Author Topic: Letting go is hard!  (Read 833 times)

rothwem

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Letting go is hard!
« on: December 22, 2020, 07:22:22 AM »
Does anyone else own a rental property that is massively over-appreciated to the point where it doesn't really make sense to own anymore? 

I know I should sell mine, but I'm not really sure I'd know what to do with the proceeds from the sale.  RE-wise, nothing really cashflows in my immediate area, or the area where the house is located.  The stock market seems like an obvious place, but without leverage, it seems inefficient.  There's also significant exposure if all of my savings are in the stock market, I like the diversification of my setup right now.  The tax benefits are nice too, and with a low interest 3.5% loan, principle paydown is no joke, I'll make $5000 in equity by the end of next year. 

Lastly, from a touchy-feely standpoint, I've worked my ass off to take it from shitheap to a pretty nice property, and it will most certainly be bulldozed if I sell it (its in one of the nicest neighborhoods in town) and I think that would be tough to see. 

I plan to keep it another year, maybe see what happens.  Am I nuts?  You guys can tell me.  Here are the numbers, in case you're wondering-

Rent: $2500

Original Purchase Price: 254000
P&I: 1392.04
Taxes (annual): 2989
Insurance (annual): 802

Maintenance Budget: 3500
Vacancy: 8.4% (one month per year, though I've never actually had it this high)

Cashflow: $290.38
Annual Profit Minus P&I: 3484.54

Here's the nutty stuff:
Mortgage Balance: 310,000 (cashed out)
Market Value: 465000
Current Sale Profit with Realtor Fees: 127100

Paper Chaser

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Re: Letting go is hard!
« Reply #1 on: December 22, 2020, 08:54:16 AM »
I don't know all the details with your refi, and that's probably messing with the numbers, but when I put your given numbers into this rental calculator I get a cap rate of 7.2% and -3.7% cash on cash return:

https://sparkrental.com/rental-property-roi-calculator/

If that's all correct, then selling and harvesting the appreciation is looking pretty good. If nothing else, put your own numbers in there and see what you get.

Dicey

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Re: Letting go is hard!
« Reply #2 on: December 22, 2020, 08:56:48 AM »
Exactly why do you want to sell? Is there really such a thing as over-appreciation? Absent more info, my answer is hell no!

Also, if you're saying you paid it off, then you're failing to consider opportunity cost in your "over-appreciation" calculations.

rothwem

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Re: Letting go is hard!
« Reply #3 on: December 22, 2020, 10:19:25 AM »
Exactly why do you want to sell? Is there really such a thing as over-appreciation? Absent more info, my answer is hell no!

Also, if you're saying you paid it off, then you're failing to consider opportunity cost in your "over-appreciation" calculations.

I guess my thought is that if I were to sell today, I could potentially realize the appreciation and walk away with 127k.  It would take me a long time to make that in cashflow. 

I don't know all the details with your refi, and that's probably messing with the numbers, but when I put your given numbers into this rental calculator I get a cap rate of 7.2% and -3.7% cash on cash return:

https://sparkrental.com/rental-property-roi-calculator/

If that's all correct, then selling and harvesting the appreciation is looking pretty good. If nothing else, put your own numbers in there and see what you get.

Yeah, I can't really figure out how to do it with the refi in there.  Would all the maintenance costs over the past 6 years go into the "initial renovation" spot? 

affordablehousing

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Re: Letting go is hard!
« Reply #4 on: December 22, 2020, 10:36:27 AM »
Can't you just increase the rent? That seems cheap to me. I have a similar situation, and I figure it might be nice to have an alternate place to stay in a zombocalypse, have a house to give to a kid, or eventually use as an out of the city retreat. Usually I would expect the rent to rise more unless it's an ultra-heated market, in which case rising rents might be lagging prices if you're in an area experiencing in-migration from Covid. If you wait, rising rents that catch up with prices should help your cash return.

rothwem

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Re: Letting go is hard!
« Reply #5 on: December 22, 2020, 02:51:23 PM »
Can't you just increase the rent? That seems cheap to me. I have a similar situation, and I figure it might be nice to have an alternate place to stay in a zombocalypse, have a house to give to a kid, or eventually use as an out of the city retreat. Usually I would expect the rent to rise more unless it's an ultra-heated market, in which case rising rents might be lagging prices if you're in an area experiencing in-migration from Covid. If you wait, rising rents that catch up with prices should help your cash return.

