SHOULD I SELL OR KEEP THIS RENTAL PROPERTY?
There are pros and cons to to each of these 3 strategies. Keeping this property as a rental means good cash flow and no tax bill. It’s the easiest solution. I would need to spend around $10,000 to make the property rent ready and then I could rent it out to a new tenant and get around $1,700 a month in rent. That sounds great, and the cash flow is great too but there are other factors to consider.
Prices in this market are very high right now (I paid just $32,000 for this property 5 years ago). Fixed up I could probably sell this house for $240,000. That is a seriously large appreciation rate. It works out to be around a 400% return over 5 years. One thing to consider is the neighborhood. Do I want to keep this property as a long term hold in my portfolio for 15 or more years or possibly forever? Or would I be better off taking my money off of the table and paying the capital gains tax?
These types of lower income neighborhoods are often the first to go down in value when the market corrects. And I think that we are definitely overdue for a correction. Could this happen? Will this happen? I can’t know for sure. But I can tell you that the buyer fever where cash investors are scrambling to buy properties, and the low 3% interest rates coupled with artificially low inventory because of Covid are gone. Those days are simply gone. And inventory is gradually starting to increase.
The “wannabe” landlords that are investing in these types of neighborhoods are probably going to bail when they realize how hard it is to maintain properties in a low income neighborhood. There will be more inventory. There will be more sellers. It will be harder to get a mortgage. There will be less buyers. And prices may decline by as much as 25% or even 30% over the next few years.
Since the long term capital gains tax rate is only 15%, if prices declined by 15% I would be in the exact same situation as if I had held the property (minus the cash flow). So if you don’t mind paying the capital gains taxes, taking money off of the table is probably a good idea. The way I calculate the return, is I look at the current cash flow on the rental after factoring in mortgage payment, property taxes, insurance, maintenance, evictions and vacancies. I look at the “net cash flow” per month that this property will generate for me.
Then I look at how much cash I will net after selling the property and paying commissions and closing costs and taxes. I take that net cash number and calculate what return I can get on that cash. Since I lend my personal money to my coaching students for fix and flips at a rate of 12% per year, it is safe to assume that I can get 12% on that cash. I compare that cash number to the cash flow on the property and I can see where I will get a better return with less headache.
