Is it a good time to sell an investment property?

Submitted by tc on April 18, 2017 - 8:36am
Yes
42% (8 votes)
No
37% (7 votes)
Undecided
21% (4 votes)
Total votes: 19
Submitted by tc on April 18, 2017 - 8:41am.

I haven't been on the site for some time. I love Piggington's and everyone who contributes to it.
Thanks for all the info Rich!
TC

Submitted by poorgradstudent on April 18, 2017 - 1:03pm.

Values are super high.

But rents are super high.

I guess what would tip the scales for me is how much of a hassle the upkeep on the property is, and how much work it would be to list it.

Submitted by spdrun on April 18, 2017 - 1:40pm.

Rents are falling in overheated markets like SF and NYC. Don't discount the possibility that the country as a whole is in a bubble.

Submitted by tc on April 18, 2017 - 2:20pm.

Thanks for the insight.

Submitted by gzz on April 18, 2017 - 4:59pm.

If you have a reason to sell it will be quick, easy, and you will get a great price.

But San Diego is one of the major RE markets that went up the least since 2011. Less than not just SF and Vancouver, but also random secondary markets.

It is kind of shocking to look at average rents and realize thet our rents are now barely more than places like Denver and Minneapolis. We were seeing 5 and 6% increases while other cities were in double digits multiple years.

Submitted by gzz on April 18, 2017 - 5:15pm.

I do not really buy those articles about declining rents in NY/SF. The data is coming from large complexes and towers with high turnover where management is always trying to raise rents and often will overshoot the market.

These places target people who are new to the city or for whatever reason, from bad credit to looking high maintenance, turn off smaller landlords.

The bulk of the market however are long term renters paying below market prices and which will on average increase due to small rent increases plus churn.

Submitted by spdrun on April 18, 2017 - 7:26pm.

Speaking to NYC only, the data are coming from brokerages that handle small and large buildings alike. Also, comparing vacancy against past numbers is instructive -- apparently running at 2009 levels in NYC right now.

If anything, the rent declines are GREATER than shown in the data. A lot of landlords like to keep "official" rents high while offering freebies like a month's rent off.

Submitted by hmc on April 18, 2017 - 7:54pm.

Simple question: Would you buy the same house at the current price? If yes, keep it. If not, consider selling it.

Many people think their cash flow is good because they bought the rental unit at low price a few years ago but this logic is flawed. One needs to consider cash flow with current market price. When the unit appreciates the value, it's your money, if you had sell it. Of course, there is a tax implication and overhead for selling it.

Submitted by sdsurfer on April 19, 2017 - 12:14pm.

hmc wrote:
Simple question: Would you buy the same house at the current price? If yes, keep it. If not, consider selling it.

Many people think their cash flow is good because they bought the rental unit at low price a few years ago but this logic is flawed. One needs to consider cash flow with current market price. When the unit appreciates the value, it's your money, if you had sell it. Of course, there is a tax implication and overhead for selling it.

I'm not so sure about the logic you are referring to. If you have a fixed mortgage payment and rents are increasing everywhere so is your cash flow right?

To the OP. I'd consider a refinance to pull the money out, but retain the property because I'm not sure where I'd put the money otherwise. Inventory is still decreasing which is pushing demand in my opinion. I think North County detached is down 6 percent YoY and attached is down 10% or so.

Good luck whatever you do!

Submitted by gzz on April 19, 2017 - 12:35pm.

Sdsurfer, Rich's last post shows inventory in SD County is down 23% year over year. I doubt NCC is only down 6% for this reason. It does have more construction and higher prices than the larger central San Diego market, so perhaps it has not fallen quite so much. But a 17 point gap seems too big.

Submitted by hmc on April 19, 2017 - 1:13pm.

Sdsurfer, Your cash flow should be *always* based on the mortgage after/assuming you refinance to pull the money out, not the original mortgage. That's basically my logic.

If you keep the house and you don't refinance, you basically getting the return at mortgage rate (for the appreciated part), with the risk of losing the money (if housing prices drop).

If you sell the house, you really realize the investment gain. Sometimes cash is king...

Submitted by sdsurfer on April 19, 2017 - 1:59pm.

gzz wrote:
Sdsurfer, Rich's last post shows inventory in SD County is down 23% year over year. I doubt NCC is only down 6% for this reason. It does have more construction and higher prices than the larger central San Diego market, so perhaps it has not fallen quite so much. But a 17 point gap seems too big.

