Should I Sell My Rental Property And Cash Out?

Should I sell my rental property? It’s a question I ask myself every month. Maybe you do too.

Update 12/05/2018: I still own the property and decided to rent it out again. I worked with a CPA to understand the exact tax consequences of selling and met with 3-4 agents to determine a value.

It’s now showering me with cash flow again. I consider the equity my “banana stand“. I’ll revisit the sale in spring of 2018.

In addition to to my rental, I’m investing on the Fundrise real estate platform. Fundrise allows regular investors to invest in high-quality real estate from their computers. 

Over the life of this blog, I’ve written on occasion about the real estate I own. Real estate is included as one of my multiple streams of income, and buying two properties has had a huge impact on my financial life. Not entirely in a good way.

During the last five months, I’ve been formulating a new plan for my real estate investing future. I’ve alluded to this in recent posts and today I’ll go into the details. Based on what I know today, I’m leaning toward selling the property some time next year and using the proceeds to make better investments.

At the end of this article, maybe some of you can offer advice or opinions on my situation. Should I sell my rental property?

Quick Overview Of My Properties

In late 2006, I bought a one bedroom condo in a good location outside of the city. I was well aware of the historic housing bubble and waited until it popped before buying. I thought I was so smart. As we all know now, the pop was followed by a slow leak that pushed prices steadily downward, falling even further when the banking and mortgage crisis hit. I bought too early in the cycle.

Mrs. RBD moved into the condo and we enjoyed it there until we were ready to start a family. Since we knew the unit wouldn’t fetch what I paid for it after five years, we rented it out when we moved to the suburbs.

I always wanted to become a landlord, but my inexperience led me to buy a unit that was not the best rental after moving out. While living in the space, I realized the many things that could go wrong with it beyond the maintenance of a normal one bedroom.

Our house in the suburbs is working well for us. We own a sufficiently sized home in a great neighborhood, not too far from the city. We’ve lowered our payments for both the house and rental through a few rounds of refinancing. The rental is cash flow positive. With cash piling up and things going well, last year I decided it was time to buy a second rental property.

I low-balled and lost the bid on the first reasonable property I found. The second attempt to purchase another rental failed just a few days before closing (read the full story here). The experience gave me a sour taste for condo rentals. Since condos are far more affordable than row homes and single family homes in my area, I decided to tone down my real estate investment aspirations and focus more on dividend paying stocks in the short-term.

Much of the intended new rental down payment was funneled into stocks during the second half of 2014. As of today, I am not in a strong financial position to buy another rental property.

Relative Landlording Success

The rental is performing well. The two different tenants over nearly four years have been excellent. My tenants have never missed or been late on a payment. The current tenants are friendly, have good jobs, and are model citizens in my view.

Every three or four months I get a call or email from either the tenants or condo association with a minor headache. Last year I had a HVAC problem that cost me about $500 with a tune-up included. There was also a roof leak that was the association’s responsibility, but it was still a hassle. To their credit, the association has made some good changes to management and invested in some long-term projects that were neglected during the bad real estate years. For the most part now, it’s a fairly low maintenance situation.

Success is relative because while managing the unit has never been an issue, the return on investment is low. As reported on the Portfolio page, the rental adds about $1,300 per year, or $108 per month to my forward 12-month investment income (F12MII). These numbers take into account all expenses, including a maintenance and vacancy allowance. The rainy day fund is now up to $9,000 and earning interest in a high-interest savings account.

The property is worth no more than $300,000 as of now. I owe $167,000. That leaves about $133,000 in equity, and after expected selling expenses, the equity is worth about $118,000 in cash if I sold today. Since there is little value appreciation, I don’t expect to owe any capital gains taxes if I sell.

Earning $1,000 in annual income after expenses on the $118,000 in equity gives me a paltry return of just 0.85%. If I add $3,500 to the annual return accounting for principle paid on the mortgage each year, that’s gets me to $4,500, or a return of roughly 3.75% on the equity. Better, but I’m more concerned about the net cash flow. This is not the best use of equity. You can never count on value appreciation in real estate, and I certainly don’t. Over eight years of ownership, the unit price is flat.

