Should I sell my rental property for upfront gain, or keep it for long term income?

Should I sell my rental property for upfront gain, or keep it for long term income?
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#1

Hello all,

To sell or not to sell real estate? That is the question I present to you.

I am twenty eight years old, and five years ago purchased a HUD home at auction through a no interest loan from a close family member. I proceeded to completely renovate the house and currently generate $5100 a year in revenue from rent. I moved to NYC and use this income to subsidize the absurd rate of rent in NYC. I have a healthy secure job where I am at the upper hierarchy of the company and earn enough to budget accordingly so I can set aside enough to work towards my personal financial goals.

The same family member who I originally received the loan from has offered to buy the house from me and I stand to earn $40-50k after paying of what I owe. In the event of their passing I would be willed the house among other assets.

The pros are numerous and I would be able to put into a money market account at least 3-6 months of expenses, top off my IRA for 2014, finish emergency fund, be debt free, have investment capitol, and have the collateral to fund my dreams.

The downside is I loose that external source of income from the rental, which accounts for almost 30% off my rent and looking a few years down the road could make a substantial difference.

Somehow these pros and cons, in my mind are equaling out and I feel I have developed tunnel vision here on this decision. So your outside opinion would be greatly appreciated. Keep the house and grow financially strong slowly with security, or sell now and become financially free now? If I decide to sell how can I make the additional $15-20k grow to upset that loss of income?

Thank you all.


#2

My initial first blush says "keep the rental property".  You indicate you have secure employment with enough resources to pursue your financial goals.  If the $5,100 is what you net, free and clear, from the rental, I'd say that's a great source of income, plus you have the underlying property as an asset on your balance sheet.

While the 40-50K of lump sum income in hand, right now, might be a great thing, subtract some capital gains taxes from that, plus any other recaptures that could be possible, and your net will be somewhat less.  I don't think you'll be able to make the 15-20K grow at a rate that makes up the difference without taking some major risk, which I don't see as "worth it" right now. 

I'd instead say perhaps look to other areas in your cash flow/spending to see what you can sacrifice to continue to build the emergency savings plus other long term savings.  Also, you might consider having a fee-only CFP do a detailed cash flow analysis for you and run both scenarios.  This will put some detail behind the numbers, use an assumed rate of return, and will in black and white perhaps give you the numerical details to make an informed decision.  Expect to pay an hourly fee for this but if you are the detailed type, it would be worth it. 


#3

I agree with Chad for all the reasons he stated so well.

One more angle to consider, though, is the sustained occupancy of your rental property. How long has your current tenant been there and do you anticipate that continuing mid-to-longer term? And if you lost your current tenant, what's the likelihood that you could quickly fill it with another good tenant?

Long term or recurring vacancies can quickly turn a cash machine into a boat anchor. If that's a significant concern, then I might lean toward selling and implementing the other plans you mentioned.

But Chad's right, in the current investment environment you won't come remotely close to replacing the lost rental income by investing the remaining $15,000-$20,000.

Hope that helps. All the best with your decision!


#4

You are doing great. Congrats- super job, performing well. You are entrepreneurial and have a great start on building wealth. So good for you.

Your rents are 10% of your current capital right? ($5100 on $50,000 net proceeds from sale.) Plus you would get the house back someday. So the question is, net after tax - say $40,000 - can you use this more profitably than continuing to receive the rents? By the way a 10% return is spectacular on real estate.

How much would free up from the debt you would payoff? That would make up for some of the lost income.

Sticking the money in a money market account is not going to get you very far. So don't count that as income replacement.

The name of the game, in my mind - is converting human capital (your income potential) to investment capital that can produce income. So if it were me, I would retain the house and the income and pay off the debts, etcs with the 30% rent savings you enjoy with the $5100.

If you were talking about $100,000+, I might be inclined to sell. But there is not enough here to make it worthwhile in my mind. But you know all the specifics. So weigh you options. With looming inflation, the house is going to appreciate more - so will the rents. You have a great investment - they are hard to find.


#5

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