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Rental House - Keep or Sell?
Old 03-21-2008, 06:56 PM   #1
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Rental House - Keep or Sell?

DH and I own a rental property that was our first house. We moved in to our current home in fall of 2006. Because the market was already slowing, we decided to not sell the old house at that time and rented it out. (In retrospect that was not such a good decision)

Our renters have been wonderful, but their lease will be up at the end of May, and we'll need to either keep renting it out or selling it. I am on the fence as to what we should do.

Pros of selling:
1. No more being a landlord (neither of us is handy);
2. No capital gains tax because it's still within 3 years of us moving out;
3. Price could keep falling (my biggest concern)

Cons of selling:
1. Price will be REALLY low (I think it's dropped a good 20% in the last 2 years) -- not bringing in as much as I'd hoped, but we won't lose money hopefully. I am a licensed realtor so I watch the market all the time. But when it's your own house it's hard to be objective.

The housing market does not really look good, and the number of foreclosures seems to indicate it will take more than a year for it to recover, so if we don't sell now we're definitely going to owe capital gains tax.

BTW, our old home is too small for us now, so we won't move back in for 2 years just to eliminate the capital gains tax liability.

Any thoughts or suggestions are welcome, especially your views on where the real estate market is going. Thanks.
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Old 03-21-2008, 07:05 PM   #2
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You're a realtor, so you probably know a whole lot more about where the real estate market is going in your area than I would.

But, it seems to me that the real estate slump is dragging out in most places and it may be a while before it picks up again. Plus, there's that capital gains tax hanging over your head, and whatever expenses result from any future tenants.

If I were in your position, I'd probably just sell and swallow the loss. But that's me. What feels right to you?
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Old 03-21-2008, 07:05 PM   #3
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Well if all real estate is local, and not knowing where you live, how can any of us try to predict where your market is going? If you want to be objective, examination of local data about your market is a must. As a licensed realtor yourself you should know where to look for that data.
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Old 03-21-2008, 07:09 PM   #4
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Why would you sell in this market if you didn't have too? Might as well hold onto it and wait for this to settle out.
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Old 03-21-2008, 08:08 PM   #5
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it's a tough decision to sell now but for me in florida, i just don't see it getting better any time soon. sure, sales might pick up eventually and so it might get easier to sell later, but i just don't see prices climbing high enough in any near future to justify holding now.
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Old 03-21-2008, 08:26 PM   #6
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Investor?

It puzzles me why when people talk about stocks they have a fifteen year time horizon for profit. You always hear that if you just hold on you will be fine.

Well, what are the odds that if you just hold on with real estate you will be fine also? Why is it different?

Your time line on investing in real estate or stocks should be long, quite long. If it isn't then you probably should rethink whether you are an investor or not.

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Old 03-21-2008, 08:43 PM   #7
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If it bothers you to rent it, sell it. If it is a chore for you to manage it, hire a property mangement firm. My wife and I have had property managers and have been happy with the level of surface etc. Not much sense in selling it now to avoid capital gain if you are gonna have to list it on the cheap to unload it now anyway. You can always approach current tenants and see if they are interest in lease to own. If you have a monster capital gain, you can always do a 1031 exchange into land or other rental home later. Just some thoughts. Jim
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Old 03-21-2008, 08:44 PM   #8
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I am in the Mpls/St. Paul area and the local market is not good. It hasn't suffered the kind of loss seen in certain areas of CA and FL, but the picture is bleak. Inventory is still at all time high and pending sales keep declining. However, from what I gather, the situation is pretty similar to a lot of other areas, and that's why I'm trying to get some input (and maybe just to confirm what I thought we should do).

The main difference between real estate and other liquid investment, IMO, is that you can't take real estate with you, and it's can be a lot more labor intensive. It's much more involved than owning mutual funds (unless you're a very active investor, of course). Also, when you sell a rental property, the depreciation for the past x years will come back to haunt you, in addition to capital gains tax, unless you move back and thus treat it as a primary residence. That's why many people do 1031 Exchange to avoid all the taxation. But that means we'll have to be landlords forever.

