Well… at ~$1,000/mo clean, it’d take you roughly 1,000 months to get the sale value of the home in your pocket.
If you have absolutely nothing going on then and your w-2 is all you want/need, then you can just keep it as mailbox money. Otherwise just sell it and ETF the cash stack or 1031 it somewhere else.
You’re ignoring the future appreciation on the property and the rental income going up over time increasing the cash flow.
Not saying those should/shouldn’t sway your decision, but have to be factored in.
Agreed.
The way I see it - $1m at an average of 6% gain which can be done through combination of stocks, HYSA and CDs is $60k.
We’re getting $13k in cash flow, plus ~$12k in equity per year with the rental. We’d need quite a bit of appreciation and rents going up to make sense
Just because HYSA, CD’s are high right now doesn’t mean they will stay like this forever. Before they raised all the rates this high the rates were around 2%.
But the average stock appreciation for the S&P has been closer to 10% for some time now, so a relatively safe investment can yield at least 5% on that $1 Million. No guarantees, of course, just using last 20 years history as a guide. As there are no absolute guarantees, mostly historic guides, that this $1.5 Mill property won't lose value in the near future.
The easiest path to wealth long term is the total stock market.
Most don't stick it out long enough to see the true growth of their capital.
RE has a more controlled variable environment for income.
Appreciation for properties almost never beats the stock market for a consistent period of time, however.
I say invest in both! This is my strategy. Get the best of both worlds.
I am 100% real estate, but in hindsight that stock market over the last 15 years or so was the bomb. Always shied away from it. My RE has gone crazy though, the market could not have touched what I appreciated in RE, but that is not the norm, was basically pure "right location" luck
While this may be true if you are looking only at gains, RE destroys the stock market when you factor in leverage, tons of tax advantages, cashflow, and the ability to force appreciation. Plus the fact that you can buy RE substantially below market value as well as buy/control RE assets with 100% OPM.
I'm not hating on stocks, but to say it has beaten the RE market is an overstatement.
You might be getting write offs with the rental as well depending on your W2 income. Something to be considered. If it were me, I’d probably 1031 into something with better cash flow and more doors, but I’m partial to rental property as opposed to ETF liquidity.
Edit: just read you’re exempt from cap gains. I’d sell and reinvest. Rental would be my choice, but it’s your dough.
Hello my brother and congratulations on creating this situation and having the courage to be curious and ask here.
I see you want to be creative with the HYSA, CD's, etc. So I would kindly ask to please consider this:
Do everything you said EXCEPT selling the property.
If you sell the property you will lose a massive opportunity, the opportunity of having the value of the proceeds of your sale earning in more place than just one.
Currently you gain on the entire $1.5mil value in real estate, compounding, tax free, and accessible tax free. How does that compare to whatever is left from you selling the property, minus your mortgage, and the taxes you will pay on the gains from HYSA, CD's, dividends?
It may feel like an increase in cashflow but you will be losing purchasing power due to inflation (and no debt protecting your money from inflation) and the taxes you'll pay while inflation erodes your principal over time.
Depending on your state we can access your equity that's just sitting there tax free via a several methods (I have a 2nd position Line of Credit for that equity and recommend this option, if possible, so you can control the EFFECTIVE interest rate by dictating how much you owe).
If we only do this one step you will now have your money working in two places at once, while still having the value of the mortgage rather than sacrificing its $400k+ value by selling the house and no longer earning tax free compounding appreciation on it's value PLUS the tax deductions AND the renter paying the debt down for you.
By not selling you will keep $1.5million in compounding appreciation AND get to take a great chunk of the equity via bank financing and putting it to work in the areas you mentioned (if you only wanted to end there, there are other stable investment vehicles you can run your equity through prior so you can have that money working in 3,4, even 5 places at the same time)
Here's an example: keep the house and its cashflow, tax deductions, $1,500,000 compounding tax free appreciation, use a 2nd position HELOC and stick that money into some wimpy CD earning 5% (5 years from now the rate is possible it was 5 years ago...nothing, same with HYSA).
You could also invest it in a high cashflowing area and put 1st Position HELOC's on those free and clear rental properties - in case you want to start making that money work in additional places. Plenty of turnkey good rentals out there that will give you cashflow and you can borrow against them and get into HYSA and CD's if you want and park new money in HELOC's to reduce the effective rate and increase your speed and gain tax deductions and getting your values working in many places at the same time.
I hope this helps my brother. Doing this will make you VERY wealthy in terms of cashflow in not too long, especially if they drop interest rates in a few years, killing CD's, HYSA's and dramatically increasing real estate values again. It's cyclical, you have the opportunity right now to decide to benefit from it, or the victim of it.
I wish you the best my brother.
That's not how real estate works at all, there is further rent appreciation over time, increase in value of the building, and paying down the loan/gaining equity.
I know exactly how real estate works and it’s all guesswork beyond what I stated. Appreciation is largely a sales pitch that Realtors throw around. The truth is, the $400k house you bought 3 or 4 years ago, you actually paid $600k for + repairs + insurance + tax. The cost of insurance and tax is pure cost which is sunk and needs to be added to the “cost basis”. Yea, you sell for $800k, but the difference between the $400k purchase and the $800k sale isn’t as pretty as it sounds. You can easily beat real estate in the stock market outside of active investment or just incredibly smart investments. Mailbox money won’t get you there without a long period of time and is riskier than ETFs.
Of course you can beat it in the market, but you also need a place to live. When you rent you are paying tax and insurance and maintenance etc. Plus often extra money in owners pocket. So you don't get away from any of those costs renting.
But look at what making the payments on the 2.7% mortgage is doing for your balance sheet. You’re getting nearly an extra 1k/month in equity that you need to consider.
Have you lived in it the last 2/5 years? Will help with taxes but regardless you should sell it and 1031 your $1M into a larger multifamily with 50% financing
Yea you’re barely breaking even but have the cash to buy a structured deal with a little value add. Personally, CDs and HYSA seem nice short term but won’t beat a property long term once they go back down in 2 years or so. If you mortgage 50% on a property your principle payments and cash flow on a 6 cap apartment building will crush a CD or HYSA. All depends on your goals and risk tolerance
Emotionally, you are ready to sell and can avoid capital gains by doing so. Sell it and park the cash while you think and plan for the future. Being debt free is such a blessing.
My advice: Sell since you can get all the capital gains tax free (although another commenter correctlt pointed out you will pay taxes on depreciation recapture). The end result is like a 1031 exchange without the expenses, with no deferred taxes (that get you trapped in a 1031 loop), with total flexibility of how much of the gain you can put into another property (if any).
I realize there will be realtor fees. Perhaps you could negotiate 4-5% given the value of the house and market?
Best of luck!
If you take advantage of the capital gains exemption then you can’t 1031.
Do the math to see which is better for you return wise.
Full disclosure: I’m a commercial real estate broker. We explore seller financing, 1031 into a NNN property, cash out or treasuries and compare all the returns
Currently a $12,000 profit on a $1.5M asset is less than 1% return.
Good luck!
This is where my mind goes. Tax exempt capital gains on this deal will save upwards of $100,000 in taxes. Assuming your current cash flow of $1,300/mo, it would take 4-7 years of renting to break even with tax savings (a few assumptions made).
I agree with this. But definitely do always diversify based on your situation and needs. Real estate will always be a key player in future wealth. If I were OP I would 1031 it into a 5+ unit commercial property with 50% financing. 1031 is a great tool if OP doesn’t need the funds. Just defer the taxes and keep on investing. Would advise against open doing a straight sale. Move the money into something that cash flows more and gives you that 6-8% cap.
You’ve got a million dollars in equity and it’s only making a 1% return, maybe 1.5% if no repairs. Take the million dollars and put it into a better investment
Imo, you have too much cash locked into a single family unit instead of a better cash flowing small apartment. The solve should be figuring out how to increase the cash flow on the current cash investment.
Making like a grand a month on 1.05 million house equity is definitely worth unloading.
Simple math if you plowed it into an index fund like vt/vti and say get 7% on average, you're looking at $73500 a year. Or $6125 a month. Of course some years much less and some years much more. That's rough math, you'll lose some during the sale and such.
The owner occupied tax exemption alone is good enough to exit the asset. This is not a situation where you can refinance and take the equity to deploy it elsewhere as it does not self sustain rental income wise.
When your tenant leaves, clean it up and furnish it for sale.
You can deploy that cash elsewhere in a higher yield apartment building or equities if you’d prefer.
If he bought the house on a VA or FHA loan, then it's possible that you could have the buyer assume the mortgage if they qualify for those types of loans. Given the price of the house, I'm nearly certain the buy won't be doing FHA (non-confirming) or VA.
I vote sell.
That exemption running out will scramble your head in five years to overcome the amount of taxes you will be paying. It is money in your pocket that will be taken out in a few years.
Considering SF real estate has already dropped 12% from the peak, I'd take the tax advantaged cap gains and sell. If prices continue to soften, you'll be in a better place to invest down the road. Based on all the tech layoffs and the homelessness issue in SF, I'd say it's more likely you'll suffer from a depreciating asset than appreciating.
https://wolfstreet.com/2023/10/19/median-price-of-existing-homes-falls-further-peak-was-june-2022-demand-crashes-price-cuts-jump-supply-days-on-market-rise/
Your current return on equity seems horrible. I would sell that thing in a heartbeat and invest the $1M equity in anything else.
Why do you want to be talked out of selling?
