Author Topic: Selling a rental property in California  (Read 2426 times)

moneywookiee

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Selling a rental property in California
« on: January 24, 2016, 02:46:55 PM »
I own a town home that I purchased in 2012 in a really "hot" area just north of Los Angeles.  The value has appreciated 90% in the past 4 years and I'm considering my options.  We're currently leasing out the home but my cash flow isnt the greatest because the area has a high tax rate, an additional Mello Roos tax, and high HOA.  After factoring in insurance and property management fees I'm left with about $300 in net profit.  Although the homes location attracts quality tenants, they are also very finicky.  For example my tenant demanded I upgrade the air and water filters in the home to top of the line filters.

These are the options I'm considering: a) Sell and cash out.  Using the cash to invest but not in property as Los Angeles real estate is way over priced at the moment b) increase the rent on my tenant by $300-400 (in line with similar rents in the area)

Any advice would be greatly appreciated.

arebelspy

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Re: Selling a rental property in California
« Reply #1 on: January 25, 2016, 01:08:22 AM »
What are your long term goals?

Play out each scenario:
- raised rent, keeping that place
- sell that place, invest the proceeds elsewhere (where?)

I wouldn't sell until you have a concrete plan of where to invest the money, be that real estate or otherwise.

Of those two scenarios: What leaves you with a better quality of life?  What leaves you with more money?
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Another Reader

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Re: Selling a rental property in California
« Reply #2 on: January 25, 2016, 03:28:12 AM »
Numbers, please?  Is the property leveraged?  If you are subtracting only the operating expenses you have listed, you really are not positive in your cash flow over the long haul.  You have not considered vacancy and collection loss, repairs and maintenance, or capital improvements.

Why did you buy this property?  Was it intended as a rental, an appreciation play, or did you live in it and move for some reason (accidental landlord)?  If you were making an appreciation play, selling now might yield the highest return, given the muted prospects for appreciation over the next few years.  However, the real estate investor's problem is always what to do with the money - where is the next appreciation play or stable income property?

As ARS says, I would not sell until I had a well-thought out plan about what to do with the proceeds.  If you do sell, remember you will likely have to pay some significant taxes on the capital gain and the depreciation recapture unless you do a tax deferred 1031 exchange into "like property."

moneywookiee

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Re: Selling a rental property in California
« Reply #3 on: January 25, 2016, 10:51:15 AM »
Market Value:                                $350,000.00
Original Purchase price:               $200,000.00
Original Mortgage Amount:         $190,000.00
Interest Rate:                                3.75%
Mortgage Term:                        30
Term remaining:                        27
Amount remaining on mortgage: $178,000.00
Gross Rents:                                $2,200.00
Principal and Interest:                $890.00
Taxes and Insurance:                $704.00
HOA costs:                               $240.00
Deferred maintenance notes:        9% property management fee

All numbers rounded

The property was originally purchased as my primary home, but my commute was 50 miles each way.  When I was looking for homes closer to work everything seemed over priced (and still is) so I figured leasing out my home was my best option while I wait for home prices to stabilize.  I now have a 5mile commute to work and rent a small apartment I'm comfortable in.

The property is new construction, built in 2008, so my maintaince and repair costs are almost non existent.  Having said that, I do keep all profits in a separate account just in case. I'm 3years into a 15yr mortgage.   

My plan is to use the proceeds to eliminate 50K in debt (35K student loans, 15K car note) using the remaining balance to kick start my mustachian savings by investing in a long term fund.  Because I've been renting the home for less than a year I qualify for a capital gain tax exemption from the sale of my main home.  Overall I feel it would improve my quality of life because I'd be 100% debt free and I could boost my savings significantly toward early retirement.
« Last Edit: January 26, 2016, 09:40:53 AM by moneywookiee »

moneywookiee

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Re: Selling a rental property in California
« Reply #4 on: January 26, 2016, 09:41:32 AM »
Numbers added to my last post

Vee2001

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Re: Selling a rental property in California
« Reply #5 on: January 26, 2016, 08:24:55 PM »
From your numbers:
$2,200 (Gross Rent) - $198 (Prop Mgt) - $890 - $704 - $240 = $168/mo cash-flow under ideal circumstances?

Payments towards mortgage principal counts in your favor but vacancy and maintenance also needs to be accounted for.  Seems like a pretty poor return.

Especially since you can take the gains tax free, I would strongly consider selling.  I guess the numbers would change if you want to account for property appreciation but I usually just focus on the cash-flow.

Urchina

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Re: Selling a rental property in California
« Reply #6 on: January 26, 2016, 08:36:42 PM »
Three questions in addition to those that have been asked here:

1. Do you like being a landlord? If it's really not your thing, that's another reason to sell it. Life is too short to do things you don't like just for money.

2. Is owning property emotionally important to you? Would selling the place have a substantial positive or negative effect for you separate from the financial effect it would have?

3. Do you ever see yourself returning to that area to live?

MaikoTsumi

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Re: Selling a rental property in California
« Reply #7 on: January 27, 2016, 10:36:33 AM »
Rough guess, you're looking at $140,000-$150,000 in cash after taxes and commissions?  Outside of CA, that would purchase 7-9 class A/B properties in many markets.   In my area, that would mean an extra $2200-$2700 a month cash flow and I'm just talking about MLS.   

moneywookiee

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Re: Selling a rental property in California
« Reply #8 on: January 27, 2016, 02:01:44 PM »
Thank you all for your analysis, it's confirmation for my thoughts on selling.

Three questions in addition to those that have been asked here:

1. Do you like being a landlord? If it's really not your thing, that's another reason to sell it. Life is too short to do things you don't like just for money.

2. Is owning property emotionally important to you? Would selling the place have a substantial positive or negative effect for you separate from the financial effect it would have?

3. Do you ever see yourself returning to that area to live?

The answer to all these questions is no, also further confirmation that I should probably sell.  I found the landlord role to be stressful.