Thanks for all of your input! Appreciate it.
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Old 03-21-2008, 08:47 PM   #9
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If it bothers you to rent it, sell it. If it is a chore for you to manage it, hire a property mangement firm. My wife and I have had property managers and have been happy with the level of surface etc. Not much sense in selling it now to avoid capital gain if you are gonna have to list it on the cheap to unload it now anyway. You can always approach current tenants and see if they are interest in lease to own. If you have a monster capital gain, you can always do a 1031 exchange into land or other rental home later. Just some thoughts. Jim
Thanks, Jim. That's a very good point. We'll probably lose more by selling it now (as our margin isn't that great to begin with) than the capital gains tax would be in 3 years. I am just not sure how long the market will keep being in this slump. Our long-term plan is to move to a warmer place in 5 to 10 years, and owning a rental house is one more thing to worry about...
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Old 03-21-2008, 08:58 PM   #10
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You can do a 1031 exchange into land. You can also do a 1031 exchange into a "rental" in the area that you want to retire to. After 1 year you can convert it to your primary residence. We are in the process of selling property (via a 1031 exchange) our intent is to purchase two homes with the proceeds. One will be a vacation rental the other will be a rental in the neighborhood in Florida where we will be moving. The FL rental will become our primary residence in several years or we will continue to rent it. Jim
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Old 03-21-2008, 09:23 PM   #11
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Originally Posted by GoodSense View Post
Cons of selling:
1. Price will be REALLY low (I think it's dropped a good 20% in the last 2 years) -- not bringing in as much as I'd hoped, but we won't lose money hopefully. I am a licensed realtor so I watch the market all the time. But when it's your own house it's hard to be objective.
Any thoughts or suggestions are welcome, especially your views on where the real estate market is going. Thanks.
By a stunningly unrelated coincidence the stock market is about 15-20% off its highs.

Is the house likely to take off in value again, as some properties could in areas like Manhattan, Bay Area, or Hawaii? Or is it more likely to appreciate at the rate of inflation?

How does the house fit into your overall asset allocation? Do you feel that you'd be able to reinvest the after-tax profits into something better suited for your portfolio and equally likely to appreciate at least the rate of inflation?

How does your cap-gains tax penalty compare to the possibility of the house bottoming out this year or next and gaining? (You'll still pay the depreciation recapture tax.) Is it worth the nail-biting wait to delay making the sale before the three-year limit?

We're accidental landlords as well but (despite being handy) we don't appreciate the hassle. Our ROE is also below CD rates, despite the recent Fed cuts, and we could do better in a blue-chip dividend stock fund. We're looking to sell as soon as the tenants are done with the place.
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Old 03-21-2008, 09:26 PM   #12
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We are in the process of selling property (via a 1031 exchange) our intent is to purchase two homes with the proceeds.
Selling 2 properties and doing 2 1031 exchanges?
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Old 03-21-2008, 09:33 PM   #13
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Well, hindsight is 20/20 for all of us and like everyone else, I don't have a crystal ball, but fwiw I'm expecting at least 5 years before we start to approach the prices we saw 2 years ago - and maybe much longer depending on the area where you live. Certainly it won't be in the next year or two. So.... as you said, by then you will have lost your homeowners exemption and will be paying capital gains taxes - if you have a gain. Only you know what the actual figures are - and as a realtor you have an inside track and can do the math. ( I have an inactive CA broker's license - like 25% of CA residents!)

You say you don't want to be longterm landlords - you're not handy, and you don't want to move back into the house, so quite possibly you've answered your own question. You don't want to do a 1031 exchange or an installment sale but possibly, you could do a 1031 into one of those hands off limited partnership things in a commercial strip mall - I'm having a senior moment here! Darn - what are they called? Well - you're a realtor - you'll know! You could also put it on the market at a realistic price for 6 months and market the h--- out of it. Maybe your tenant would stay as month to month for a slightly reduced rent?

By the way, if you feel so inclined, Google the candidates and see where they stand on taxes - both Democrats say they intend to raise Fed longterm capital gains rates to 20-28% - back where it was before the Bush tax cuts to help pay for their new social programs. McCain hasn't been consistent on his position so I'm expecting an increase of some sort after 2010. The info you get from the internet might help you make up your mind.
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Old 03-22-2008, 06:56 AM   #14
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Catching the tax exemption is a driving factor IMO ... accepting that, bailing now will be better than bailing in 2 years - again IMO (IF you can get a vacant unit). I'ld float it out onto the market while you have a capitol gain. The current market direction will not change in 2 years. Sounds like managing the thing for 5+ years is out of the question (only to then pay a third of the gain to Uncle Sam). It's still a good time to sell.
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Old 03-22-2008, 07:59 AM   #15
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Originally Posted by GoodSense View Post
Thanks, Jim. That's a very good point. We'll probably lose more by selling it now (as our margin isn't that great to begin with) than the capital gains tax would be in 3 years. I am just not sure how long the market will keep being in this slump. Our long-term plan is to move to a warmer place in 5 to 10 years, and owning a rental house is one more thing to worry about...
(emphasis mine)

So how much is eliminating that worry worth to you in dollars and cents? That is your dilemma (as I see it).