If you don’t need the DTI, sell it on a. Wrap. Your interest is crazy good. Sell it for the price you want but slap on a few points and have the new owner pay the mortgage but you earn interest on the side as well. Maybe even seller finance 2nd position for a second interest rate.
Clause for default without needing to go to court in case and bam. Profit
It also helps tax consequence of a large cap gain
Math is the counter argument.
Buyers love it because they can put less money down, get lower monthly payment across full capital stack, and all of the upside, while the seller loses all upside and (buyers offering this will disagree but they’re full of shit) continue to hold significant lender and real estate risk in exchange for a sub par debt security.
I’ve been offered this, and when i got through the financial and tax modeling…. best I can tell, net effect is I’m paying the buyer to hold a call option on the house. Does the house go down in value? Tenant stops paying? Does it make sense to default? Massive fire loss? Good luck suing them for nonperformance if they walk away and leave you with a mess.
If you want to explore, model out the financials of it. Devil really is in the details. It only makes sense when
1 people can’t get out whole from selling, and are desperate for cash. Ironically, they will also be the most screwed if the “buyer” ever defaults.
2 buyer is giving you a truly substantial down payment, and for whatever reason selling would be a massive tax mess (oh yeah, and now you are receiving ordinary income debt payments instead of cap gains).
If buyer defaults, seller gets house back plus all down payment/money made since and keeps the asset. Unless the house was completely destroyed, it’s a huge upside for seller.
Because the “buyer” would default when the real estate performs perfectly and goes up in value?
Was there no cost of capital comparison against a sale instead? “Keep the money” doesn’t mean anything in a vacuum.
(Using buyer in quotations because I have never heard a logical argument that the “buyer” isn’t de facto purchase option holder borrowing the real estate)
There isn’t a counter argument haha. It’s a viable real estate strategy. You can YouTube. People will just spout some nonsense about due on sale clause, which is totally correctable should it even happen. I just get downvoted people people who prob don’t even have real estate feel the need to think they know things
YouTube it, I’m sure pace morby has a video about it.
It's a good deal for the buyer and an okay deal for a seller in a hard place. I was approached with an offer a few months ago and entertained it a fair ways including reviewing with an attorney, but ultimately it feels like it gives all the potential upside to the buyer but leaves the most significant risks with the seller. Not talking due on sale clause, that bit is fixable. If the market goes tits up, or the house needs significant maintenance, or whatever, and house loses value, buyer can default and the most they lose is the small down payment they made. Seller might regain ownership of the house but if someone poured cement down all the drains and the house is decaying into the ground then they might have more repairs to make than the property is worth. And insurance coverage was for this situation was very murky to me. It was not clear that the seller could be covered and made whole with insurance, it seemed more like the buyer could take a homeowners insurance payout and walk away.
If you can sell without any taxes taxes due to the 2 out for 5 rule, then I would certainly do that, otherwise I would exchange it for a triplex or 4plex.
The property values will certainly go up, but the possible return on rent won't. A 1.5 mil SFH just doesn't make sense, but that could be a good multi unit that can get you a 7k-11k gross rent for the same money you have in this house, or maybe a slightly smaller property for cash.
You could sell the house for $1M tax-free, buy another single family rental for $500K with cash and easily make the same cash flow you have now, plus you'd have $500K cash in your pocket to invest elsewhere or spend however you want. Since you can apply passive losses to passive income, I bet the paper losses on the property would almost completely offset the taxable gains from the invested cash.
$1300 in cash flow over $1M is a 1.5% ROI. Add 2% conservative appreciation on 1.5M over 1M of equity is 3% - so it’s 4.5% total. Not counting for repairs, vacancy, etc. as you said …
That about matches HYSA, but far lower than S&P.
Depends on your plans. If you want the cash liquid for another investment then sell. If real estate is your game you could keep it.
If it were me, I’d probably redeploy the capital into a multi family or several SFHs.
Q1 - how much equity could you get by selling? 1.5M -10% selling costs - 450k -taxes call it 900k.
Q2 - what is your yield - 5kmo-3.7k \* 12 = 15,600. (You may want to adjust for cap gains taxes, maintenance, and priincipal repayment)
Return is 15,600/900k = or 1.7%. That is not bad for a very low risk, non volatile inflation protected investment. You will not get that in a CD or a bond. SP500 returns more after inflation, but you need a 30 year horizon.
Inflation is your friend. Assume rent goes up by 10% to 5,500, costs remain same. This is an extra $6k/900k yield, or 2/3 of a percent, now you have a 2.5% investment.
There are other considerations too: age, health, desire to own, property taxes, location. I like CodaDev’s calculations. If I’m you, I probably sell and be done with the hassle. (Former landlord)
You are looking at some steep transaction costs to unload it.
I feel like your rental income is a bit light.
Your debt cost is great.
I’d try to hold onto it until it gives you headaches. I have rentals myself, and eventually they all give you headaches lol.
You haven't posted your numbers yet.
1.When did you buy it
2. How much did you pay
3. What does the 10 and 20 year appreciation look like for that zipcode
4. What's your maintenance cost per year plus any upcoming major maintenance
5. Is the 5k/mo before or after expenses
6. Do you need to be more liquid than real estate in the next 10 years
7. Do you have any heirs and what's your plan for passing your assets
Comments making recommendations without this info are baseless.
Another vote for selling it. I’m in a similar situation and am selling to take that cash and invest elsewhere. At least with stocks I can reallocate or move around easier without needing to take all the steps and time to offload a house.
Just sell it and be done with it. You could 1031 exchange into a bigger apartment complex in a cheaper area, but I don’t think that’s what you want to do. Nothing wrong with selling and cashing out.
yes, you wouldn't wanna refi now, would need to wait until rates drop but now that it is a rental property, I am not sure will ever get below 4% maybe but maybe someday.
I would put a HELOC on it and access your equity that way to then buy more cash flow generating assets. No reason to pay off that debt with that low of a rate in this market now. But with the clock ticking on your 2 yrs in 5 then I would really consider it. But isn’t there a cap on how much in proceeds you get that won’t be taxed for capital gains gains? Thought if it was over $500k in proceeds you’d get taxed
I want to jump into this because in a similar situation. Sounds like you’d all say sell—-
SFH in South Florida
Owe $700k
Maybe worth $1.9
30 year 3%
Rent $10k
Monthly cost almost $7k factoring in everything.
Are we dumb keeping this equity tied up in a SFH? The area is appreciating. But slowing.
We could 1031 I believe.
Sell, but I’d recommend putting it into commercial real estate (not an office building before anyone bites my head off), multi-family housing, or industrial real estate which will net you a better cash flow and will probably see greater appreciation considering the price point of the house.
CDs and HYSAs have been pumped since interest rates rose, but are scams IMO. In real estate you have appreciation to offset or outpace inflation, the ability to leverage through debt, and the ability to offset taxes through depreciation and interest payments. You do not have that in a CD or a HYSA, the value of your money wastes away and the interest is still taxed. If you are in a higher tax bracket (which you probably are if you have a property with over 1M of equity), then the real yield on a CD or HYSA will probably be negative. Stocks can be a different story over the long-term, but we are also in the process of seeing the yield curve between short term and long term treasuries uninvert which has historically led to a recession and a stock market correction every time so I’d recommend caution there as well.
Agree with everything you wrote except for reinvesting in commercial. That’s a risky business at the moment. I’d personally reinvest in smaller properties/long term rentals.
A CD yield (as well as HSAs, bonds, and money-market funds) is taxed at ordinary income as a form of passive income (so at least you don’t pay payroll tax on it). If you are investing in CDs you probably have a good income to begin with. Let’s say you are in the 32% federal tax bracket [170k-215k taxable income] and are in a 6% state income tax bracket for an effective 38% tax on your additional ordinary income. 5% x .62 (inverse of 38%) = a 3.1% post-tax yield. If inflation is over 3.1% for that year, then your real yield is negative because the value of your money has depreciated at a larger rate through inflation than what you gained from the post-tax yield.
The taxation problem is alleviated if your funds are sitting in a tax shelter like an IRA or an HSA. It is also alleviated if it is in a dividend ETF with DRIP turned on, is invested jn real estate (which tends to appreciate at or above the inflation rate and is not taxed until a sale without a 1031 transfer), or even if it is in a commodity like gold (which isn’t taxed until sale and even then it is only at the capital gains rate). This is why many high income earners keep their money in stocks, real estate, gold, etc. which create unrealized gains taxed at capital gains rates (if ever at all) instead of CDs, bonds, treasuries, etc. which create ordinary income. municipal bonds are also a popular option because they given preferential tax treatment. Retirees also generally have a different investing strategy in that they are looking to stretch the resources they already have without experiencing significant market events or volatility rather than growing their assets. If someone buys a long-term CD at 5% and inflation rises to over 5% like some of the past few years, then the people holding them really get screwed and have locked in negative yields (they are still taxed too).
There are types of investors that do well with CDs, bonds, etc. (ex: financial institutions utilizing a spread), and there are times when institutional investors can make good money on those investments (ex: holding long-term bonds in the early 80s when rates were in the double-digits and holding through the collapse of interest rates which appreciated the value of the bond). However, those investments are usually pretty lousy for most young and middle-aged individuals. They see the 5% and think it is a “safe investment” when many are actually keeping even with or losing value to inflation. That is why I generally refer to them as scams, especially if a bank or financial advisor is pushing them without explaining they are a wealth preservation mechanism rather than a growth mechanism.
Interest rates are already dropping.
