Sell or rent home - possible vacation rental or business use.

[Marvel2017]

My wife and I own a single family home in a highly sought after Historic neighborhood in our City. Guess you would say it's "Class A"? The property is also zoned Multi-Use (and Multi-family), so it has expanded use possibilities beyond just residential (some of the houses in the neighborhood have restaurants, retail shops, etc in them-we could do the same if wanted or rent to these type of businesses for operation on the property). There is the main house at the front of the property (1,400sqft 3BR/2.5BA) and an apartment at the rear of the property (600sqft 1BR/1BA). The property is pretty much fully renovated with all new HVAC, roof, etc so maintenance should be relatively low moving forward. The lot the property sits on is worth more than the structures sitting on it, because 1) location and 2) it's zoned in such as way that a developer could do a lot with the property by building more square footage (larger house, etc). When the house is fully used/run down we could probably sell just the lot for $500K or tear down and develop ourselves and profit that way (sqft sale prices are between $250 and $450/ft in our neighborhood depending on size of the house). Lots of possibilities, it's not your typical cookie cutter type house/area, which is why we're really on the fence about what to do. Would appreciate any opinions/suggestions.

So...we are planning to travel extensively out of the country (US residents, just have some "wander lust" right now) and trying to decide what to do with the house. We've been renting the main house for about the last four years and living in the apt in back for the last two. So if we sell, we would have to pay capital gains of about $60K.

My wife likes the idea of renting it out so we'd have some income coming in while we're living overseas (I'm not sure that I'll work while we're there for at least the first year or so). Below are the "monthly income/expenses" of the property that I'm calculating:

OPTION 1: Sell

Sale price: $600K

HELOC (payoff): -$75K

Cap Gains: -$60K

Realtor Commission (5%): -$30K

WALK AWAY FROM SALE WITH $430K free and clear.

OPTION 2: Long Term Rental as residence (would be higher for renting to a business though, and could also do vacation rental-the area is highly desirable for tourists and it's a large industry here)

(Monthly)

Rental Income (Gross): $4,250

Prop Taxes and Insurance:  -$490

HELOC payment: -$275

Vacancy (5%): -$212

Maintenance (8%): -$340

Property Mgmt (8%): -$340

So net income would be about $2,600/month and then there would be the depreciation tax advantage against the income, etc.

OPTION 3: (Cash out refi equity in the house and buy other rental properties to leverage the equity)

Thoughts on the cashflow of this relative to the sale price of the house (considering the cap gains hit, etc) and future possibilities of the property? I feel like the cash flow is a pretty low-risk endeavor given the class of the property/neighborhood but I don't know-thoughts from the experts? Thanks!

[Cwadda]

We've been renting the main house for about the last four years and living in the apt in back for the last two. So if we sell, we would have to pay capital gains of about $60K.

Is the main house and the apartment on the same property? If yes, you may not have to pay capital gains because you've occupied the apartment, though it is still classified as the same property. Ask your accountant.

What did you purchase the property for?

Would you consider doing FSBO if you did sell?

[Marvel2017]

Yes, it's on the same property, one lot.
The purchase price was $240K without the garage apt on site. We paid about another $120K to build the garage apt. It was purchased by my wife as her residence, then we moved to another house and rented this one out, then moved back into the garage apt when that was completed a year and a half ago.
I've thought about FSBO, and researched it, because I feel like the % model is just ridiculous for a $600K property. And because our house is on a very high profile street in a high profile area of town, with buyers swarming. It's a huge sellers market here.

[Cwadda]

Yes, it's on the same property, one lot.
The purchase price was $240K without the garage apt on site. We paid about another $120K to build the garage apt. It was purchased by my wife as her residence, then we moved to another house and rented this one out, then moved back into the garage apt when that was completed a year and a half ago.
I've thought about FSBO, and researched it, because I feel like the % model is just ridiculous for a $600K property. And because our house is on a very high profile street in a high profile area of town, with buyers swarming. It's a huge sellers market here.

Could you keep living there and wait until you're eligible to not pay capital gains on the whole property? I'm not sure exactly if this would work, you'd have to ask your accountant.

I'd recommend learning about FSBO and considering it. It could be $30k worth your time. Even if you spend 50 hours doing that, that's $600/hr.