It would be worth a LOT to me. But then that's me, not you. If you sell the home, and if that causes you to lose some money compared with the alternatives, then you are spending that money to buy yourself into a future that is free of that worry.
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Old 03-22-2008, 10:08 AM   #16
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No, you can do a 1031 exchange into multiple properties as long as you meet the other requirements for a 1031 exchange. I've found this website a useful tool for understanding 1031 exchanges : 1031 exchange, 1031 real estate exchange, tax deferred exchange - 1031 Exchange Services use the links on their websites to answers for common questions. Jim
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Old 03-22-2008, 10:47 AM   #17
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it's a tough decision to sell now but for me in florida, i just don't see it getting better any time soon. sure, sales might pick up eventually and so it might get easier to sell later, but i just don't see prices climbing high enough in any near future to justify holding now.
What exactly is going on with Florida real estate? I'm looking at some of these nice condos that have water front view, 1100+ sq. ft., 2004 construction (new code), and 2 BRs that selling for less than a closet would cost in Boston. I'm looking at the realtor.com's demographics information, and it would appear that median household incomes aren't that different between Florida and Boston.
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Old 03-22-2008, 01:45 PM   #18
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aside from a legacy of boom & bust and outside of hijacking this thread with a treatise on “what exactly is going on with florida real estate”, the short answer is that the rules are different here.

now for the hijack (apologies to the op). i don’t know where you are looking but price is highly dependent on very localized area. i have zero ‘for sale’ signs on my street and maybe 3 or 4 (including our rock star neighbor’s house) in my entire area of 300 houses so i think the market has stabilized. my friend just a few miles away in what he thought was a “better area” has 12 signs on his one block so he thinks the world is coming to an end.

some areas like miami overbuilt so badly that now many condo buildings have been blacklisted by financial institutions, so units can only be purchased with cash—add that to the foreclosure mix and see what ya get. other areas like mine redeveloped from downtrodden to highly desirable and so haven’t lost as much value (though to sell now i’d still be down 28% from peak but up annual 11-12% from when i bought) because much of our increase reflects actual change of character over the last 10 years rather than just a lot of hot air from the past five. areas like cape coral & punta gorda on the west coast never really had much going for them in the first place—not even an airport (we have three internationals here)--got caught up in the craze so are hurting even worse now.

generally and contrary to popular belief, i think the bubble was somewhat justified in the tri-county area of south florida because of the population growth we experienced in the early 2000s. each county had about 700 new students to accommodate every single month for about five years. it was crazy and the builders could hardly keep up with the influx. the feeder road that takes me off my side street and into town had maybe five cars an hour on it when i first moved here. now i have to fight my way into traffic (thus the gt) just 14 years later. this is not what i signed up for but it’s what we got. our county made national news the other night because we lost population for the first time in history but here’s the local newspaper’s poll, reflective, i think, of dealing with such long-term & rapid population growth:

Quote:
South Florida traditionally is one of the nation's fastest-growing areas, yet Broward County's population shrunk by 13,154 from 2006 to 2007, and Palm Beach County's grew by 99. Is this good or bad?

Good. (2357 responses)
75.2%
Bad. (778 responses)
24.8%
3135 total responses (Results not scientific)
because florida has a history of attracting retirees who already made their money so purchase with previous equity, because we are a vacation destination attractive to owners of 2nd homes and because florida also attracts european, south american and now middle east money, housing prices especially along the beach have never coincided with medium income. there still are plenty of affordable places to live (away from the beach and out of south florida).

but while our prices are not what they were, i don't know that it is fair to compare florida prices to boston. likely no one here will ever pay $200k for a parking space, at least not in my lifetime.

florida is in a slump but the south will rise again. you are going to find some excellent bargains for a while and then it will get crazy again. come bubble burst, occasional hurricane, come overpopulation, it is still and will always be south florida.
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Thanks!
Old 03-22-2008, 04:05 PM   #19
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Thanks!

Thanks for helping me see the picture more clearly. No, real estate isn't getting any better anytime soon, and despite the market uncertainly, at least my mutual fund won't call me at 3 a.m. with an overflowing toilet.

Lazy, thanks for the info about Florida real estate. It's interesting to hear how the rest of the country is doing. The media exaggerate everything and I never know how much to believe them.
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Old 03-22-2008, 04:19 PM   #20
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Thanks for helping me see the picture more clearly. No, real estate isn't getting any better anytime soon, and despite the market uncertainly, at least my mutual fund won't call me at 3 a.m. with an overflowing toilet.

Lazy, thanks for the info about Florida real estate. It's interesting to hear how the rest of the country is doing. The media exaggerate everything and I never know how much to believe them.

Well said! While I have never been a landlord, I've had some indirect involvement with rental property. Enough to know that I want nothing to do with owning any. I'm too darn lazy. I'll set my stock/bond/cash AA and let the market do its thing, thank you very much!
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