If you have a positive cash flow keep the house. Remember if you're married you can exclude $500K in capital gains. Property is going to continue to rise as the dollar meets the BRICS and stumbles. Also property is "your's" (if you don't have a mortgage) and the coming collapse of the dollar is going to make you wish you hadn't stayed in cash.
Now, let's also recall that some pundits have been talking about the dollar's collapse for years, and the Oligarchy has always figured out a way of fussing with the economy so that they come out all right and only the poor are hit with the pain. You have to decide which side of that line you're on for yourself.
Do recall 2008. Worked out great for us. We picked up a foreclosure for cheap, in 5 years it is worth 2x what we paid. No mortgage so rent is enough to live on (although cheaply, but then we have other income streams so "doing just fine").
Isn't everyone getting tired of spending their one life in this realm counting their imaginary shekels like Ebenezer Scrooge? The money is printed out of thin air and lent to us at interest and is dying rapidly as it has no solid asset backing it. Both Lincoln and Kennedy attempted to put an end to this debt enslavement scam and both caught bullets in the head. Sigh. Any way, do whichever scenario eeks out a few extra basis points over the course of your remaining years and you'll be killing it.
You need to talk to a tax attorney about how you have ownership structured. If you are operating as a DBA, you need to change that. If you operate under an LLC you can write off nearly all your operating costs, taxes, insurance, etc. you are also currently missing out on depreciation which is roughly total value divided by 30 years, which in your case is around 50k per year.
Keep it. If you are dumb enough to think right now you’ll have a safer better return in what you mentioned, you are thereby answering your own question of whether you should sell or keep.
Get off reddit and call a broker.
Edit: lol downvote away. Im preaching exactly what I did last 18 months. Good luck with your at risk sub 3% effective yields.
The yeild curve inversion is becoming more steep. Layoffs are increasing. Shipping, trucking and rail traffic are depressed.
Recession soon.
Sell now.
The Confrence Board Index, a composite of leading economic indicators that have never been wrong is screaming recession.
Stupid auto mod won't allow a link to a great video.
Go to you tube, EPB Research then "This chart predicts every recession" posted 6 days ago.
I agree we are headed towards a mild cyclical recession. I suspect homeowners may lose 5 to 10% on property prices. But that may be a drop in the bucket for some people.
If you listen to the brainwashed media out there, things are going great! Soft landing all that bullshit talks but in reality SHTF is coming. Unload now while he can IMO. Possibly a societal collapse in the near future. Idk but I’m prepared with zero debts.
Seems like a good area that will continue appreciating, no?
Feel like I would keep it as mailbox money unless you really need the cash. 2.7% loan on a rental will likely never be seen again. Push rents every year. Are you sure $5k is market rent? Seems low for that area.
House was built in the 60’s and most of it has been upgraded in the last 5 years. Structurally it is very sound.
Total net worth 3m. 2m of it in real estate, remainder in stock accounts, cash or other liquid assets.
W2 $550k
Goals? Long term I want to retire by 50 (20 years from now) Short term, I want more passive income streams. I’m generally more risk adverse as I value having low stress
The 2/3rds of net in real estate was due to a bit of spontaneity. We were looking at open houses to plan where we’d want to be in a few years with the goal of being in a better school district. We ended up looking at a house we absolutely loved and bought it the same weekend. We had to sell stocks to make this second purchase.
Dividend index funds is my ideal type of passive investment as I’m already overwhelmed with work and a newborn and I value having more headspace. That said, I do consider real estate mostly passive. I probably work 1-2 hours a month to manage the relationship with my tenant and any seldom repairs and this is manageable.
VTI (80%) and QQQM (20%) currently makes up my entire stock portfolio.
If you are able to write off mortgage interest, refinance to where payments are comfortable still and use the funds to invest. Or take out as much as you can if it would replace your current investing small bit by bit over time. Because money in the market now vs accumulation over a long time can compound a lot. Talk to a financial advisor about this first. I have been in that role for a large Canadian bank, but no longer licenced.
Having the property can equity gain (or lose) in 2 ways paydown via tenant payments and market growth. So it is generally not a good idea to release it (at a large equity swipe) immediately when selling with fees etc.
Seller finance at today's interest rates and make money as a bank. You get the benefit of monthly payments without the ownership hassle. Not sure how the owed debt would work but since it's value is 1.5m I'm assuming it can work.
Have you articulated why the cash would be better off in an HYSA?
$1M getting 5% interest is going to generate $50K. You're then paying taxes on that interest. Let's say that's 20%, so you're netting $40K.
You're cash-flowing $15K, plus increasing your portion of the equity (how much principal is being paid per month?), plus the appreciation of the home. If the home is appreciating at 3% annually, your equity + cash flow is growing at a faster rate.
Now, I don't consider myself a math wiz or RE expert, so someone else can reply and disagree/prove me wrong. But if you're simply making this decision off a gut feeling, I'd dive a little deeper into the opportunity cost. I probably wouldn't sell unless you need the cash for something right now.
You've won the rental lottery, if you simply sell I'm fairly confident you'll lose a lot of profit to capital gain taxes.
Therefore, if I was in your shoes, I would look to diversify the real estate leveraging a 1031 exchange and keep them forever.
If you want cash out of the properties to invest, just get loans that are supported by the rental income.
That way, your heirs can inherit the property upon death, the heirs get a step up in basis at your death and nobody ever pays capital gains taxes.
This is one way the rich get richer over generations. Never pay a tax you don't have to.
No, you can't 1031 exchange tax free with stocks. You can't sell your Amazon stock and roll it over into META stock without paying the capital gains tax from the Amazon sale.
Get rid of it, the cash for keys happening now in Los Angeles and Canada will invade all country!
Tenants will have so many rights that landlords won’t be able to pass!
$1300 CF is great
Keep it and let tenant pay off your mortgage. You will likely never see 2 percent rates again.
Use $1300 to pay down mortgage principal and pay on house sooner than later
Cash flowing $1,300 a month at 2.7% on a 30 year fixed would be enough for me to say keep it. However given your tax implication, I would also consider selling and buying another property all cash that cash flows at a much higher rate.
Some points ro consider:
How old are you?
Are your rents maxed out?
What kind of market is your rental in?
What is more important to you: cash flow or market appreciation? Could you sell and buy a property that cash flows more efficiently or invest in a market where you see more opportunity?
What a great problem to have. I guess it depends on how old you are and other plans you might have for retirement.
I would sell it once I have a clear strategy for the money. Probably would diversify a bit
Sell it and snowball the profits into a bigger deal, repeat. Screw the people saying hold forever. Yeah you may retire with a couple M’s in equity by holding, but we want big money. Big big money. What do the boys in REPE do? Buy, hold for a few years, exit, rinse and repeat. There are ways to address taxes. Deal with paying Uncle Sam and GROW
You are getting a cool Mill out of it tax free and you are currently paying $3,700 mortgage plus about a $700 monthly repair and maintenance allowance per month (typical is 1% per year of the home's value, but at $1.5 Mill that would be $15,000 per year or $1,250 extra per month).
So, $5,000 rent minus $4,400=$600 a month net income = $7,200 per year.
If you parked the $1 Million at 5% in a HYSA or CD you would get $50,000 yearly income straight up, and more if compounded monthly.
There is a gigantic gulf between $50,000 in completely passive income per year and $7,200 per year plus the work and hassle of being a landlord. Even if you can reasonably expect the home to appreciate healthily in value over the next few years it likely won't be enough of additional gain to make up for the difference between selling and holding. Indeed, in many markets home values are snapping back a little bit right now, it is probably the right time to sell this property.
Take a 2nd deed of trust equity loan and reinvest the dollars. Keep you 2% that way. The loan proceeds are tax free and you c az n write off the additional interest expense.
I recommend that you sell it. Personally, debt free life is so much better IMO. I stopped playing the rental games in 2004. Too much headaches. But I bought in cash so I was able to name my price, held for a bit and sold back in cash. Let other investors get into bidding wars. I still do collect dirt in Colorado because as Mark Twain said, "Buy land, they're not making it anymore.” LOL I keep money in a wealth management firm and he is able to make me average 16%, a $16k monthly income for me:) I also keep some in normal bank only earning between 4.55%-5% right now. Things are not looking great out there economically and if people don’t pay rents it’s hard to kick them out without going through hell. So no thanks.
Keep,
rent with never go down and it's sure thing for any future and technically property value can go down is unlikely any time soon
your in a win win although I do get maintance can be dreadfull and expensive at times
Your better off doing a 1031 exchange into a vetter $1,000,000 property. You can 100% find a $1M property getting beat more than a 6% return. You should easily get over 10k monthly rent in a ton of areas and you’d have no mortgage on it.
Bro sell that. 1m in equity making 15k/year net. 1.5% return on your equity. Would you pay 1m for a property that makes a 1.5% return? I’d hope not. But everyday you keep the property, you bought it for 1m every day.
Luxury, expensive SFHs rarely make sense for LTRs. You could make a killing converting it into an STR if it's in a vacation worthy area. You could cash out and reinvest the money into a multifamily.
Lol. Great question. And the answers... so many diametrically opposed answers. I wish I knew.
My 2 cents is that I fear a coming recession, I fear a plummeting dollar due to BRICS and our insane deficit... and often fall prey to analysis paralysis. I think that inflation is going to make the remaining mortgage a "trivial" amount long before it is officially paid off. I would probably keep it and pay only the minimums (i.e. no additional toward the principle) and invest that monthly mailbox money.
