Should you keep your Austin rental home or sell?
It’s the start of 2016 and already I’ve received a few inquiries from my investor clients wondering whether they should hold on to their rental property, or sell this year. It’s a conversation I have multiple times with multiple clients each year, and it’s a question Sylvia and I sometimes ask ourselves about our own rental property. Especially given the appreciation gains of the past 5 years in Austin. So this article will walk through some of the questions you might ask yourself when contemplating whether to sell your real estate asset, based on how I look at the question with my own rental properties.
The first questions to ask yourself are:
1) Do you need the money? and
2) What will you do with the money?
I normally don’t make it past those two questions, because the answers for me are are “no” and “I don’t know”.
For most, the equity would simply go into almost zero-interest savings or CD accounts, or into the stock market. Having just watched The Big Short, watched my Mutual Fund IRAs tread water last year, and then take a dive the first week of 2016, I’m pretty OK with leaving my real estate alone.
But if you have a defined purpose for the money, such as purchasing your retirement home, or funding a child’s college costs, those reasons can make sense. Using it to fund lifestyle adventures, like buying a boat or an RV, would be a bad idea though, in my opinion. Unless it’s part of an overall “next chapter” of retirement, and it’s time to spend that money.
I’m personally more comfortable leaving my equity to grow inside the real estate asset than I am betting on the stock market. If you feel just the opposite because of some special knowledge or a great stock investing track record, then cashing out and reinvesting in stocks might make sense for you. But most of us are better off in real estate so long as we can survive the ups and downs and cash flow surprises.
If “sticking with real estate” as an asset class is the answer for you as well, that leaves another question, which is whether to cash out and re-invest through a 1031 Exchange in different property in another real estate market in Texas, or in another state. I’d probably look at San Antonio myself, because of the proximity to Austin, but I’d also investigate other cities in other states where I know other property managers.
But doing so would require that I make some predictions. I’d have to believe “Austin is all played out and the market will flatten, but this other market is on the cusp of a big appreciation boom“. Then I’d have to believe that the opportunity is so great and obvious, that it’s worth the transaction costs, hassle and the risk of making a change.
I’m not smart enough to know that. I don’t have a crystal ball. So, for now, I’m just gonna sit tight and let time do it’s thing, even if that means riding out some dips such as 2001-2005 and 2008-2011 in Austin. But those dips are always followed by some good years.
Also, we sell a lot of investment property in Austin to investors who have done extensive research themselves, and they end up liking Austin as a long term buy and hold market, even with the run up of prices that past 5 years. I do think we’re past the midway point in the current up cycle market though.
You Don’t Always Need a Good Reason to Sell
But there are also more nuanced reasons to sell that have nothing to do with money per se. These reasons don’t always fit into a spreadsheet equation or perfect financial logic. Some of my investors simple say “it feels like the right time for me to sell”.
That is no less valid a rationale that any other. For some, the asset has performed and served its purpose, and it seems like a good time to quit while they are ahead and take that money off the table and put it somewhere safe, even at low interest rates. Some never were true “investors”, but hung onto the house in Austin in case they move back someday, but now know that they will never return.
Others just want to simplify their lives. Having fewer moving parts to their financial picture. Even with a turnkey property manager such as us, the property just doesn’t fit into their life going forward and it seems like the right time to cash out.
Still others confess absolutely no rationale, other than they seem “antsy”, and just want to sell. Maybe they don’t like exposure to the cash flow disruption that can happen with a bad turnover or unexpected repairs. It’s ok to not have a rock solid “spreadsheet” rationale, and none of us have to defend the decisions we make. But it is good to have at least some sort of answer to “why now?”
So, for most of my owner/investor clients this year, we’ll have the conversation and they will decide to hold on. About 5-10% will decide to sell, for various reasons. There is no “right” answer, just what make sense for you at this time in your life, given all the other personal and financial factors in your equation.
But for those who answer those first two questions the same as me, “no, and I don’t know”, holding on is probably not a bad choice.