new development. It is one of three rowhouses on the corner of a good size city parking lot. It is a nice place inside and brings a in decent rent for good cashflow every month.  I bought it with the thought of a developer purchasing the parking lot for a new condo tower and making me a good offer for the rowhouse a few years down the road.  Now the city has announced it will be using the lot as the site for a new community housing tower that will be 12 stories tall or more with mostly geared-to-income units and some market value units. This will basically surround the rowhouse on one side and behind it. So the tower will be a rectangle with a bite out of one corner around my rowhouse and the two neighbouring rowhouses. I asked the city if they were interesting in buying our rowhouses and incorporating them into the project, they said no. I talked to the neighbour who owns both of the other rowhouses and he is interested in buying mine for a little bit more than what I paid for it. Basically it would be as if I had never bought it in the first place.  Do you guys think that the community housing project will drastically reduce the future value of the rowhouse, what would you do?

lhamo

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Re: Circumstances have changed for rental property - Sell or Stay The Course?
« Reply #1 on: February 17, 2018, 09:18:02 PM »
How large is the three-house plot?  Is it large enough/zoned so that it could eventually still be developed into a larger building?

I'm guessing the owner of the other two units is probably holding out for that possibility.

Ty Webb

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Re: Circumstances have changed for rental property - Sell or Stay The Course?
« Reply #2 on: February 18, 2018, 07:28:27 AM »
The footprint of three rowhouses is around 60í x 60í right up against a busy intersection downtown but possibilities will be limited by the highrise towering over it on two sides.  I think the time to sell is now or never.

toganet

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Re: Circumstances have changed for rental property - Sell or Stay The Course?
« Reply #3 on: February 21, 2018, 01:53:48 PM »
Will the new development reduce the rents you can get?  If you think the cashflow potential is going to dry up, and future value will be lower, I'd say sell.  But I'd want to get more than one offer, if I could.

Capt j-rod

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Re: Circumstances have changed for rental property - Sell or Stay The Course?
« Reply #4 on: February 21, 2018, 02:22:04 PM »
if it makes money and will continue to do so then I say let it ride. You can always sell it. I have two properties that are worth way more than I have in them, but I can't replace them with the same margins if I sell them. It will be interesting to see where this thread goes...

Ty Webb

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Re: Circumstances have changed for rental property - Sell or Stay The Course?
« Reply #5 on: February 21, 2018, 05:25:43 PM »
Itís possible that the new development will reduce the amount of rent I charge, first because of the noise and mess of construction, then because of the privacy issue and possible stigma of a low--income housing tower looming over the rowhouses. Hard to say for sure though.
« Last Edit: February 21, 2018, 06:01:49 PM by Ty Webb »

FINate

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Re: Circumstances have changed for rental property - Sell or Stay The Course?
« Reply #6 on: February 21, 2018, 06:00:17 PM »
We have a somewhat similar situation.

Our rental property is very cash flow positive. But with the huge run-up in prices/rents around here our investments are now way too RE heavy. I know, great problem to have. On the other hand, IMO the city it's in is generally mismanaged -- economy is booming and still they're running deficits with growing unfunded pension obligations on the horizon -- so we were already considering getting out. More recently there's been a move to implement rent control that looks to have a reasonable chance of passing.

Even though the property has great cash flow (could not get anything similar if we bought RE now), we are leaning on getting out. But I get the delima you're in. Difficult to make long term decisions about rental property because its a large chunk of change and the real estate market is so local and unpredictable.

We'd like get out of landlording and avoid the headaches and potential long-drawn out problem of dealing with a rent controlled property (very aware of what has happened in places like SF), but avoid a large tax on capital gains. Our current thinking is to do an owner move-in on the rental property and sell our current primary residence (in neighboring city), which would allow us to take advantage of the real estate exemption. This would reduce our exposure to the RE market without a tax on our appreciation. We'd have to pay taxes on the depreciation we wrote off on the rental unit, but after living there for 2 years we can sell it and take the real estate exemption again (rental property has appreciated about 60% since purchase). After cashing out of our current HCOL area we'd move to a LCOL area with better than dysfunctional governance.

For now this is the plan we're most serious considering. Interested to see what other thoughts and ideas pop up on this thread.
« Last Edit: February 21, 2018, 11:22:35 PM by FINate »

Capt j-rod

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Re: Circumstances have changed for rental property - Sell or Stay The Course?
« Reply #7 on: February 22, 2018, 11:08:17 AM »
I can't really help you guys in the HCOL areas. Our RE is very reasonable in my area. I am looking to transition out of residential and move to farmland and commercial property. Less return but way less responsibility. I've never heard of fixed rent in a community. That is insane. It could lead to slum property with no incentive to compete for better tenants with nicer property. This is what metro housing has done to our area. Private supply and demand keeps the market alive. I have a two bedroom that rents for double of the metro housing rate in my area. It is very nice, granite, ss appliances, tile shower, hardwood floors, sky lights, custom cabinets, radiant floor heat, central air. The tenant loves it and swears she will live there for the rest of her life. My buddies thought I was crazy for doing it and pumping that much work into a rental in a LCOL community. Bottom line was supply and demand. I have one of the VERY FEW nice rentals in town.

FINate

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Re: Circumstances have changed for rental property - Sell or Stay The Course?
« Reply #8 on: February 22, 2018, 03:45:26 PM »
I've never heard of fixed rent in a community. That is insane. It could lead to slum property with no incentive to compete for better tenants with nicer property.

Yep. Pure insanity. The vast majority of economists agree with you that it lowers the quality (and quantity) of housing supply. The negative effects of rent control are one of the best understood and least contested issues in economics. But this is California, land of magical thinking, so damn the torpedoes, full speed ahead!

FatFI2025

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Re: Circumstances have changed for rental property - Sell or Stay The Course?
« Reply #9 on: February 22, 2018, 05:53:47 PM »
I would sell in this case. Housing projects are bad for nearby rents and valuations. Another option to consider is to do a redevelopment with your neighbor, either now or later. If they can build a tall building, so can you.

ChpBstrd

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Re: Circumstances have changed for rental property - Sell or Stay The Course?
« Reply #10 on: February 23, 2018, 08:00:34 AM »
I doubt you'll sell to a buyer who will fail to find out the news about the new building. This event is already priced in, so don't worry about timing. In fact, some buyers will stay away until they see how the new construction pans out.

In terms of whether you should accept your neighbor's offer, consider your entire portfolio. Is it too RE heavy? Are you too exposed to property-specific risks? Do you wish you were getting your yields from a diversified, no-maintenance REIT?

FWIW, I'd be more concerned about rising interest rates.

Ty Webb

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Re: Circumstances have changed for rental property - Sell or Stay The Course?
« Reply #11 on: February 23, 2018, 08:23:41 AM »
I have my principal residence plus two rental houses. I have more RE equity than I have invested  in stocks. I am locked into a good rate for the next 4-1/2 years on the rental houses, both have good cash flow for that period at least.  The city itself is rapidly gentrifying, housing orices have already doubled in the last 6-8 years and still have a lot of upside left.  The only thing scaring me about this particular property is the immediate  proximity of the community housing.  I actually contacted the head of city housing and tried to sell them on buying us out and partnering witha condo developer to add a dozen stories of market value condos to the development to  bring in $40-$50M in revenue. They donít seem interested in the idea.