I got the 6% number from the NSDREI meeting last night (detached...think attached was -11%), but I do recall them mentioning that the low end areas (Logan, Chula Vista, etc.) inventory being -25% or more Yoy in certain zip codes. Thanks for chiming in though forcing me to look a little closer.

Submitted by sdsurfer on April 19, 2017 - 2:14pm.

hmc wrote:
Sdsurfer, Your cash flow should be *always* based on the mortgage after/assuming you refinance to pull the money out, not the original mortgage. That's basically my logic.

If you keep the house and you don't refinance, you basically getting the return at mortgage rate (for the appreciated part), with the risk of losing the money (if housing prices drop).

If you sell the house, you really realize the investment gain. Sometimes cash is king...

Thanks for elaborating. Wouldn't you make that assumption after you refi? I'm not sure if everyone can depending on their financial situation right?

I think the cash is king argument is a bit cliche sometimes. Of course we'd all like more of it, but using 75% of the banks money when rates are at 4% is pretty "king" too if it helps you to accomplish your long term cash flow goals of buying an investment property in an area where rents are increasing and when all cash is not an option.

I love this site for learning how people do their calculations and for people sharing their logic. Thank you for sharing.

Submitted by hmc on April 19, 2017 - 6:57pm.

Sdsurfer, refi or not, your cash flow should always be calculated based on the latest price (not your original paid price) with 25% mortgage. Appreciated money is yours, regardless you refi or not. If you don't refi, you are getting mortgage rate return for that part of money, which is not high.

I bet cash flow would not be good with current housing price (think as if you buy your exact unit at current price).

So, in my view, there is "buy" or "sell". "hold" is not that sensible (unless you live in it or you don't want to pay closing cost or capital gain tax). If you hold it, what is your exit strategy? Do you plan to pass it to your next generation?

Submitted by matt on April 20, 2017 - 2:24am.

My NCC SFH rental cost 900k in 2010 and now values at 1.35. I rent it under market (amazing tenants for 4500). I paid it off cause I couldn't refi and it was a guaranteed 4.75 percent return + the peace of mind of having a home to live in if needed or at least some monthly income to survive on if we chose to live in our vacation rental in Mexico. When I run the math I use the 900k cause everything else is a gain on paper. If they move I'm raising rents to 5k which factoring property taxes, etc, is about a 5 percent return plus capital appreciation (which to date is close to 50 percent in 7 years.) Am i a less savvy investor for locking this capital up vs chasing other returns? Probably yes.. But it works for me and the worst case scenario is living in a 4000 sq ft home in beautiful coastal Carlsbad and working somewhere like Trader Joe's to cover our property taxes and basic living expenses. After slogging it out in the Middle East to pay this home off, this scenario sounds like a dream come true!

Submitted by FormerSanDiegan on April 20, 2017 - 8:27am.

hmc wrote:
Simple question: Would you buy the same house at the current price? If yes, keep it. If not, consider selling it.

Many people think their cash flow is good because they bought the rental unit at low price a few years ago but this logic is flawed. One needs to consider cash flow with current market price. When the unit appreciates the value, it's your money, if you had sell it. Of course, there is a tax implication and overhead for selling it.

The decision to sell is more complicated than an assessment of buying at today's price. This is because there are additional cost/benefit factors in relationship to keeping versus selling an existing rental property.

Some additional factors/considerations:

How much of the house have you depreciated and what is the financial impact on depreciation recapture ?

What is the impact of passive carryover losses :

Do you have passive carryover losses ?
(most folks who make over $150K would because you can't deduct these losses with that level of income. Most of these losses are phantom losses due to depreciation even if the property has positive cash flow

Is your marginal tax rate high, ?
If so, the harvesting of these carryover losses at your current marginal tax rate may be valuable for a positive cash-flowing property. If you sell you get to harvest these losses at your capital gains rate (15-20%). If your marginal rate is higher, it is more valuable to try to harvest the tax carryover loss over time against income as opposed to capital gains.

If you sell, you get the pleasure of paying 25% tax against depreciation, which you harvest at 15-20% of you sell (a losing proposition). You get to pay tax on the depreciation recapture at a higher rate than what you get in relief on the capital gains. The difference could be worth thousands of dollars.

Submitted by no_such_reality on April 20, 2017 - 11:04am.

gzz wrote:
If you have a reason to sell it will be quick, easy, and you will get a great price.

