When we moved out of the first house we ever bought, we kept it as a rental because the move was out of state and we weren't sure if it was going to stick. We're past that now. It's been a rental for almost 7 years so we fully understand what being in the landlord business entails. It's been managed by a company all this time and we've had a good experience with them.
The ROI on the house has never been fantastic. Our current tenant's lease is up this summer. They've been paying $1,900/month on an 18-month lease, which is waaaay under market with the inflation we've experienced these last two years. Market rate on our place is about $2,300 now. Maybe $2,400 because there is practically nothing available in our zip code.
If we were listing the house right now I'd say the sale price would be 350-360k. I know the numbers for the area well so that's a solid expectation with recent sales to comp. If interest rates edged down this year and demand picked up this summer, who knows, maybe it would push up to 380k. Again, the key consideration is that there is basically nothing for sale in our zip code.
My primary reason for selling would be to access our equity. We had refinanced to a 15 year mortgage before we moved and there's only a few years left on it. We have 275-300k of equity, depending on the exact particulars of a sale, that I wouldn't mind making liquid. We currently have ~400k in brokerage accounts that we can pull from and we're halfway through the first 5 years of our Roth conversion pipeline. Capital gains, including depreciation recapture, on a sale would be 80-100k. We have set ourselves up so that this would be the bulk of our income in 2024 if we sell.
Before upkeep and vacancies, the house will net 17k at $2,150/month. Our current tenant has been there almost 4 years and my guess is they would stay because everything else is more expensive. Plus they have two young kids and the middle and elementary school are right behind our house. The management company has done a good job of minimizing vacancies and I understand enough now to know that keeping a tenant in place a bit under market rate more than pays for itself via no vacancy or turnover costs. When this tenant leaves we likely need to replace most of the carpets and the flooring on the entire main level. It's a small townhouse (1,200 sq. ft. above grade) but it'll still be a few thousand dollars at minimum.
Comparing 17k net rental income to 280k from a sale is a 6.0% rate of return. Not particularly great. I feel like we are always lagging market rate so I don't think that return will ever be 8%. The house is 26 years old. One nice thing about being a middle unit is minimal exterior maintenance. Roof was replaced in 2021. Gas furnace is original but we replaced a control board in 2016 and it's run without a hitch. It's an extremely high efficiency furnace (92-93%) and it's possible it could run for 40 years. Or it could die next year. A/C was replaced in 2008 from a lightning strike. At least we're not dealing with freon but the system is 16 years old now. Fridge 2011. Dishwasher 2018. Stove 2020. Washer 2022. Dryer 2023. When appliances die we replace them. I feel like we've faired better than average there.
If we keep the house, there will inevitably be some larger repairs in the near future and that will cut into the middling ROI. Then again, both home prices and rents in our Maryland suburb lagged the broader inflationary trend these last two years and the area seems to be catching up now. I'm seeing some larger townhomes pushing 3k in rent. I'd guess if we wanted to commit to new carpet and flooring, updating vanities, doorknobs, and that sort of thing to what is currently trendy we could very well pull in $2500-2600/month.
The one thing the area has going for it is its solid long-term prospects for stability. Hurricane, wildfire, and flood risk are all as minimal as it gets. As an interior unit townhome constructed with newer building standards its very inexpensive to heat and cool. Water resources are fairly abundant (Potomac river). The immediate area is going to experience moderate growth and the larger Baltimore/DC metro area will be stable as long as government work is plentiful.
The only real reason I'd like to have the equity in the house liquid is for the possibility of moving west in the future. We could see ourselves relocating to the front range eventually and home prices there are considerably higher than all the East Coast areas we've lived. We'd likely need the cash to make a purchase there feasible. Though we have no imminent plans to relocate and I don't have great confidence in whether we'd actually move or not. Both my wife's and my entire families are in Maryland. Denver makes visiting much tougher.
Part of me would like to sell while RE prices are up and there's no ACA subsidy cliff. Capital gains would put us over. Part of me sees the appeal in continuing to own an RE asset that will likely be a solid, middle of the road performer for decades to come, especially if there is no serious reason to need that liquidity right now. However, the lesson the Great Recession taught me was that liquidity should be planned for ahead of time.
We have one other rental here in Wilmington. The ROI on it (12-13%) is considerably better because our equity is lower. It's also a new (2022) house so expected upkeep is minimal in the near future. However, I have some concerns about the long-term viability of rentals in this area. Insurance companies are asking the state insurance commission for a 75% increase in insurance this year. It'll end up being much lower than that but this is the new reality of these coastal areas where hurricanes can strike every year.
Perhaps I'm underestimating the viability of a 1031 exchange in the future, were we to relocate out west. We have enough equity in our two rentals that we could do an exchange and then rent our new place on the front range for a couple years before moving in. The time constraints on a 1031 exchange might not be for us though. We'd probably be pretty picky about where we wanted to live. It'd likely end up being a reverse exchange where we buy a place first and then sell our current rentals. I don't know what the costs associated with doing something like that are but maybe it's not that much better than just paying some capital gains and having complete freedom of operation.
Any thoughts from other RE investors here? Maybe there are factors others think about regarding keeping a rental or not that I haven't really considered.