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. You can read all about the details of my rental property by clicking here.

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?

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  1. rbd,

    I’m sort of in a similar boat, although I don’t think I have as much equity. I too bought in late 2006, a new house, which was in a new subdevelopment that the homebuilder had as overstock. It had 25K off the purchase price, and I thought I had “instant equity”.

    I bought it with no money down, and only paid closing costs. I paid off the second mortgage in less than a year, with the goal of refinancing at a lower rate. The property dropped in value even further. I recently re-financed under the HARP program, and I’m still cash flow negative every month. The rents that were quoted to me initially by a property manager were a bit optimistic. The whole area in 2007-09 was flooded with foreclosures, to the point that I could’ve bought that same house at more than 50% off!

    The prices have since recovered, but rents are soft, and though I’ve had a stable tenant in there for the last 2.5 years, I really don’t want to raise the rent because he may leave. I have since gotten another property manager, and this has helped tremendously.

    There are a few reasons why I don’t want to sell. The biggest one is that of the depreciation recapture. Since it has been a rental for the last 9 years or so, if I do sell at a loss, I may be on the hook for all those years of depreciation. Talk about a double whammy! The second reason is that property values are starting to appreciate there again, and I figure if I pay down some more of the mortgage, I can refinance again. I’m still negative cash flow every month to the tune of $150. That was better than before i refinanced which was $350 a month. Ouch…..

    I do have another rental that is so far cash flow positive to the tune of just under $400 per month. I bought it out of state (as the case with my first rental), the numbers work, and the place was gutted and rehabbed prior to my purchase. The property management thus far has been fantastic, and it’s nice to have money hitting your bank account every month instead of the latter. What I learned was that you absolutely cannot count on appreciation, and you have to make sure the numbers work from the get go. It seems so simple now, but back then everything “appreciated” 20% in a matter of months… and thus refinancing after a year or so would make sense.

    My passive income streams are those two rentals, and my dividend stocks. I’m not ruling out real estate as an income source because I think I learned from my mistakes. I think in my case the alternative of selling the cash flow negative property now would be an unwise decision because the depreciation issue. I am glad however, that I held on to the majority of my dividend stocks. The payouts have been increasing nicely in my portfolio, and that along with the $400 I make on the other rental certainly takes the sting out of the -$150 per month on my first rental.

    1. JM,
      Thanks for sharing you experience. New homes were tough in that era because the prices aren’t as market based as a previously owned sale. I’ve heard many stories similar to yours. Glad you are making it work.

      I did not mention depreciation recapture in this post because I haven’t done my research on it yet. I’m not a tax pro, and expect that selling this property may lead me to consult one for taxes that year. It’s a lot of money and I don’t want to screw it up. Best to contact a pro prior to selling to see if maybe there’s a tax strategy that could help save money. I don’t think depreciation will be a huge impact because it’s only been 3 years and depreciation on the property has carried over year to year.
      Refinancing helps cash flow, but it locks up more equity. I added more cash to make it work, tying up more cash. Now it’s stuck there. I’m ok with that, but motivates me more to sell.

  2. Have you seriously investigated other properties? My first investment property experience sounds similar to yours. I didn’t meet the 1% rule, it was cash-flow negative for a few years, I put more money into it than I should have – all rookie mistakes (no HOA, though). I had also thought about selling this house and replace it with a better “mistake-free” investment property, but I couldn’t find a “better” investment. Basically, the attractive properties have been rising over the last few years of economic recovery and were expensive. The “good deals” were circumstances that I didn’t want to deal with. So, in short, I have purchased 2 other investment properties, BUT I’ve held onto my first because I’ve “paid” for those mistakes already. It’s a tough call – good luck with yours.

    1. KY,
      Yes, I almost bought 2 of them. The were not steals, but both would have provided good cash flow. That said, I don’t see a ton of properties out there I would buy so I’m not that eager to get another at the moment. Perhaps the market will change in 2 years. Sounds like we have a lot of similarities.

  3. Good read. I am in my first year of rental income experience and watching how things unfold closely. I made an employment transition to another state which facilitated my renting a property. I have good tenants and a good property manager thus far. I bought a new house in the new state so I now consider the rental as an investment.

    I think property ownership and rental income is very specific to each investor. It is not like investing in the stock market where everyone is buying the exact same company at the exact same price. People may view that stock differently, but if each are buying on the same day— it is the same thing.

    My experience in RE thus far tells me the two biggest factors are location and type. SFR seem to be better than condos and location really matters. I was shocked by what I was able to rent my house for, but it rented very quick– and to folks with solid credit and jobs.

    I had a lot of expenses in the early months because my move was sudden and there were a lot of little things of disrepair that a homeowner can live with. We call those our honeydo lists. Renters don’t really like to put up with those things tho.

    Since the home was in a great location the price has soared over the last few years creating instant equity like we used to expect it pre-crash. I bought as the housing market was just coming out of its funk and you bought just prior to the crash. I got lucky, that is all.