Rent is actually right at market.  Its a duplex and each unit is only 720 square feet, which limits how much I can charge (currently at $1250/side) despite it being in an extremely nice location. 

PMJL34

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Re: Letting go is hard!
« Reply #6 on: December 22, 2020, 03:40:49 PM »
OP,

Numbers are screaming sell right now. Currently, you are only cashflowing $500 at best (with no vacancy and I assume you are self-managing). But you already know this :)

If you are hell bent on keeping it, you can cash out refi again? Not sure, it would be wise though.
What are your goals long term? Did you plan to keep this home forever?
What would you accomplish by keeping it one more year?
Do you own more than one rental?
Also out of curiosity...what year did you buy this home?
« Last Edit: December 22, 2020, 03:43:04 PM by PMJL34 »

Jon Bon

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Re: Letting go is hard!
« Reply #7 on: December 23, 2020, 07:09:55 AM »
What about taxes here? I mean that is going to be a huge hit. Not sure what your rate is our how you are structured but that honestly is the biggest factor in this IMO. To be honest I feel your pain, the asset has become more than an asset to you.  I don't blame folks for loving their first house/car/etc.

Assuming you an find a way to limit your taxes a little bit I think you should consider selling. However I kind of have the same situation on a few of my houses. The money that the fed keeps helicoptering in makes being a landlord great in terms of appreciation(speculation) and terrible in terms of cash flow. So in good faith I will run my numbers on my rentals and report back!








rothwem

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Re: Letting go is hard!
« Reply #8 on: December 23, 2020, 09:05:21 AM »
What about taxes here? I mean that is going to be a huge hit. Not sure what your rate is our how you are structured but that honestly is the biggest factor in this IMO. To be honest I feel your pain, the asset has become more than an asset to you.  I don't blame folks for loving their first house/car/etc.

Assuming you an find a way to limit your taxes a little bit I think you should consider selling. However I kind of have the same situation on a few of my houses. The money that the fed keeps helicoptering in makes being a landlord great in terms of appreciation(speculation) and terrible in terms of cash flow. So in good faith I will run my numbers on my rentals and report back!

I kinda forgot about taxes. Depreciation recapture will probably be a bitch and capital gains too, unless I try to do a 1031, which will be tricky to find another place >465k that cash flows.

OP,

Numbers are screaming sell right now. Currently, you are only cashflowing $500 at best (with no vacancy and I assume you are self-managing). But you already know this :)

If you are hell bent on keeping it, you can cash out refi again? Not sure, it would be wise though.
What are your goals long term? Did you plan to keep this home forever?
What would you accomplish by keeping it one more year?
Do you own more than one rental?
Also out of curiosity...what year did you buy this home?

Yeah, no reason why I canít cash out again, assuming rates stay low. My long term plan was to keep it forever, but I foolishly thought rents would keep up with the home value and they havenít. I have made a number of improvements that I probably wouldnít have messed with if I wasnít planning on keeping it long term. Itís my only rental though and I bought it six years ago.

PMJL34

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Re: Letting go is hard!
« Reply #9 on: December 23, 2020, 10:53:20 AM »
OP,

If you purchased 6 years ago, that's not that long ago. Did you ever live in it? Any possibility of capital gain exclusion (even if it's partial)?

If it's your one and only rental and you want to keep it forever, that's understandable. How badly do you want to cash out? Many people are fine just keeping it as is for diversification from stocks. I mean it's not the optimal use of your equity, but it may not be the end of the world.

waltworks

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Re: Letting go is hard!
« Reply #10 on: December 23, 2020, 04:41:22 PM »
I don't get emotionally attached to houses (or any inanimate physical objects, really) but it can really sting to cough up capital gains and depreciation.

-W

Mr. Green

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Re: Letting go is hard!
« Reply #11 on: December 24, 2020, 11:55:40 AM »
If you want to try avoiding a nasty tax bite all in one year looking in to structured sales. Similar to an installment sake but doesn't hang up the deed transfer. Basically, the proceeds go into a trust and you get paid out on the terms you dictate when setting up the trust. IRS says taxes are paid in the year you receive payouts. It costs a little money to setup and maintain the trust but if there's a significant tax savings it could be well worth it.