Should I sell my rental property in North Carolina? - Nancy McKenna ––

Should I sell my rental property in North Carolina?

Help me think through a financial decision.

I bought a rental property in suburban Raleigh, North Carolina in 2006.  I paid $141k for it.  Today Zillow tells me it's worth about $147k today.  Impressive appreciation, I know.

I contacted a local realtor this week who tells me it's a "seller's market" there now and I could probably sell the property for $150k- $160k.

Should I?

Let's think through various implications.  There are tax implications, the what-will-I-do-with-the-proceeds implications, and the trying-to-be-strategic-with-my-future implications.

Fact:   I live in New Jersey.  Dave Ramsey would say this is reason enough to sell the rental property.  He does not dig long-distance rentals.

Fact:   The property hasn't appreciated much since I bought it, and it is questionable how much it will appreciate in the future

Fact:  I have great tenants now.   They've lived there several years.  They pay the rent the day before the first of the month, though they do have an unfortunate tendency to clog the toilets - on a rather alarming basis...

Background:  I fell in love with real estate as a retirement strategy while I was in my late 30s.   My goal was to buy a rental each year from the ages of 40-50, then pay them off while I was in my 50s. Then I'd be able to retire at 60 with lots of income, and will lots of real estate.

But, the best laid plans....

There was the real estate meltdown, and the subsequent change that only allowed a total of 4 mortgages, and the unfortunate low-income properties I bought in Indianapolis.

I did buy three properties, at ages 40, 41 and 42.   At the time I lived in the San Francisco Bay Area, where the price of houses is ridiculous, so I bought all three properties in remote locations.

The property in Portland was my first.  And has had the greatest appreciation.  And - get this - has the same tenants living in it. I've owned that house for 13 years, and the tenants have lived there longer than that!  

But, back to the townhouse in North Carolina.  

I owe about $75k on this property.  If I sell it for $150k, pay 6% commission fee, I'll walk away with about $65k.  

I'd have to pay tax on the capital gains, which won't be a lot, because I will sell it almost for what I paid for it.  Plus, any gains will be long-term capital gains.  But I'd have to add back what I've depreciated.  Though most of the depreciation sits in an enormous NOL that I carryforward each year.

So, what to do with the money?

  • pay down the mortgage on my primary residence? I could, but:
    •  my mortgage is at 3.5%, which is cheap money
    • $65k won't get me much closer to a paid off mortgage, so should I bother
    • I don't plan to stay in this house beyond the next two years (when my kids graduate from high school), so the money won't do much good.  No tax break, and 3.5% would be the best possible return
  • buy another rental in an area with a greater chance of appreciation
    • I plan to move back to the mid-Atlantic area - back to Maryland, maybe Virginia, on the Chesapeake.  My dream is Rehoboth Beach, Delaware
    • I could buy a rental in Annapolis, for instance
  • hold onto the cash and buy a rental in a few years in an area where one of my kids is going to college
    • they could live in it and get a roommate
  • use the proceeds to pay for college
    • I do have a debt-free degree site, after all!

My budget for the kids college is $30k per year.  I already have about $40k saved for Tommy, who is a junior in high school now.  That would get us pretty well on our way.  

Next question - should I put the money in a 529 plan, or regular savings?   Or maybe peel of $6,500 to put in an IRA (for me), then put the rest in a college fund.   Or, put $30k in each kid's college fund.

My son Tommy wants to join the service, and I am hopeful that he will get an ROTC scholarship.  My personal plan is that he go to school freshman year, which I will pay for.  He can join the ROTC program to see if he really wants to go that route.  Then, he can apply for a scholarship sophomore year.  If he is fortunate enough to get a scholarship, it will pay for (in-state) tuition,  Then I would just need to cover room and board.  My oldest sister did this, way back in the 1970s.  

I called the (very anxious) realtor in Raleigh, and he hyped the market so much that I decided to hold on to the property.  I have to remember my long-term goal of retirement income.   I also asked a colleague from our London office for advice.  He owns multiple properties - in London, Edinburgh and Armagh, Ireland, where he's from.  When I laid it out to him "my mortgage is $660 a month (which includes property taxes and insurance) and the rent is $1,100 - it sounded silly to sell it.  

In fact, he said to double-down and pull equity out and buy another house.  

It can be hard knowing what is best. But I try to think of the long-term implications of decisions.  Selling real estate is expensive, and this property has been a good rental, so I should stick to my original plan of having rentals pay my income in retirement.   

Thanks for listening!

About the Author Nancy McKenna

I'm a personal finance geek. A real estate investor. An accountant, a single mother. And I'm going to get my kids through college without student debt! Will you?

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