Should I sell my investment property at a loss? If your rental property will continue to appreciate, hold onto the home.
Q: We live in Illinois but own property in Las Vegas. We are considering selling the Las Vegas property since the Las Vegas market is moving right now. We’re looking for some professional advice.
We purchased a condo before the crash. Our son was in school there and we thought at the time it would be better to own than pay room and board. When the market crashed we refinanced our primary residence at a low rate (4.1 percent) and paid off the condo that he was living in. We have been renting it out for about 3 years. We have just been informed that our tenant will be leaving at the end of July. We need to decide if we are going to continue renting, or try and sell.
Our plan is to retire in 4 to 5 years. We would like to have a small place in Illinois where our kids live and one in Arizona, maybe Sedona, if we can make that work financially. The truth is we would need the cash from our Las Vegas property to purchase one in Arizona. We feel that it would be wise to purchase there now rather than 4 to 5 years from now when we might be priced out of the market. We feel the Sedona area market might be more stable and appreciate better than Las Vegas for quite some time. Our fear with Las Vegas is that this is a temporary bubble and prices could fall and remain low again for a long time.
We net about $6,000 per year ($500/month) from the condo. That’s the good news. But we bought the property for $190,000 and it should sell quickly for about half of that. We realize we are going to take a loss and obviously would like to get as much out as possible. So “When to sell?” is the big question.
We realize that it’s impossible to predict and time the market. Since we don’t live in Las Vegas, we just want to put together all the information we can to make an educated decision instead of just guessing.
Here are a couple of questions we’d love for you to answer: Should we sell now while the market is hot, and move the cash over to the Arizona market? Should we continue to rent for another year or so? What do you think the Las Vegas market is going to do? Should we just keep the condo for the long run and wait until we retire?
What would you do? Any input you can give me would be very helpful.
A: What you’re asking us to do is essentially pull out our crystal ball and tell you what’s going to happen to the real estate market over the next few years. We’re not in the forecasting business, but we do think you’re asking the right questions.
Currently, property prices in Las Vegas and Phoenix, not to mention several other markets that were hit extremely hard in the housing crisis, are making a comeback. But as you can see from your own property, if prices have fallen 50 percent, you’d need a 100 percent growth in property prices just to get you back where you were. The fact that prices are 10 or 20 percent higher than they were at the bottom is something, but it won’t make you whole – not by a long stretch.
Many people tend to gauge the real estate market by what it does from week-to-week or month-to-month. You may hear that the market is hot today. But that comment depends on where you live, not even the neighborhood, but your street and your location on your specific block.
The real question for you is whether you would want to buy your future retirement home now as a primary residence. And if you did, what would you pay for that property? If you thought that your investment property is in a hotter market now and will continue to appreciate, you might want to hold onto this home for a while. If you think that you’re getting a good price for the home relative to where prices were in the last year or two and you don’t want to deal with a tenant and other remote home ownership issues, you’re better off selling.
Our overall real estate investing philosophy is that you shouldn’t stay invested in something that no longer makes sense if you’ve got a better place to put your cash. For any number of reasons, it sounds as though you’ll ultimately want to move to Arizona. So, the plan should be to sell the property in Las Vegas and buy something in Arizona.
But interest rates are so low now, perhaps you can purchase the property you’d ultimately want to retire to in Arizona, and continue to rent out the Las Vegas property for a few more years. We’re suggesting the “have your cake and eat it, too” philosophy of real estate investing. And while it often doesn’t work, it just might in your case.
Over time, your Las Vegas property may rise in value, especially once all of the foreclosures in the immediate area are sopped up. In the meantime, you’re clearing $6,000 per year profit, which is a nice little annuity. Since prices haven’t risen all that much in parts of Arizona, you’re still buying when interest rates are very low and affordability it high. This allows you to “double down” (to use a gambling term) on housing by buying low and waiting for prices to rise to sell.
In some real estate markets, the rental market is even hotter than the purchase and sale market. We don’t know about your particular property and the neighborhood it’s in, but if renters are readily available and rental prices are going up, you may clear even more from your rental in Las Vegas over the next several years.
You might want to talk to a tax specialist about what that rental income does to your federal income tax return. If you not only receive income from the property, but owning this real estate investment gives you additional federal income tax benefits, you might be better off keeping the property, receiving that income and obtaining federal income tax benefits through the depreciation of the property.
If that seems too risky or your responsibility for the property too high, then you should sell your Las Vegas property now, and look for an Arizona property to buy and rent until you’re ready to retire. Once you are ready to retire, you can downsize your Illinois property, and use that cash to pay off the mortgage on the Arizona property. And at the time you do sell Las Vegas, you can either use that cash to pay off other debts or purchase another investment property or just bank for your retirement enjoyment.
None of this has to be hard. You’re in a good spot. You’ve got equity in your properties and no time horizon that must be met. And as long as you get a mortgage in the next six months or so, interest rates will be very low and you’ll have taken advantage of a truly unique time in the market.