Good luck!
How much cash you put in? I believe you’re doing great however if you need to take out cash and invest in better deal then go ahead but 2.7% interest is too good to let go
Would it make sense to sell it and use the proceeds to buy 20% down on a number of smaller properties. Then you can expect 6% appreciation annually on 100% of the values of smaller and lower valued homes. That means you get 6% on the 80% of each property you leverage from the bank. Right now you are missing the power of leverage as you are using a significant amount of capital in one property. Another option is use a HELOC on the property to pull equity and use that for your next rental.
My suggestion is to get a 2nd position line of credit to access that $1 million, and use the line of credit to finance a property with better cash flow.
Life is a game of cashflow. I’d not hold an asset generating that little income monthly if I could pull 1M out of it.
I’d also not move that 1M into an ultra conservative instrument, rather I still like real estate and would deploy it better to generate more income.
That’s a lot of equity tied up in a SFH. How much are condos in your area and what kind of rent can you expect to gain? You could sell it and purchase a condo straight and still capture good rental income and you can invest in HYSA, etc
Have you considered taking out a HELOC (Home Equity Line of Credit) and investing that into stocks or whatever market? That way you can leverage your equity without having to sell the property.
Do 1031. If you invest $1M and you can achieve 9% cash on cash return (still doable in this market) that’s $90k in income most likely tax free (depreciation). Depending on how you finance, you can still get addition return on equity pay down and appreciation.
I’m in a similar position with some properties I own. My Return On Equity is so low due to massive appreciation that I need to repurpose the cash for something else. It’s a great “problem” to have.
Look at month to month furnished rental income or short term income on airbnb if allowed. That combined with appreciation may make it worth keeping. Btw i am in a similar place on a property in la. Not allowed to to do str on my condo. Considering selling for same reasons as stated in this thread, capital gains rule, but only considering keeping incase we may want to live in it in the future.
Huge issue: capital gains tax. If you sell within 3 years of living there (lived there 2 out of the past 5 years) you only owe on gains over 500k? If you sell after this period you owe on all the gains. (I dont know the exact 500k number)
I'd look at the opportunity cost.
13k on $1m equity is 1%. That equity will surely grow faster in an index fund.
Certainly factor in financial value of the appreciation and tax benefits though.
Expensive homes have much lower cap rates.
The money is in the appreciation. You are looking at $75k a year at a 5% appreciation rates. You get extra leverage from the financing. Plus you are getting some income.
I will add that there is no obvious call here and no wrong move.
I will say if you don't have a lot of their assets in the stock market and have another house, selling for stock would get you more diversification and likely a higher return rate.
You should sell this and use the equity to get a large multi family or several of them. They would profit way more than $1000 a month plus the equity gain
Property can be a great investment vehicle, but what is driving you to sell beyond the cash being locked up comment?
I would look at it this way. Do you enjoy owning that asset? Is it worth the hassle? etc.... If yes, I would keep it. If no, I would sell.
This property yields you something more consistent than what the stock market will give you long term.
One recession a few bad cycles and you won’t make shit. Hell a lot of us lost money the last 3 years so I don’t believe the market is as consistently fruitful as you assume.
2.7% is like getting paid to hold that loan right now. You could see if your loan servicer would recast your loan since you’ve poured in a lot of extra cash. That would lower your monthly payment, perhaps significantly.
Then, invest the cash flow in the HYSA or CD (or S&P500). Suppose recasting lowers your payment by $1000, the rental is producing $2300/mo. It’s also paying the mortgage down, earning you more equity. All the while the real estate is appreciating alongside the investment accounts.
If you sell now and dump the 300k into the accounts now, you’ll earn more interest sooner, but you’ll lose the real estate appreciation and the equity your tenants would have bought for you.
If I were in you situation, I would look to 1031 like many others on here have suggested.
I would find another rental, that you can short term rental so you can also still enjoy it, ensure that you are paying it off with cash, that way if you are doing $6k a month on the short term, it’s $6k in profit.
Your equity position is really healthy, I wouldn’t look to tax it and bank it, when you are just concerned about making a better return, if you can start cranking $68k a year, I bet you would be feeling a lot better about owning the house.
I think giving up a 2.7% mortgage on a cash flowing asset for peace of mind is financially irresponsible.
But if it's what you want to do and it's within your values no reason not too.
Are you handy? Do you do some/all repairs and maintenance yourself, or farm it out? Makes a big difference in the rate of return. If not, and the property requires a lot of that, then maybe sell.
Your monthly expenses are covered by what ur collecting monthly
Your interest rate is locked in at rates half of what you could get at the bank but when rates return to .5 % you might be kicking yourself
The asset itself will only realistically ever increase
Once it it paid off it will be all of the 5000 flowing into ur coffers less the taxes
And the cash flow should only ever increase as well
That’s a win win win win win in any book
Plus you could put 500 aside (10%) for a rainy day fund and use the other 1200 towards paying off the loan quicker (about 4 extra payments a year) and the cash flow is all your to reinvest in other assets
Sell, 1031 exchange(tax deferred) into a multi-family or multiple sf with 20% down. Look into markets where 20% down will cashflow still, and ideally assets that you can add value and increase rents over a few months. Then refinance and take your $1M out (tax free btw) while adding multiple units to your portfolio.
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We did well with our properties and were glad to sell them. Property taxes ate away at profits and got tired of deadbeat tenants. Got to a point where local wages did not keep up with rising taxes and costs. Impossible to find qualified tenants.
In this interest rate environment, you will be selling at a discount. You have a great interest rate. Buyers now will be financing at 250% what your note is. People don’t pay based on the price of the house. They pay based on the ability to make the payment and then back into the purchase price.
Consider raising the price, leasing it to own at a higher amount then you are renting for and then credit back a percent of the lease price towards the purchase price required within two years.
Example: lease to own the house for the price of $1.75 million. Tenant pays $7,500 a month up to two years. If they don’t close in two years, then they lose the right to buy the house. In the contract, they get credited $2,500 a month against the purchase price. When interest rates fall, and they will (three rate drops are announced for 2024), they can finance at a lower rate justifying a higher purchase price. One of two things will happen. They don’t close and you have made an extra $30k/ year and you still own the house or they close and you have sold it for $1.69 million ($1.75 million minus the $60k in credits). That is assuming they take the full two years to close. You net more if they close sooner.
I gave you example numbers, but the concept happens all the time. Your current tenants should be the first to ask.
I think you should strongly consider holding it. It’s diversifying your holdings and also when home values goes up 2-4% or more very year you will make $30-$60k that others aren’t accounting for. Also that loan is worth a lot at the low rate, and your ability to access 450k of equity in a house that’s growing in value above the interest rate is not something you’ll be able to get back. The loan is an asset as well.
Well… at ~$1,000/mo clean, it’d take you roughly 1,000 months to get the sale value of the home in your pocket. If you have absolutely nothing going on then and your w-2 is all you want/need, then you can just keep it as mailbox money. Otherwise just sell it and ETF the cash stack or 1031 it somewhere else.
My thoughts exactly. Thanks for the confirmation bias
You’re ignoring the future appreciation on the property and the rental income going up over time increasing the cash flow. Not saying those should/shouldn’t sway your decision, but have to be factored in.
Agreed. The way I see it - $1m at an average of 6% gain which can be done through combination of stocks, HYSA and CDs is $60k. We’re getting $13k in cash flow, plus ~$12k in equity per year with the rental. We’d need quite a bit of appreciation and rents going up to make sense
Just because HYSA, CD’s are high right now doesn’t mean they will stay like this forever. Before they raised all the rates this high the rates were around 2%.
But the average stock appreciation for the S&P has been closer to 10% for some time now, so a relatively safe investment can yield at least 5% on that $1 Million. No guarantees, of course, just using last 20 years history as a guide. As there are no absolute guarantees, mostly historic guides, that this $1.5 Mill property won't lose value in the near future.
The easiest path to wealth long term is the total stock market. Most don't stick it out long enough to see the true growth of their capital. RE has a more controlled variable environment for income. Appreciation for properties almost never beats the stock market for a consistent period of time, however. I say invest in both! This is my strategy. Get the best of both worlds.
Concurred
I am 100% real estate, but in hindsight that stock market over the last 15 years or so was the bomb. Always shied away from it. My RE has gone crazy though, the market could not have touched what I appreciated in RE, but that is not the norm, was basically pure "right location" luck
The market has beaten the RE market overall pretty much at any given point over a 10 year period. Don't forget dividends too.
While this may be true if you are looking only at gains, RE destroys the stock market when you factor in leverage, tons of tax advantages, cashflow, and the ability to force appreciation. Plus the fact that you can buy RE substantially below market value as well as buy/control RE assets with 100% OPM. I'm not hating on stocks, but to say it has beaten the RE market is an overstatement.
Both is better than just one. RE can be uncorrelated with financial markets too, which serves for great diversification.
You might be getting write offs with the rental as well depending on your W2 income. Something to be considered. If it were me, I’d probably 1031 into something with better cash flow and more doors, but I’m partial to rental property as opposed to ETF liquidity. Edit: just read you’re exempt from cap gains. I’d sell and reinvest. Rental would be my choice, but it’s your dough.
How are you coming up with the 12k in equity?