But San Diego is one of the major RE markets that went up the least since 2011. Less than not just SF and Vancouver, but also random secondary markets.

It is kind of shocking to look at average rents and realize thet our rents are now barely more than places like Denver and Minneapolis. We were seeing 5 and 6% increases while other cities were in double digits multiple years.

Where you at in the Minneapolis area? A 3 Bd out in Minnetonka (upscale suburb) is $1800, a 3 bd, in St Paul, just across from the downtown area is $1200.

Submitted by FlyerInHi on April 20, 2017 - 12:00pm.

I'm selling an investment property. A guy from the Middle East is paying cash sight unseen. Maybe I'm selling too soon, but some profit taking is good.

Submitted by sdsurfer on April 20, 2017 - 12:45pm.

hmc wrote:
Sdsurfer, refi or not, your cash flow should always be calculated based on the latest price (not your original paid price) with 25% mortgage. Appreciated money is yours, regardless you refi or not. If you don't refi, you are getting mortgage rate return for that part of money, which is not high.

I bet cash flow would not be good with current housing price (think as if you buy your exact unit at current price).

So, in my view, there is "buy" or "sell". "hold" is not that sensible (unless you live in it or you don't want to pay closing cost or capital gain tax). If you hold it, what is your exit strategy? Do you plan to pass it to your next generation?

You have an interesting take on it hmc. I always considered the monthly difference between the expenses and the rent to be the cash flow. I dont really buy based on appreciation myself. I like it, but I buy based on cash flow from rents and the appreciation is the gravy on top if/when it comes into play.

I know waay more people that are wealthy and subscribe to a buy and hold philosophy than I do people that time the market. I also know a ton of people that even when successful/lucky wish years later they had retained the property...especially in coastal So Cal. If your cash flowing then you just get to choose when to exit if ever because you are making money every month anyways so you are never forced to sell as long as you are smart about reserves and managing the property. Not for everyone, but I've known some people that did pretty well buying and holding in So cal. Not for everyone though:)

Submitted by hmc on April 20, 2017 - 4:22pm.

Sdsurfer, I don't mean to time the market. You hold it as long as you would still buy the same unit at the current price (also factor in transaction cost and tax implication if you will).

At some point, price is so high that you would not buy it. That's the time you should consider selling it. "Price is so high" is subjective but in my view, when cash flow is not satisfactory to you (with current price), it's high. Some other people are even ok with negative cash flow in hope for price appreciation. That's why it's subjective...

No matter how, any investment needs a plan and an exit strategy... Or you don't have a goal or you are not getting actual return ("Greed" is usually also in play). It's just a number on the paper. I know a lot of people are happy about paper number... That's fine as long as one is happy...

Submitted by gzz on April 20, 2017 - 4:37pm.

No Such:

Here is my source.

https://www.apartmentlist.com/rentonomic...

The point is not that SD is cheap, but that a lot of secondary non coastal cities are now in the same ballpark. If you are grandfathered into a place 10% below market in San Diego, you would barely save anything on rent now moving someplace like Denver or Dallas.

And you need a bigger place in MN because you will be stuck inside a lot longer because of weather, plus some sort of mud room and huge entry closet for puffy coats are requirements there for a tidy apartment or house.

Submitted by gzz on April 20, 2017 - 6:04pm.

My investment properties are worth more to me than someone else because I have a below market mortgage and tax assessment.

Cash out refi rarely makes sense because of the higher interest rate. I guess you could do a refi of the refi and not take cash out the second time.

Submitted by FlyerInHi on April 21, 2017 - 3:55pm.

gzz wrote:
No Such:

Here is my source.

https://www.apartmentlist.com/rentonomic...

The point is not that SD is cheap, but that a lot of secondary non coastal cities are now in the same ballpark. If you are grandfathered into a place 10% below market in San Diego, you would barely save anything on rent now moving someplace like Denver or Dallas.

And you need a bigger place in MN because you will be stuck inside a lot longer because of weather, plus some sort of mud room and huge entry closet for puffy coats are requirements there for a tidy apartment or house.

I agree that secondary cities have high rents also which makes investing there more profitable than San Diego. That's why REITs are building "luxury apartment homes" all over the major metros. There could be oversupply in the future.

In Vegas, I'm getting $900 rent on a studio I paid ~$40k and remodeled. One could rent a house for that much too, but it won't look as nice and be in as convenient a location.