Some New Information

I have a good personal relationship with my tenants. When I visit, I try to catch up with them to see how things are going. The last time I saw them, I received some useful information.

The tenants informed me of their long-term plans which include relocating cities, likely around late summer 2016. Now that I’m privy to this information, I know it is unlikely they’ll move out before that time.

Instead of planning to find a new tenant to occupy the unit when they move out, I’m 80-90% sure that I’m going to sell the unit.

Many factors go into my thinking. The market rate for the rent would certainly be higher than I’m charging now. I estimate I could raise the rent by $100-$125. That would increase my annual income by $1,200 to $1,500. Best case scenario my return on equity would increase to 2.12%. This is okay, but still not a particularly good use of the $118,000. By summer 2016, the equity available would be closer to $125,000.

The net cash flow numbers would be better with increased revenue, but I’d still have to manage the unit, be liable for any repairs, and contend to all the other ‘pleasantries’ that come with being a landlord.

Selling the rental property would eliminate this property from my life and open up the cash to use as we wish. Eliminating the hassle of being a landlord and the mortgage on my name would be a nice relief, and it would greatly simplify our lives.

In addition, there’s the possibility of investing some money into the current rental that would increase the sale value. The kitchen is mostly outdated. By fixing it to make the space more efficient and modern, the investment could bring in an extra $10,000-$15,000 above the cost to make the improvements.

What To Do With All Of That Money?

I once wrote about what I’d do with $1 million dollars. Selling this property would bring in 1/8th of that amount. It’s not enough to retire on, but it would have a positive impact on our financial lives. My first step would probably be to fully fund our Roth IRAs for two years. Some of the amount would go toward investing in my taxable dividend stock accounts too. The rest could be used in a number of ways.

Most prominently in my mind would be to invest it back into real estate. Sounds silly to get out of landlording, then jump right back into it, but let me explain.

As I discussed with the numbers, my current rental unit has a bad return on investment. On top of that, the unit has some features that I believe are bad for a rental. First, it’s a top floor unit and there’s no elevator. This limits the kind of tenants that would be interested. Second, the HVAC unit is a water source heat pump in a tight space. That probably doesn’t mean much to you, but the replacement cost is very high and it’s loud.

I already had to replace it once and it was a major hassle. Next, the spiral staircase is a bit of a liability and again limits the type of renter who would live there. The loft area also has some drywall problems and has had some roof leaks over the years. This is the condo association’s responsibility, but the leaks have been frequent and each time it’s another headache. Lastly, the kitchen is old and needs to be upgraded.

Buying a new investment property that is meant to be a rental from the start, has the potential for a much better return on capital. I could select a better property, then use $50,000 of the proceeds from the sale for a down payment. The right property would make more money than the one I current own, but take up a lot less equity. I’d still have $75,000 left over for other uses. Now that I know what it takes to be a landlord, I’d make sure a new rental would be easier to maintain and hopefully not include a condo association.

Potential uses of the remaining money include refinancing our current home, paying down the existing mortgage, or investing it in stocks or some other kind of opportunity. I like the idea of having a nice chunk of cash to play with. Who doesn’t!

So Should I Sell My Rental Property?

Despite poorly timing the purchase of my rental property, I’ve made the best of the situation. It’s plump with equity. Each month, the best way forward is becoming more clear. Sure, I could hold on to this unit into my retirement. The money would keep flowing in while the value would eventually appreciate.

But considering how bad this investment is performing, and the increased simplicity of our financial lives that would result from a sale, selling may be the best move. I have plenty of time to think about it, but it will be good to have a plan in place when the time comes.

I don’t regret buying this property. Owning it has sucked in a lot of cash over the years, cash that could have been otherwise invested in income producing assets. But alas, here I am today with my retirement planning still on track, so it’s not all bad.

Let this be a reminder to all that buying real estate has major consequences on your financial future. Take your time.

What do you think?  Based on what you’ve read, should I sell my rental property?

Craig Stephens

Craig is a former IT professional who left his 19-year career to be a full-time finance writer. A DIY investor since 1995, he started Retire Before Dad in 2013 as a creative outlet to share his investment portfolios. Craig studied Finance at Michigan State University and lives in Northern Virginia with his wife and three children. Read more.