In Debt - Keep my rental property or sell?

In Debt - Keep my rental property or sell?
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#1

Hello,

I have a small rental property that I got out of a divorce. I currently rent it out for $850/mo. My mortgage on it is $550/mo, and I also have a HELOC on the house that costs me $200/mo, so all in all I’m bringing in about $100/mo off of it. The HELOC would be paid off in about 4 years, and at that point I would be making $300/mo off the house. I don’t usually have a hard time getting good renters in.

My total debt load (including the HELOC) is about $21,000. I’m struggling to make payments on all this debt, although hoping to get some headway with a tax return this year.

The house currently has about $22,000 in equity.

I’m trying to figure out if I should sell the house and attempt to pay off most all my debts, or continue to rent it and build more equity.

I’m a little afraid the house might not sell right away (it has some downfalls), and then I’d be stuck paying the mortgage while it’s on the market.

Thank you for any thoughts/opinions/advice.


#2

Hi, errantbehavior (love the handle!), and welcome to the community.

It can feel great to get rid of debt in one fell swoop, but it’s also scary to sell an investment in order to do that–what if you regret it later?

The first thing I’d do is talk to both a real estate agent and a tax pro. The agent can give you a realistic idea of how much you’re likely to clear on the sale, and the tax pro can tell you about the tax consequences. Any profit you’ve earned on the property would be subject to capital gains taxes. (It’s not like a primary home sale, where the first $250,000 of profits typically isn’t taxed.) You also get tax benefits from a rental, such as depreciation. That can be helpful to keep your tax bill down (although if your income isn’t that high, this may not be a huge factor).

Since you’re cash-flow-positive on the property (meaning you don’t have to shell out money to cover the costs every month) and you typically get good renters, it may be worth trying to hang on to the place and looking into other ways to pay down your debt. Here’s a page that can help you get started:

https://www.nerdwallet.com/blog/category/loans/paying-off-debt/

Please feel free to ask any follow-up questions!


#3

Determining the best way to manage debt can feel so overwhelming; it’s definitely helpful to consider all of your options. My husband and I also have a cash-positive rental property, which we could sell and use to pay off his student loans, etc, but we have opted to keep it for now knowing that in the long run it will be a bigger source of income for us. Additionally, as you note, a house with a few downfalls may not be a quick sell and you might find that you have to make repairs, etc before you could see it. That can take financial resources that you are already allocating to existing debts.

Also, as Liz noted, the financial impact of selling a rental property could be greater than you expect. I’d second her recommendation of checking with a tax pro to help you sort out the implications of selling.

Best of luck! Keep us posted on how you move forward. Just starting the conversation is a good first step towards bringing down your debt.