Rental Properties - Decisions, Decisions...

[njonge01]

I am wondering if my decision to continue to own these properties is the best path. Thanks in advance for any advice and/or food for thought.

I own two residential properties other than my homestead. Both are occupied and the prospects look very good to keep them occupied and continue with this contribution to the paydown on the mortgages. The tenants and property management keep both properties in very good condition.


Both were my home at one point, and then when I moved and bought a new home, I just kept them both. Seemed like a great idea before 2009!

- Between the 2 of them, I am out of pocket ~ $800-1000 / month to cover mortgage, association fees and management fees. Most of that 'cost' is for the less valuable of the 2 properties.
- Both mortgages are 30 year, one is 5.5 the other is 5.8
- For the smaller property, I would probably have to write a 10 - 15K check at closing.
- This smaller property has been depreciated for 10 years so there would be a pretty big capital gain I would need to declare at tax time.
- For the larger property - I could probably walk away with 50-60K.
- This larger property has been depreciated for 5 years, and I don't think capital gains taxes would exceed proceeds.

 

[MasterBlaster]

Is there a question in there somewhere ?

the big question is ... What will house prices do ?

If prices go up strongly from here, you'll do great. If prices stay flat or decline then you won't do so well.

Since property #2 has some real equity. Do you think the growth in housing prices will beat some other investment you could make with the equity ? The answer should be in after-tax dollars.

 

[calmloki]

Keep on renting till the money runs out!

In a no property appreciation climate $800-1000 'cost' is actually COST! I am a big fan of rental property, but not when it costs money for the joy of owning it. Feel your pain at writing a check for the pleasure of selling the lesser rental, but it looks like you would save that amount in a year - don't expect the RE market to turn in that brief time

 

[njonge01]

I am wondering if my decision to continue to own these properties is the best path.

There's the question... right up top.

Here are some other factors that have kept me on this path.

- Another variable is the rental rate. I should be able to demand a total of about $400 more per month with new leases in 2012.
- Also, between Depreciation, Mortgage Interest and other costs, these 2 properties give me about a $20,000 - $25,000 deduction on my annual income tax.
- The other downside to selling is the prospect of them sitting unoccupied while for sale. In Atlanta, GA and Jacksonville, FL... there is lots of inventory to compete against when selling.

 

[calmloki]

The depreciation you save now you have to give back at time of sale. The interest you write off against your income? So if are losing money on the places for every $4 in interest you pay you save $1 in tax liability vs. paying $0 in interest and paying $1 to the tax man. Net, $2 savings without the rental.

Simplistic, but I'm simple.

 

[wolf]

OP:

Keep it simple. No emotion. Just look at the "numbers".

What is your "return" on investment. End of the year, net income, divided by the value of the house.

Figure the return for each house independently.

Example. You can earn 2-3 % in a CD. No risk, no work.

What is the return for your rental House. It has to be much more that 2-3%.

If not. sell. Keep it simple.

This advice has worked for me for years. Just my 2 cents.

 

[JOHNNIE36]

Have you looked into refinancing? In todays world, 5.5 and 5.8% look high.

 

[Nords]

- Also, between Depreciation, Mortgage Interest and other costs, these 2 properties give me about a $20,000 - $25,000 deduction on my annual income tax.

Gotta do more math, but first separate the oranges from the apples.

You're taking a $20K deduction, but that's not how much money you're saving. You're saving money at the 10%, 15%, or 25% income-tax brackets (probably at some combination of two of the three). So even if you're really haulin' in the income loot (from other income sources, not the rentals!) you're only saving $6250/year... and since you're losing at least $800/month on expenses, you're paying at least $9600/year for that dubious privilege.

When you sell the place, that "deduction" for depreciation will be taxed at a 25% rate for depreciation recapture. So you were deducting dollars to save quarters (at the 25% rate, anyway, otherwise it's dimes & nickels). When you sell the place then Uncle Sam, having allowed you to keep your small change, will expect to the depreciation recapture to be repaid in dollar bills.

Then there's the whole issue of AMT plus state & local taxes.

You have a choice: amputate and apply a tourniquet, or continue to hemorrhage until gangrene sets in.

 

[arebelspy]

What is your "return" on investment. End of the year, net income, divided by the value of the house.

Or perhaps divided by the equity in the house. Or rather what you would get if you sold (minus selling costs, capital gains, etc). Calculation only works if both these are positive numbers, otherwise you're looking at a different calculation on how to lose less money. But in terms of return, if you're comparing to what else you could do with that money, and looking only at this point in time (ignoring sunk costs), net return / proceeds after sale could give you a reasonable number for return that you could consider versus selling and putting the money to work elsewhere.

And, of course, factor in the work that it takes, somehow.

 

[LightningDawg]

Refinance.

 

[njonge01]

Interesting advice, on all counts. I don't know about you guys, but I must be the only one NOT living a world where banks are readily offering below 5% loans for investment properties that are in Floriida and/or are multi-unit condominiums. Also, from my extensive research, similar properties in Atlanta and Florida, even foreclosures at give away prices, are sitting on the market for as 6 months and longer. And then, you have to hope that the buy side of the equation doesn't fall through.

Most months the worse of the 2 properties bring in enough rental income to cover the interest on the loan, the property management fees plus a portion of the condo' association fees. The larger part of my out of pocket "expense" pays principal on the loan. So, I'm getting an interest free loan and I am partially on the hook for the association fees.

The other property is cash flow positive including the principal payment.

Who knows, by the time I sell it, maybe the tax code will return to the days to where I can move into the more troubling of these properties for 2 years and then sell it as a Homestead with zero capital gains or income tax exposure.

 

[wolf]

Or perhaps divided by the equity in the house. Or rather what you would get if you sold (minus selling costs, capital gains, etc). Calculation only works if both these are positive numbers, otherwise you're looking at a different calculation on how to lose less money. But in terms of return, if you're comparing to what else you could do with that money, and looking only at this point in time (ignoring sunk costs), net return / proceeds after sale could give you a reasonable number for return that you could consider versus selling and putting the money to work elsewhere.

And, of course, factor in the work that it takes, somehow.

Agreed. I was just trying to keep it really simple.

 

[Nords]

Who knows, by the time I sell it, maybe the tax code will return to the days to where I can move into the more troubling of these properties for 2 years and then sell it as a Homestead with zero capital gains or income tax exposure.

"Hope". Yeah, that sounds like a plan.