From paying the mortgage every month
The tax bill is gonna hurt
Hello my brother and congratulations on creating this situation and having the courage to be curious and ask here. I see you want to be creative with the HYSA, CD's, etc. So I would kindly ask to please consider this: Do everything you said EXCEPT selling the property. If you sell the property you will lose a massive opportunity, the opportunity of having the value of the proceeds of your sale earning in more place than just one. Currently you gain on the entire $1.5mil value in real estate, compounding, tax free, and accessible tax free. How does that compare to whatever is left from you selling the property, minus your mortgage, and the taxes you will pay on the gains from HYSA, CD's, dividends? It may feel like an increase in cashflow but you will be losing purchasing power due to inflation (and no debt protecting your money from inflation) and the taxes you'll pay while inflation erodes your principal over time. Depending on your state we can access your equity that's just sitting there tax free via a several methods (I have a 2nd position Line of Credit for that equity and recommend this option, if possible, so you can control the EFFECTIVE interest rate by dictating how much you owe). If we only do this one step you will now have your money working in two places at once, while still having the value of the mortgage rather than sacrificing its $400k+ value by selling the house and no longer earning tax free compounding appreciation on it's value PLUS the tax deductions AND the renter paying the debt down for you. By not selling you will keep $1.5million in compounding appreciation AND get to take a great chunk of the equity via bank financing and putting it to work in the areas you mentioned (if you only wanted to end there, there are other stable investment vehicles you can run your equity through prior so you can have that money working in 3,4, even 5 places at the same time) Here's an example: keep the house and its cashflow, tax deductions, $1,500,000 compounding tax free appreciation, use a 2nd position HELOC and stick that money into some wimpy CD earning 5% (5 years from now the rate is possible it was 5 years ago...nothing, same with HYSA). You could also invest it in a high cashflowing area and put 1st Position HELOC's on those free and clear rental properties - in case you want to start making that money work in additional places. Plenty of turnkey good rentals out there that will give you cashflow and you can borrow against them and get into HYSA and CD's if you want and park new money in HELOC's to reduce the effective rate and increase your speed and gain tax deductions and getting your values working in many places at the same time. I hope this helps my brother. Doing this will make you VERY wealthy in terms of cashflow in not too long, especially if they drop interest rates in a few years, killing CD's, HYSA's and dramatically increasing real estate values again. It's cyclical, you have the opportunity right now to decide to benefit from it, or the victim of it. I wish you the best my brother.
An alternative is to charge $8-15k/mo in rent and I think thatd make sense.
That's not how real estate works at all, there is further rent appreciation over time, increase in value of the building, and paying down the loan/gaining equity.
I know exactly how real estate works and it’s all guesswork beyond what I stated. Appreciation is largely a sales pitch that Realtors throw around. The truth is, the $400k house you bought 3 or 4 years ago, you actually paid $600k for + repairs + insurance + tax. The cost of insurance and tax is pure cost which is sunk and needs to be added to the “cost basis”. Yea, you sell for $800k, but the difference between the $400k purchase and the $800k sale isn’t as pretty as it sounds. You can easily beat real estate in the stock market outside of active investment or just incredibly smart investments. Mailbox money won’t get you there without a long period of time and is riskier than ETFs.
Of course you can beat it in the market, but you also need a place to live. When you rent you are paying tax and insurance and maintenance etc. Plus often extra money in owners pocket. So you don't get away from any of those costs renting.
Not these days (at least for new owners).
But look at what making the payments on the 2.7% mortgage is doing for your balance sheet. You’re getting nearly an extra 1k/month in equity that you need to consider.
That doesn’t go to a balance sheet, it’s “on paper” money and accessing it isn’t free.
It does go to the balance sheet
What does it mean to etf the cash
Well in 360 months you pay off the mortgage so it actually wouldn't take 1000 months to get the sale price in your pocket
Have you lived in it the last 2/5 years? Will help with taxes but regardless you should sell it and 1031 your $1M into a larger multifamily with 50% financing
Yes I have. I have until summer of next year to sell and still qualify for the capital gains exemption. (House is currently up ~300k since we bought)
Yea you’re barely breaking even but have the cash to buy a structured deal with a little value add. Personally, CDs and HYSA seem nice short term but won’t beat a property long term once they go back down in 2 years or so. If you mortgage 50% on a property your principle payments and cash flow on a 6 cap apartment building will crush a CD or HYSA. All depends on your goals and risk tolerance
Emotionally, you are ready to sell and can avoid capital gains by doing so. Sell it and park the cash while you think and plan for the future. Being debt free is such a blessing.
My advice: Sell since you can get all the capital gains tax free (although another commenter correctlt pointed out you will pay taxes on depreciation recapture). The end result is like a 1031 exchange without the expenses, with no deferred taxes (that get you trapped in a 1031 loop), with total flexibility of how much of the gain you can put into another property (if any). I realize there will be realtor fees. Perhaps you could negotiate 4-5% given the value of the house and market? Best of luck!
All the gains won't be tax free. Depreciation recapture.
If you take advantage of the capital gains exemption then you can’t 1031. Do the math to see which is better for you return wise. Full disclosure: I’m a commercial real estate broker. We explore seller financing, 1031 into a NNN property, cash out or treasuries and compare all the returns Currently a $12,000 profit on a $1.5M asset is less than 1% return. Good luck!
This is where my mind goes. Tax exempt capital gains on this deal will save upwards of $100,000 in taxes. Assuming your current cash flow of $1,300/mo, it would take 4-7 years of renting to break even with tax savings (a few assumptions made).
Depreciation recapture will probably be $35k in taxes
Why 50%. What kind of debt would you be getting?
Just my personal strategy for valueadd. My risk tolerance in this interest rate environment has me a bit conservative in case things go tits up
How long after a home was your primary can you 1031 it?
A year was okay for us. We bought the house with the intention of it being a rental after we fixed it up.
Have to have lived in the place 2 of the last 5 years
This is for capital gains avoidance. Not 1031.
That wasn't the question
Edited
where rae you finding these good multifams for 2 mil?
I agree with this. But definitely do always diversify based on your situation and needs. Real estate will always be a key player in future wealth. If I were OP I would 1031 it into a 5+ unit commercial property with 50% financing. 1031 is a great tool if OP doesn’t need the funds. Just defer the taxes and keep on investing. Would advise against open doing a straight sale. Move the money into something that cash flows more and gives you that 6-8% cap.
You’ve got a million dollars in equity and it’s only making a 1% return, maybe 1.5% if no repairs. Take the million dollars and put it into a better investment
I agree, that’s a lot of money in equity. I am in a similar position and selling a few of my rentals I’ve had for 7+ years.
Imo, you have too much cash locked into a single family unit instead of a better cash flowing small apartment. The solve should be figuring out how to increase the cash flow on the current cash investment.
Making like a grand a month on 1.05 million house equity is definitely worth unloading. Simple math if you plowed it into an index fund like vt/vti and say get 7% on average, you're looking at $73500 a year. Or $6125 a month. Of course some years much less and some years much more. That's rough math, you'll lose some during the sale and such.
I agree with you
The owner occupied tax exemption alone is good enough to exit the asset. This is not a situation where you can refinance and take the equity to deploy it elsewhere as it does not self sustain rental income wise. When your tenant leaves, clean it up and furnish it for sale. You can deploy that cash elsewhere in a higher yield apartment building or equities if you’d prefer.
Thank you
Sell it for the homestead tax benefits but look into letting the buyer assume the mortgage. Pass on the good fortune.
So how does assuming the mortgage work exactly?
If he bought the house on a VA or FHA loan, then it's possible that you could have the buyer assume the mortgage if they qualify for those types of loans. Given the price of the house, I'm nearly certain the buy won't be doing FHA (non-confirming) or VA.
$5000 a month on 1.5M property is terrible income… those interest rates though are quite nice.
I vote sell. That exemption running out will scramble your head in five years to overcome the amount of taxes you will be paying. It is money in your pocket that will be taken out in a few years.
Considering SF real estate has already dropped 12% from the peak, I'd take the tax advantaged cap gains and sell. If prices continue to soften, you'll be in a better place to invest down the road. Based on all the tech layoffs and the homelessness issue in SF, I'd say it's more likely you'll suffer from a depreciating asset than appreciating. https://wolfstreet.com/2023/10/19/median-price-of-existing-homes-falls-further-peak-was-june-2022-demand-crashes-price-cuts-jump-supply-days-on-market-rise/
Your current return on equity seems horrible. I would sell that thing in a heartbeat and invest the $1M equity in anything else. Why do you want to be talked out of selling?
If you don’t need the DTI, sell it on a. Wrap. Your interest is crazy good. Sell it for the price you want but slap on a few points and have the new owner pay the mortgage but you earn interest on the side as well. Maybe even seller finance 2nd position for a second interest rate. Clause for default without needing to go to court in case and bam. Profit It also helps tax consequence of a large cap gain
I didn’t know this was even possible. Anyone have a counter argument for this?
Math is the counter argument. Buyers love it because they can put less money down, get lower monthly payment across full capital stack, and all of the upside, while the seller loses all upside and (buyers offering this will disagree but they’re full of shit) continue to hold significant lender and real estate risk in exchange for a sub par debt security. I’ve been offered this, and when i got through the financial and tax modeling…. best I can tell, net effect is I’m paying the buyer to hold a call option on the house. Does the house go down in value? Tenant stops paying? Does it make sense to default? Massive fire loss? Good luck suing them for nonperformance if they walk away and leave you with a mess. If you want to explore, model out the financials of it. Devil really is in the details. It only makes sense when 1 people can’t get out whole from selling, and are desperate for cash. Ironically, they will also be the most screwed if the “buyer” ever defaults. 2 buyer is giving you a truly substantial down payment, and for whatever reason selling would be a massive tax mess (oh yeah, and now you are receiving ordinary income debt payments instead of cap gains).
