Should I sell my rental?

[SaraB]

Hello!
I'll try to make this short... I bought a primary in 2013 before the boom in Northern Colorado, which is now a rental. The mortgage is $1000 and it rents for $1650. Because we lived it two of the last five years if I sell it within the next 11 weeks I won't have to pay capital gains tax. in case your not familiar with this market, at this time, 11 weeks is not unreasonable and homes in this price range generally go under contract in a few days. I owe 165 and I could likely sell it for 300-310 (if not more but I want to be conservative). I do not have a real estate license  so after fees I think I would walk away with ~117K.

So my options are to sell now and walk with the cash or keep it as a long-term rental for passive income. I may try to post this in the real estate forum as well. Thanks in advance!

[Archipelago]

You're losing money on this property. Sell ASAP, avoid capital gains, and invest all the proceeds.

[Chickadee]

Okay I am a greenie and new to this but I read somewhere on here rent should be 1% of value (or something on that line)

By that measure unless your rent is over 2800(??) you should sell.

Plus avoid cap gain tax.

In regard to capital gains tax ...

If property sells for less than 250,000 there is no tax ever right?

[ecchastang]

Given that you haven't factored vacancy, maintenance, property management, cap ex, etc, you are probably barely breaking even at best.  The question is, do you think prices will continue to go up at the same rate as the last 5 yrs or so?  I would lean 65% to sell and 35% to keep.

[Papa bear]

1) the numbers provided, rents of 1600 and value of 310 makes this house more valuable as a primary residence than as a rental.

2) how much did you pay for the house?

3) tax free capital gains is amazing.  You likely won’t ever get this opportunity again. If you sell after it’s been a rental for too long, expect to pay major taxes unless you 1031 exchange into a new property.  And then it’s only really a tax deferral (some loopholes exist)

4) you’re probably only clearing 100 / month at best when you factor in all true expenses.  This gives you 1200/yr on 117k in Capital.  That’s just a tad over 1%.  You can make better money in a bank account.

5) do you even like being a landlord?  While you may not have had to do any work for awhile, this is still a business, sometimes with crappy clients and sometimes requiring massive amounts of time, capital, or both. 

6) all this to say - SELL THIS HOUSE! Congrats! You made a boatload of tax free money! Take it and run! This opportunity won’t come back again in the future! List it today! 

7) in case I wasn’t clear. SELL SELL SELL!!!!!!!!


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[SaraB]

@Papa bear You made me laugh, thank you for the advice. I know it makes more sense to sell it but we really had hoped to move back into it when the girls have moved out and it's paid off. @Chickadee The 1% rule generally applies to new purchases. You want a new purchase to cash flow 1% of the total purchase price. Because we are a married couple it's 500K, and of what you MAKE on the house. It is a pretty sweet deal but the truth is I'm emotionally attached to the house and it's clouding my judgement!

[Chickadee]

Thank you for explaining it to me!

Best wishes to you ! I totally get the emotions - check out my sell my rental post. I needed the sound advice here to clear my mind and heart.

Ok this is the #1 thing I learned about renting my home...

Do not love a rental. It will be like a loaner car. You can not get emotions into rental or your pocketbook suffers and your heart aches. It took me 3+ years to learn that.

[SaraB]

@Chickadee Thank you so much. I will look for your post! I really do love that house. My mother and I were homeless for a while when I was a teenager and when I bought that house it was VERY emotional for me. I really wanted to retire there. I know it makes more sense on paper to sell but some of this is un-spreadsheetable. Did you sell your place?

[Papa bear]

@Papa bear You made me laugh, thank you for the advice. I know it makes more sense to sell it but we really had hoped to move back into it when the girls have moved out and it's paid off. @Chickadee The 1% rule generally applies to new purchases. You want a new purchase to cash flow 1% of the total purchase price. Because we are a married couple it's 500K, and of what you MAKE on the house. It is a pretty sweet deal but the truth is I'm emotionally attached to the house and it's clouding my judgement!

Emotions play a big role in this.  Sometimes they make you do things that aren’t in line with maximizing profit.  You are not a business with shareholders.  You don’t have to maximize profit.

If you really are going to move back in some day, and you really really like the location, then it might not be terrible to hold on.  Just know that you have capital tied up in something that isn’t making you money. 

We can’t answer this question for you because we can’t put a number on the value on your intangibles.

As for the 1% rule, it is very important when you’re buying a place. But it is still important for houses you already have.  There is the opportunity cost of capital to consider.  The 1% rule will give you an idea if the property would still be a good rental or if it’s better off sold to as someone’s primary residence. 






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[Archipelago]

@Chickadee Thank you so much. I will look for your post! I really do love that house. My mother and I were homeless for a while when I was a teenager and when I bought that house it was VERY emotional for me. I really wanted to retire there. I know it makes more sense on paper to sell but some of this is un-spreadsheetable. Did you sell your place?

There you go then, you're doing an awesome service by selling your home to the next family. They will be very happy there, and you will save over $10k in taxes. Total win-win.

[Chickadee]

@Chickadee Thank you so much. I will look for your post! I really do love that house. My mother and I were homeless for a while when I was a teenager and when I bought that house it was VERY emotional for me. I really wanted to retire there. I know it makes more sense on paper to sell but some of this is un-spreadsheetable. Did you sell your place?

In the process now - have accepted an offer!

[MoneyMatrix]

I think much of the decision to sell or not depends on 2 things. Current cashflow and future potential of the area.
Well 3, the 3rd is how you feel about having rentals and the occasional issues that come up.

Taking into account all expenses and potential expenses (Property management, vacancy, maintenance, repair, and capital expenses-like a roof), do you make money?

Future potential of the area - What will it be worth in 20 years? Are there jobs in the area and potential for more, is there limited land for development?  Those are the 2 things that mainly determine value and growth.  You said it's a good area , so you are partway there.

My personal experience is that if I have a rental that I like in an area I think has future potential it's much easier to ride out the issues that come up and down times.

These are some things to think about as well as the emotional issues you talked about.

[Archipelago]

For now, she may be breaking even by renting it but that area is going to continue to go up in value.

Could I take a look through your crystal ball, too?

[ecchastang]

The other factor to consider here is if the OP ever plans to move back to the area. 

[Jon Bon]

I think these responses were pretty short sighted and keeping the property was the way to go. If she wants to return to the area later in life buying may be out of the question the way Northern CO is booming. She got in at the right time. For now, she may be breaking even by renting it but that area is going to continue to go up in value. My recommendation would be to hold very long term. Someone else is paying that mortgage and rents in that area will continue to go up as well. Then either retire there or use the rental income as your retirement when the house is paid off.

You are completely ignoring opportunity cost.

Sure someone might be "paying the mortgage" But all that equity is earning zero dollars. So in fact they are losing money on holding the property. I agree staying in the area would be nice, but me thinks there might be other houses that could suit the OPs needs for sale if that situation ever arises.

However if OP is FIRE and RICH sure keep the house for purely sentimental reasons. It would just be some real expensive sentiment.