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Sell or rent?

Started by groovyone, December 09, 2018, 12:15:25 PM

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Looking for some input on whether I should sell or rent out a property. Keep going back and forth and I feel like i'm a little bit of a unique situation (nothing I can find elsewhere). For some background, I'm late 20's, single, and no kids (yet).

Fall 2015: bought a brand new 3BR/3BA townhouse in a "rough-around-the-edges" neighborhood that I saw a lot of potential in. Paid 460k, put 95k down.
Fall 2018: bought a new house in another turnover neighborhood. My view on the townhouse's neighborhood panned out and I listed the townhouse for 675k and was under contract in under 2 weeks. It appraised and inspected but the buyer walked due to personal issues.  >:( :(

Now, a couple months later, I'm on the verge of an offer in the ~650k area. Will be able to pull out a decent amount of equity. I don't have an immediate or expected future need for the money, it would just be invested.

However, I also just got an offer to rent for 2 years at $4k/mth. My monthly cost is 2.4k/mth before rental income tax so it would cashflow well, especially if I depreciate the asset (understand I'd have to add it back at a sale). Running the numbers it seems like an after-tax investment income of 6% on the equity would be the equivalent rental cashflow.

So then there's the appreciation/depreciation part of the equation. The broader housing market for the area is definitely softening but the specific neighborhood is still booming. Lots of high quality office space under construction within 3-4 blocks that will lease out over the next 1-2 years. While I've seen the area change drastically over the past three years, quite a few projects are right near the end of construction so it feels like I'm not quite realizing the benefits of what is about to come. Not quite sure what the cap on the value would be (before people just live 10 min further away, or are deterred by congestion). And the newness/appeal of the townhome will certainly fade with age while other housing projects could fill the area as well. I'm also potentially the first in my development to sell in the last 2 years and have the opportunity to set the price now. Versus risk someone else with an inferior unit selling in a hurry and setting the market at a lower price-point.

Renting at 4k/mth on a 460k purchase doesn't quite clear the 1% rule-of-thumb, certainly not at the 650k current value. I have my apprehensions on renting such a nice, newer place. Feels like it'd be a little less risky to rent two, 300k properties instead. I do not have landlord experience but do live and work less than 15 min from the townhome. Could be convinced to hire a property manager as well.

I have 3 years left on my ARM, and I could only rent for 3 years to take advantage of the tax-free gains for a primary residence sale. The 2-year lease fits this nicely. However, feels like I could be boxing myself into a sale in 2-3 years during a soft part of the cycle and be long quite a bit of real estate in one place at my relatively young age in the meantime. However, without a foreseeable need for the equity, a ~6% equivalent return and the potential for some more price appreciation is appealing. Friends around me keep suggesting to rent because they're bullish on the area, but they aren't landlords either.

Am I missing anything here? Curious what others would do in my shoes....


$4K/month That's great Rent versus the selling price.

Where is the property? To give you an idea of how crazy valuations are in San Francisco, I only get $4300 a month in rent and my neighbor with an identical unit sold last year for $1.36 million.

Even though the market is slowing and in some places going down, that rent is great and I would just keep it forever.




With a 10.64 Gross Adjusted Yield / Cap Rate, I think that is a great cash flow, especially with your primary residence rate. $460k purchase for $4000 monthly rent is very good.

Is this investment property 30 minutes from where you live or out of state? Keep in mind, when you sell your home will incur both the depreciation recapture tax (25%) and capital gains tax (15%). If this home is close by for you to self manage and you are not cash poor, I would definitely continue to hold it for that cash flow. What mortgage rate do you have on this property? What market are you in?



Thanks all for the replies. Property is in a big city in the southeast. Rents feel like they're finally starting to soften a bit just due to a drastic increase in apartment supply. Thankfully there aren't a ton of townhouse type rentals, or 3 bedrooms, so the rents are still pretty high for those. I'm at a 3.125% rate on an ARM for 4 more years. I lived in the property for 3 years so I have another 3 years where I could rent and then sell without capital gains considerations.