    I think RE investing is another way to diversify, but you could do that with REITs too. Good luck

    1. Mike,
      REITs are certainly another way to go. The easy way. I own REITs and enjoy that cash flow. Doing it yourself can have much bigger returns. But a good investment is made at the buy. I was buying as someone who wanted to live in the condo, even though I figured I would have rented it out eventually. Even our home in the suburbs, part of us thinks buying a town home that would have been a good rental would have been the better move. But we wanted to become established in a community so here we are. We don’t regret it because we are happy. Thinking more as investors could have put us in a better financial position. But we maybe wouldn’t be as happy where we live.

      Thanks for sharing your experiences.

  4. I can’t blame you for wanting to sell out of a rental that isn’t providing the kind of returns you could get elsewhere. Especially if it means you could greatly simplify your finances without sacrificing or even improving your passive income. Sounds like a win win situation to me. Eventually I think I’ll own a rental property because with the right situation you can generate a much higher return. Now whether it’ll be worth the hassle will be unclear until I actually jump into it.

  5. Sounds like you have already convinced yourself to sell the property when the current tenants move out in summer of 2016. Sounds like the rental rates are pretty low, so you are probably better of just selling the property.

    I guess the value is pretty close to the original purchase price sine you said you don’t expect to pay any capital gains on it. If that weren’t the case I would had recommended that you consider a 1031 exchange to avoid paying taxes if you were just going to roll it back into a new property.

    The 1031 exchange allows you to roll proceeds from a property sale into a new property within 6-months and avoid paying taxes on the sale. You can think of it as a 401K roll over.


    1. GYFG,
      You could say that. I’d like to know exactly the amount of tax exposure I have before I sell. I don’t want any surprises. That will probably cost me a few hundred dollars with a CPA, but worth it. If they tenants stayed longer, that could be another factor. The longer they are there, the less I think about it. Sounds naive to trust your tenants, but they really are genuine people. So I am very comfortable with them living there. That said, they have many reasons to eventually leave and I don’t expect them to stay for too much longer regardless of their plans.

  6. I appreciate all the information that you have shared here. I am looking into buying a rental property and this is a great read on things that could go wrong. I think in the end, you should sell the property and eventually reinvest in another one that can earn you a greater return.

    Just curious – when you bought, did you follow the 1% rule or use any kind of criteria to select your property? Or did you buy the property to live in yourself and then decide to rent it out later?

    1. John,
      I did not have the 1% rule in mind. I lived there for five years before renting it. I knew I wanted to be a landlord some day when I bought it, but didn’t focus enough on the rentibility aspect of the unit. These other issues also arose after living there, not making it a great rental.
      Thanks for stopping by!

  7. I think you should sell the rental and look at investing the capital elsewhere. Whether that be stocks or another rental, I think you can get a much better return with something different. I have always wanted to be a landlord so thanking you for showing me what could go wrong. I think my biggest fear is not knowing how it will work out. I’d hate to invest into something with a ton of capital like a rental and see everything go wrong and lose all my investment.

    It seems to me that since you continue to write about the topic that you are really wanting to get rid of it. Luckily, you have until 2016 to figure it all out.

    1. ADD,
      Living for 5 years in the property really helped with being a landlord. I know all the ins and outs of the place. When things go wrong, it’s never a surprise. That all said, it’s a lot of equity. With that cash in a bank account, I can think of so many better things to do with it. Simplification is a big driver. I would like to eliminate some things from my life so I have even more time to spend with my kids.

  8. SavvyJames says:

    As the owner of a rental property myself (about 14 years) who occasionally considers getting rid of it, I can relate.

  9. Nice article and interesting insight into your motivation to sell your rental properly. I’ll be selling my rental property next year as well, but not necessarily because the home is swimming in equity (though there is some). In my case, our plans changed and we are looking to buy a town house in our dream retirement city (Sedona, AZ) and we will be using the proceeds from the sale of the rental property to plop down a nice down payment on the town house, then immediately starting renting that guy out.

    Really, I am selling one property to buy another. Plans changed, so the house will go.

  10. Wow, after reading your post, I realize what a great buy I got on my first rental property. I bought a duplex at the end of 2013 for $400,000 and it brings in $4,000 per month in gross rents, which equates to about $1,500 per month net profit. I like multifamily’s and stay away from condo’s and HOA’s. Too bad prices have gone up since then. I am contemplating buying my second rental property.

  11. Given that you’ve already refinanced several times, I’m guessing you’re at or near your best available rate. Even at that, though, your ROE is terribly low for somebody who is actively managing the property. Your inclination is sound, sell the property and (with all this landlord experience), reinvest into a more fruitful property.

    Assuming your research is thorough, upgrading the kitchen is probably a no-brainer prior to selling.

    1. R29,
      I didn’t purchase the property as an investment to begin with. In hindsight, I should have thought of it more as in investment, even though I was planning to live in the condo. What transpired instead, was a serious lesson learned. That said, the equity in the property is more than $100k. It really was a sponge for a few years there, taking money away from investing. So selling accomplishes a few things, including freeing up that cash, and getting rid of a hassle and liability. I’ll sleep better at night. Although I should add, since I wrote this piece, I’ve gone back and forth a few times on my thinking. I’m confident I could rent it out at a much higher rent. So that is tempting.

  12. RBD,
    I live in the NoVA suburbs as well and have found that rental properties in this area simple aren’t very attractive from an investment perspective. For our own home, even, the monthly rent to home value would be around 0.5%–very hard to swing that as an investment if we chose to move out.