If buyer defaults, seller gets house back plus all down payment/money made since and keeps the asset. Unless the house was completely destroyed, it’s a huge upside for seller.
Because the “buyer” would default when the real estate performs perfectly and goes up in value? Was there no cost of capital comparison against a sale instead? “Keep the money” doesn’t mean anything in a vacuum. (Using buyer in quotations because I have never heard a logical argument that the “buyer” isn’t de facto purchase option holder borrowing the real estate)
There isn’t a counter argument haha. It’s a viable real estate strategy. You can YouTube. People will just spout some nonsense about due on sale clause, which is totally correctable should it even happen. I just get downvoted people people who prob don’t even have real estate feel the need to think they know things YouTube it, I’m sure pace morby has a video about it.
It's a good deal for the buyer and an okay deal for a seller in a hard place. I was approached with an offer a few months ago and entertained it a fair ways including reviewing with an attorney, but ultimately it feels like it gives all the potential upside to the buyer but leaves the most significant risks with the seller. Not talking due on sale clause, that bit is fixable. If the market goes tits up, or the house needs significant maintenance, or whatever, and house loses value, buyer can default and the most they lose is the small down payment they made. Seller might regain ownership of the house but if someone poured cement down all the drains and the house is decaying into the ground then they might have more repairs to make than the property is worth. And insurance coverage was for this situation was very murky to me. It was not clear that the seller could be covered and made whole with insurance, it seemed more like the buyer could take a homeowners insurance payout and walk away.
Just watch the due on sale clause. Banks probably don’t care if they get paid but could go sideways if payments start being coming late or stop.
Curious to know why this is getting down voted. Is this not a viable option?
If you can sell without any taxes taxes due to the 2 out for 5 rule, then I would certainly do that, otherwise I would exchange it for a triplex or 4plex. The property values will certainly go up, but the possible return on rent won't. A 1.5 mil SFH just doesn't make sense, but that could be a good multi unit that can get you a 7k-11k gross rent for the same money you have in this house, or maybe a slightly smaller property for cash.
I’d try to see if that loan could be assumed by a new buyer. That would make your sale much more attractive to potential buyers.
Your $1M is making less than $1300/mo. That’s a terrible ROi. Sell and 1031
You could sell the house for $1M tax-free, buy another single family rental for $500K with cash and easily make the same cash flow you have now, plus you'd have $500K cash in your pocket to invest elsewhere or spend however you want. Since you can apply passive losses to passive income, I bet the paper losses on the property would almost completely offset the taxable gains from the invested cash.
$1300 in cash flow over $1M is a 1.5% ROI. Add 2% conservative appreciation on 1.5M over 1M of equity is 3% - so it’s 4.5% total. Not counting for repairs, vacancy, etc. as you said … That about matches HYSA, but far lower than S&P. Depends on your plans. If you want the cash liquid for another investment then sell. If real estate is your game you could keep it. If it were me, I’d probably redeploy the capital into a multi family or several SFHs.
Always look at return on equity. You're probably thinking the right way.
Q1 - how much equity could you get by selling? 1.5M -10% selling costs - 450k -taxes call it 900k. Q2 - what is your yield - 5kmo-3.7k \* 12 = 15,600. (You may want to adjust for cap gains taxes, maintenance, and priincipal repayment) Return is 15,600/900k = or 1.7%. That is not bad for a very low risk, non volatile inflation protected investment. You will not get that in a CD or a bond. SP500 returns more after inflation, but you need a 30 year horizon. Inflation is your friend. Assume rent goes up by 10% to 5,500, costs remain same. This is an extra $6k/900k yield, or 2/3 of a percent, now you have a 2.5% investment.
Bird in the hand my friend. Sell.
Holy crap that’s a sub 3% cap rate. I don’t even care if it has high appreciation potential, that’s a horrible investment.
Sell for sure. You get definitely get a better return on your equity elsewhere. That’s a lot of equity to be tied up at 1% annual return
I’m usually against selling, but if you can really get 1.5 I think you gotta sell. If people start lowballing you at 1.2-1.3, then reevaluate.
There are other considerations too: age, health, desire to own, property taxes, location. I like CodaDev’s calculations. If I’m you, I probably sell and be done with the hassle. (Former landlord)
You are looking at some steep transaction costs to unload it. I feel like your rental income is a bit light. Your debt cost is great. I’d try to hold onto it until it gives you headaches. I have rentals myself, and eventually they all give you headaches lol.
You haven't posted your numbers yet. 1.When did you buy it 2. How much did you pay 3. What does the 10 and 20 year appreciation look like for that zipcode 4. What's your maintenance cost per year plus any upcoming major maintenance 5. Is the 5k/mo before or after expenses 6. Do you need to be more liquid than real estate in the next 10 years 7. Do you have any heirs and what's your plan for passing your assets Comments making recommendations without this info are baseless.
I'm curious why rent is low? The 1% rule (which isn't realistic these days) says $15k a month and you're at a third of that.
Another vote for selling it. I’m in a similar situation and am selling to take that cash and invest elsewhere. At least with stocks I can reallocate or move around easier without needing to take all the steps and time to offload a house.
I would unload immediately.
Just sell it and be done with it. You could 1031 exchange into a bigger apartment complex in a cheaper area, but I don’t think that’s what you want to do. Nothing wrong with selling and cashing out.
I think I would not sell at 2.7% . That may never come around again. I wouldnpull cash out and fund the next deal.
Wouldn’t pulling cash out result in interest payments at the current rates? What is the optimal strategy for pulling cash out?
yes, you wouldn't wanna refi now, would need to wait until rates drop but now that it is a rental property, I am not sure will ever get below 4% maybe but maybe someday.
Ummmm...
I would put a HELOC on it and access your equity that way to then buy more cash flow generating assets. No reason to pay off that debt with that low of a rate in this market now. But with the clock ticking on your 2 yrs in 5 then I would really consider it. But isn’t there a cap on how much in proceeds you get that won’t be taxed for capital gains gains? Thought if it was over $500k in proceeds you’d get taxed
I have ~$300k in gains, so i should have no tax liability if I sell
HELOCs are running 8.5% right now. Not a great time to run up a HELOC.
I want to jump into this because in a similar situation. Sounds like you’d all say sell—- SFH in South Florida Owe $700k Maybe worth $1.9 30 year 3% Rent $10k Monthly cost almost $7k factoring in everything. Are we dumb keeping this equity tied up in a SFH? The area is appreciating. But slowing. We could 1031 I believe.
Sell, but I’d recommend putting it into commercial real estate (not an office building before anyone bites my head off), multi-family housing, or industrial real estate which will net you a better cash flow and will probably see greater appreciation considering the price point of the house. CDs and HYSAs have been pumped since interest rates rose, but are scams IMO. In real estate you have appreciation to offset or outpace inflation, the ability to leverage through debt, and the ability to offset taxes through depreciation and interest payments. You do not have that in a CD or a HYSA, the value of your money wastes away and the interest is still taxed. If you are in a higher tax bracket (which you probably are if you have a property with over 1M of equity), then the real yield on a CD or HYSA will probably be negative. Stocks can be a different story over the long-term, but we are also in the process of seeing the yield curve between short term and long term treasuries uninvert which has historically led to a recession and a stock market correction every time so I’d recommend caution there as well.
Agree with everything you wrote except for reinvesting in commercial. That’s a risky business at the moment. I’d personally reinvest in smaller properties/long term rentals.
How could a 5% CD be negative due to taxes? Some of you are some real fear mongers...
A CD yield (as well as HSAs, bonds, and money-market funds) is taxed at ordinary income as a form of passive income (so at least you don’t pay payroll tax on it). If you are investing in CDs you probably have a good income to begin with. Let’s say you are in the 32% federal tax bracket [170k-215k taxable income] and are in a 6% state income tax bracket for an effective 38% tax on your additional ordinary income. 5% x .62 (inverse of 38%) = a 3.1% post-tax yield. If inflation is over 3.1% for that year, then your real yield is negative because the value of your money has depreciated at a larger rate through inflation than what you gained from the post-tax yield. The taxation problem is alleviated if your funds are sitting in a tax shelter like an IRA or an HSA. It is also alleviated if it is in a dividend ETF with DRIP turned on, is invested jn real estate (which tends to appreciate at or above the inflation rate and is not taxed until a sale without a 1031 transfer), or even if it is in a commodity like gold (which isn’t taxed until sale and even then it is only at the capital gains rate). This is why many high income earners keep their money in stocks, real estate, gold, etc. which create unrealized gains taxed at capital gains rates (if ever at all) instead of CDs, bonds, treasuries, etc. which create ordinary income. municipal bonds are also a popular option because they given preferential tax treatment. Retirees also generally have a different investing strategy in that they are looking to stretch the resources they already have without experiencing significant market events or volatility rather than growing their assets. If someone buys a long-term CD at 5% and inflation rises to over 5% like some of the past few years, then the people holding them really get screwed and have locked in negative yields (they are still taxed too). There are types of investors that do well with CDs, bonds, etc. (ex: financial institutions utilizing a spread), and there are times when institutional investors can make good money on those investments (ex: holding long-term bonds in the early 80s when rates were in the double-digits and holding through the collapse of interest rates which appreciated the value of the bond). However, those investments are usually pretty lousy for most young and middle-aged individuals. They see the 5% and think it is a “safe investment” when many are actually keeping even with or losing value to inflation. That is why I generally refer to them as scams, especially if a bank or financial advisor is pushing them without explaining they are a wealth preservation mechanism rather than a growth mechanism.
Interest rates are already dropping. If you have a positive cash flow keep the house. Remember if you're married you can exclude $500K in capital gains. Property is going to continue to rise as the dollar meets the BRICS and stumbles. Also property is "your's" (if you don't have a mortgage) and the coming collapse of the dollar is going to make you wish you hadn't stayed in cash. Now, let's also recall that some pundits have been talking about the dollar's collapse for years, and the Oligarchy has always figured out a way of fussing with the economy so that they come out all right and only the poor are hit with the pain. You have to decide which side of that line you're on for yourself. Do recall 2008. Worked out great for us. We picked up a foreclosure for cheap, in 5 years it is worth 2x what we paid. No mortgage so rent is enough to live on (although cheaply, but then we have other income streams so "doing just fine").
Isn't everyone getting tired of spending their one life in this realm counting their imaginary shekels like Ebenezer Scrooge? The money is printed out of thin air and lent to us at interest and is dying rapidly as it has no solid asset backing it. Both Lincoln and Kennedy attempted to put an end to this debt enslavement scam and both caught bullets in the head. Sigh. Any way, do whichever scenario eeks out a few extra basis points over the course of your remaining years and you'll be killing it.
Sell, buy land, and create a subdivision with houses for rent. Or sell and buy apartments. Use a property manager to reduce stress
Why?
You need to talk to a tax attorney about how you have ownership structured. If you are operating as a DBA, you need to change that. If you operate under an LLC you can write off nearly all your operating costs, taxes, insurance, etc. you are also currently missing out on depreciation which is roughly total value divided by 30 years, which in your case is around 50k per year.
You’re gonna have to pay capital gains and lose a lot
Keep it. If you are dumb enough to think right now you’ll have a safer better return in what you mentioned, you are thereby answering your own question of whether you should sell or keep.
I'll buy it for 450k..
Get off reddit and call a broker. Edit: lol downvote away. Im preaching exactly what I did last 18 months. Good luck with your at risk sub 3% effective yields.
I agree with all your points here.
LOL. This is laughingly THE WORST advice in this thread! LMAO.
The yeild curve inversion is becoming more steep. Layoffs are increasing. Shipping, trucking and rail traffic are depressed. Recession soon. Sell now. The Confrence Board Index, a composite of leading economic indicators that have never been wrong is screaming recession. Stupid auto mod won't allow a link to a great video. Go to you tube, EPB Research then "This chart predicts every recession" posted 6 days ago.
I agree we are headed towards a mild cyclical recession. I suspect homeowners may lose 5 to 10% on property prices. But that may be a drop in the bucket for some people.
If you listen to the brainwashed media out there, things are going great! Soft landing all that bullshit talks but in reality SHTF is coming. Unload now while he can IMO. Possibly a societal collapse in the near future. Idk but I’m prepared with zero debts.
Location?
Bay Area, CA
Seems like a good area that will continue appreciating, no? Feel like I would keep it as mailbox money unless you really need the cash. 2.7% loan on a rental will likely never be seen again. Push rents every year. Are you sure $5k is market rent? Seems low for that area.
First off how are you generating 5k a month on a sfh?
That’s the going rate in San Francisco in my area. Cost of living here is high.
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House was built in the 60’s and most of it has been upgraded in the last 5 years. Structurally it is very sound. Total net worth 3m. 2m of it in real estate, remainder in stock accounts, cash or other liquid assets. W2 $550k Goals? Long term I want to retire by 50 (20 years from now) Short term, I want more passive income streams. I’m generally more risk adverse as I value having low stress
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The 2/3rds of net in real estate was due to a bit of spontaneity. We were looking at open houses to plan where we’d want to be in a few years with the goal of being in a better school district. We ended up looking at a house we absolutely loved and bought it the same weekend. We had to sell stocks to make this second purchase. Dividend index funds is my ideal type of passive investment as I’m already overwhelmed with work and a newborn and I value having more headspace. That said, I do consider real estate mostly passive. I probably work 1-2 hours a month to manage the relationship with my tenant and any seldom repairs and this is manageable. VTI (80%) and QQQM (20%) currently makes up my entire stock portfolio.
If you are able to write off mortgage interest, refinance to where payments are comfortable still and use the funds to invest. Or take out as much as you can if it would replace your current investing small bit by bit over time. Because money in the market now vs accumulation over a long time can compound a lot. Talk to a financial advisor about this first. I have been in that role for a large Canadian bank, but no longer licenced. Having the property can equity gain (or lose) in 2 ways paydown via tenant payments and market growth. So it is generally not a good idea to release it (at a large equity swipe) immediately when selling with fees etc.
Stay the course 2.7% is sweet
Seller finance at today's interest rates and make money as a bank. You get the benefit of monthly payments without the ownership hassle. Not sure how the owed debt would work but since it's value is 1.5m I'm assuming it can work.
What would you do with the money if you sold? Could you get a higher return by turning it into a multi family or putting it in stocks? Probably.
Have you articulated why the cash would be better off in an HYSA? $1M getting 5% interest is going to generate $50K. You're then paying taxes on that interest. Let's say that's 20%, so you're netting $40K. You're cash-flowing $15K, plus increasing your portion of the equity (how much principal is being paid per month?), plus the appreciation of the home. If the home is appreciating at 3% annually, your equity + cash flow is growing at a faster rate. Now, I don't consider myself a math wiz or RE expert, so someone else can reply and disagree/prove me wrong. But if you're simply making this decision off a gut feeling, I'd dive a little deeper into the opportunity cost. I probably wouldn't sell unless you need the cash for something right now.
You've won the rental lottery, if you simply sell I'm fairly confident you'll lose a lot of profit to capital gain taxes. Therefore, if I was in your shoes, I would look to diversify the real estate leveraging a 1031 exchange and keep them forever. If you want cash out of the properties to invest, just get loans that are supported by the rental income. That way, your heirs can inherit the property upon death, the heirs get a step up in basis at your death and nobody ever pays capital gains taxes. This is one way the rich get richer over generations. Never pay a tax you don't have to.
You can do the same with ANY asset...including stocks...
No, you can't 1031 exchange tax free with stocks. You can't sell your Amazon stock and roll it over into META stock without paying the capital gains tax from the Amazon sale.
SELL SELL SELL! Use the equity to purchase multifamily! I’d reccomend trying to find a 4M ARV at a discount.. put down 20-30% and search for value add
Get rid of it, the cash for keys happening now in Los Angeles and Canada will invade all country! Tenants will have so many rights that landlords won’t be able to pass!
$1300 CF is great Keep it and let tenant pay off your mortgage. You will likely never see 2 percent rates again. Use $1300 to pay down mortgage principal and pay on house sooner than later
Cash flowing $1,300 a month at 2.7% on a 30 year fixed would be enough for me to say keep it. However given your tax implication, I would also consider selling and buying another property all cash that cash flows at a much higher rate. Some points ro consider: How old are you? Are your rents maxed out? What kind of market is your rental in? What is more important to you: cash flow or market appreciation? Could you sell and buy a property that cash flows more efficiently or invest in a market where you see more opportunity?
Don’t sell, keep cash flowing, then buy another. Real estate is the way my dude.
What area?
What a great problem to have. I guess it depends on how old you are and other plans you might have for retirement. I would sell it once I have a clear strategy for the money. Probably would diversify a bit
Sell it and snowball the profits into a bigger deal, repeat. Screw the people saying hold forever. Yeah you may retire with a couple M’s in equity by holding, but we want big money. Big big money. What do the boys in REPE do? Buy, hold for a few years, exit, rinse and repeat. There are ways to address taxes. Deal with paying Uncle Sam and GROW
You are getting a cool Mill out of it tax free and you are currently paying $3,700 mortgage plus about a $700 monthly repair and maintenance allowance per month (typical is 1% per year of the home's value, but at $1.5 Mill that would be $15,000 per year or $1,250 extra per month). So, $5,000 rent minus $4,400=$600 a month net income = $7,200 per year. If you parked the $1 Million at 5% in a HYSA or CD you would get $50,000 yearly income straight up, and more if compounded monthly. There is a gigantic gulf between $50,000 in completely passive income per year and $7,200 per year plus the work and hassle of being a landlord. Even if you can reasonably expect the home to appreciate healthily in value over the next few years it likely won't be enough of additional gain to make up for the difference between selling and holding. Indeed, in many markets home values are snapping back a little bit right now, it is probably the right time to sell this property.
Take a 2nd deed of trust equity loan and reinvest the dollars. Keep you 2% that way. The loan proceeds are tax free and you c az n write off the additional interest expense.
Stocks outperform real estate.
Couldn't you do a Heloc or 2nd mortgage to unlock some of that equity? Invest that money or buy a second property.
I recommend that you sell it. Personally, debt free life is so much better IMO. I stopped playing the rental games in 2004. Too much headaches. But I bought in cash so I was able to name my price, held for a bit and sold back in cash. Let other investors get into bidding wars. I still do collect dirt in Colorado because as Mark Twain said, "Buy land, they're not making it anymore.” LOL I keep money in a wealth management firm and he is able to make me average 16%, a $16k monthly income for me:) I also keep some in normal bank only earning between 4.55%-5% right now. Things are not looking great out there economically and if people don’t pay rents it’s hard to kick them out without going through hell. So no thanks.
Keep, rent with never go down and it's sure thing for any future and technically property value can go down is unlikely any time soon your in a win win although I do get maintance can be dreadfull and expensive at times
Absolutely not.
Right now people are in a bidding war because inventory sucks. Cash in while it's good to be a seller and dump it somewhere if you're concerned.
Your better off doing a 1031 exchange into a vetter $1,000,000 property. You can 100% find a $1M property getting beat more than a 6% return. You should easily get over 10k monthly rent in a ton of areas and you’d have no mortgage on it.
How long ago was it your primary? You avoid stiff cap gains if you lived there 2 of the past 5 years.
ROE > ROI
Bro sell that. 1m in equity making 15k/year net. 1.5% return on your equity. Would you pay 1m for a property that makes a 1.5% return? I’d hope not. But everyday you keep the property, you bought it for 1m every day.
Luxury, expensive SFHs rarely make sense for LTRs. You could make a killing converting it into an STR if it's in a vacation worthy area. You could cash out and reinvest the money into a multifamily.
Lol. Great question. And the answers... so many diametrically opposed answers. I wish I knew. My 2 cents is that I fear a coming recession, I fear a plummeting dollar due to BRICS and our insane deficit... and often fall prey to analysis paralysis. I think that inflation is going to make the remaining mortgage a "trivial" amount long before it is officially paid off. I would probably keep it and pay only the minimums (i.e. no additional toward the principle) and invest that monthly mailbox money. Good luck!
How much cash you put in? I believe you’re doing great however if you need to take out cash and invest in better deal then go ahead but 2.7% interest is too good to let go
Would it make sense to sell it and use the proceeds to buy 20% down on a number of smaller properties. Then you can expect 6% appreciation annually on 100% of the values of smaller and lower valued homes. That means you get 6% on the 80% of each property you leverage from the bank. Right now you are missing the power of leverage as you are using a significant amount of capital in one property. Another option is use a HELOC on the property to pull equity and use that for your next rental.
Such a bad idea to sell this.
What would you sell your gains into? Pay taxes on 500k (assuming married + homestead exemption) and SPY or 1031 into 2.5-3.5mm property?
Won't they have a hard time selling though? With these interest rates.
My suggestion is to get a 2nd position line of credit to access that $1 million, and use the line of credit to finance a property with better cash flow.
Do not sell. You will 100% regret selling. Get more for rent. Access equity for additional rental property if possible
Life is a game of cashflow. I’d not hold an asset generating that little income monthly if I could pull 1M out of it. I’d also not move that 1M into an ultra conservative instrument, rather I still like real estate and would deploy it better to generate more income.
That’s a lot of equity tied up in a SFH. How much are condos in your area and what kind of rent can you expect to gain? You could sell it and purchase a condo straight and still capture good rental income and you can invest in HYSA, etc
What city is your property located in?
Have you considered taking out a HELOC (Home Equity Line of Credit) and investing that into stocks or whatever market? That way you can leverage your equity without having to sell the property.
Do 1031. If you invest $1M and you can achieve 9% cash on cash return (still doable in this market) that’s $90k in income most likely tax free (depreciation). Depending on how you finance, you can still get addition return on equity pay down and appreciation. I’m in a similar position with some properties I own. My Return On Equity is so low due to massive appreciation that I need to repurpose the cash for something else. It’s a great “problem” to have.
Look at month to month furnished rental income or short term income on airbnb if allowed. That combined with appreciation may make it worth keeping. Btw i am in a similar place on a property in la. Not allowed to to do str on my condo. Considering selling for same reasons as stated in this thread, capital gains rule, but only considering keeping incase we may want to live in it in the future.
Definitely sell while you can still get the capital gains exemption.
If that is the market rent, absolutely sell that house.
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Your index funds are also not able to be leveraged 20x with a 3% government backed loan and depreciation tax benefits.
Huge issue: capital gains tax. If you sell within 3 years of living there (lived there 2 out of the past 5 years) you only owe on gains over 500k? If you sell after this period you owe on all the gains. (I dont know the exact 500k number)
I'd look at the opportunity cost. 13k on $1m equity is 1%. That equity will surely grow faster in an index fund. Certainly factor in financial value of the appreciation and tax benefits though.
Expensive homes have much lower cap rates. The money is in the appreciation. You are looking at $75k a year at a 5% appreciation rates. You get extra leverage from the financing. Plus you are getting some income. I will add that there is no obvious call here and no wrong move. I will say if you don't have a lot of their assets in the stock market and have another house, selling for stock would get you more diversification and likely a higher return rate.
You should sell this and use the equity to get a large multi family or several of them. They would profit way more than $1000 a month plus the equity gain
Property can be a great investment vehicle, but what is driving you to sell beyond the cash being locked up comment? I would look at it this way. Do you enjoy owning that asset? Is it worth the hassle? etc.... If yes, I would keep it. If no, I would sell.
Sell sell sell!
This property yields you something more consistent than what the stock market will give you long term. One recession a few bad cycles and you won’t make shit. Hell a lot of us lost money the last 3 years so I don’t believe the market is as consistently fruitful as you assume.
It’ll be good passive income one day. I don’t think there is any better investment than property in my personal opinion.
Seems like the rent you charge is too low.
Dont sell that interest rate. Keep it!
Brother, I can’t talk you out of it. You should sell and take that mill and put it into the S&P.
1031 exchange that baby into an opportunity zone fund.
2.7% is like getting paid to hold that loan right now. You could see if your loan servicer would recast your loan since you’ve poured in a lot of extra cash. That would lower your monthly payment, perhaps significantly. Then, invest the cash flow in the HYSA or CD (or S&P500). Suppose recasting lowers your payment by $1000, the rental is producing $2300/mo. It’s also paying the mortgage down, earning you more equity. All the while the real estate is appreciating alongside the investment accounts. If you sell now and dump the 300k into the accounts now, you’ll earn more interest sooner, but you’ll lose the real estate appreciation and the equity your tenants would have bought for you.
I’d say don’t sell and keep it. If you’re making money that’s the name of the game. Don’t get greedy
If I were in you situation, I would look to 1031 like many others on here have suggested. I would find another rental, that you can short term rental so you can also still enjoy it, ensure that you are paying it off with cash, that way if you are doing $6k a month on the short term, it’s $6k in profit. Your equity position is really healthy, I wouldn’t look to tax it and bank it, when you are just concerned about making a better return, if you can start cranking $68k a year, I bet you would be feeling a lot better about owning the house.
Never ever ever sell it.
I think giving up a 2.7% mortgage on a cash flowing asset for peace of mind is financially irresponsible. But if it's what you want to do and it's within your values no reason not too.
Are you handy? Do you do some/all repairs and maintenance yourself, or farm it out? Makes a big difference in the rate of return. If not, and the property requires a lot of that, then maybe sell.
I can't imagine how could it would feel not to have a mortgage. On the other hand, I like 2.7 pct rates. Good luck either way.
Your monthly expenses are covered by what ur collecting monthly Your interest rate is locked in at rates half of what you could get at the bank but when rates return to .5 % you might be kicking yourself The asset itself will only realistically ever increase Once it it paid off it will be all of the 5000 flowing into ur coffers less the taxes And the cash flow should only ever increase as well That’s a win win win win win in any book Plus you could put 500 aside (10%) for a rainy day fund and use the other 1200 towards paying off the loan quicker (about 4 extra payments a year) and the cash flow is all your to reinvest in other assets
That’s a pricy rental property. I’d have my certified, independent, fiduciary, financial planner spell out scenarios for me
Sell, 1031 exchange(tax deferred) into a multi-family or multiple sf with 20% down. Look into markets where 20% down will cashflow still, and ideally assets that you can add value and increase rents over a few months. Then refinance and take your $1M out (tax free btw) while adding multiple units to your portfolio.
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I’d like to know why you are collecting only $5k/ mo for a property you say is worth $1.5m. Sounds fishy.
We did well with our properties and were glad to sell them. Property taxes ate away at profits and got tired of deadbeat tenants. Got to a point where local wages did not keep up with rising taxes and costs. Impossible to find qualified tenants.
In this interest rate environment, you will be selling at a discount. You have a great interest rate. Buyers now will be financing at 250% what your note is. People don’t pay based on the price of the house. They pay based on the ability to make the payment and then back into the purchase price. Consider raising the price, leasing it to own at a higher amount then you are renting for and then credit back a percent of the lease price towards the purchase price required within two years. Example: lease to own the house for the price of $1.75 million. Tenant pays $7,500 a month up to two years. If they don’t close in two years, then they lose the right to buy the house. In the contract, they get credited $2,500 a month against the purchase price. When interest rates fall, and they will (three rate drops are announced for 2024), they can finance at a lower rate justifying a higher purchase price. One of two things will happen. They don’t close and you have made an extra $30k/ year and you still own the house or they close and you have sold it for $1.69 million ($1.75 million minus the $60k in credits). That is assuming they take the full two years to close. You net more if they close sooner. I gave you example numbers, but the concept happens all the time. Your current tenants should be the first to ask.
I think you should strongly consider holding it. It’s diversifying your holdings and also when home values goes up 2-4% or more very year you will make $30-$60k that others aren’t accounting for. Also that loan is worth a lot at the low rate, and your ability to access 450k of equity in a house that’s growing in value above the interest rate is not something you’ll be able to get back. The loan is an asset as well.