Evaluating the Decision to Sell an Accidental Rental Property

Alex should evaluate the stress versus cash flow of his accidental rental property before deciding to sell.

### Evaluating the Decision to Sell an Accidental Rental Property
* 🏠 Alex, you're not alone in facing the challenge of managing an **accidental rental property**, which could stem from **inheriting it** or transitioning your **first home into a rental**.
* 💰 A **10% cash on cash return** is commendable in real estate, but the **$300 monthly cash flow** may feel insufficient due to existing debt on the property.
* 🤔 It's crucial to assess the **opportunity cost of capital**; consider if you could achieve a **similar or better return elsewhere** without the stress of property management.
* 📉 Evaluate your time and stress levels, as money is merely a **tool to help you achieve your goals**, and low maintenance may be a priority for you.
* ⚖ Consider the risks involved with rental properties, particularly how much **leverage or debt you have**, as a vacancy could **drastically affect your financial situation**.
* 📊 Ensure your financial foundation is solid by completing the **financial order of operations** before diving deeper into real estate investments.
* 💡 Understanding the tax implications of selling is vital, especially if the property was **inherited** or if you qualify for **tax exclusions based on your residency status**.
* 📅 Conduct a thorough analysis of **cash flow**, **property appreciation**, and potential **tax impacts** to determine if selling aligns with your **long-term financial goals**.

[Music] Yeah, we're going to kick it off with a question from Alex T. He says, At what point should I consider selling an accidental rental property? I'm making about 10% cash on cash, but it seems like a lot of work for 300 bucks per month. So, what do you have to say to Alex? Well, one, Alex, I want you to know you're not alone. I'm not sure how you came into this accidental rental property. One of two things likely happened. Either you inherited a property that you did not previously purchase, and maybe it was already a rental property and there were tenants in there, so that's taking place. Or maybe two, you bought your first home, and you decided that you wanted to move homes, but for some reason, you could not sell, so you ended up buying the second home and turning your first home into a rental property. Either way, it doesn't sound like you're in a horrible situation. 10% cash on cash return is pretty strong when it comes to real

estate even though you say $300 a month of free cash flow isn't all that attractive. I would imagine the reasons that $300 is because there's some sort of debt still on the property. What I would think through though is the opportunity cost of capital. If I were to sell the rental property, if I were to not be using it in the way that I'm using it right now, is there somewhere else that I could go easily get a 10% rate of return? That's question number one you have to ask. Well then question number two you have to ask is okay what's my time worth, what's my stress level worth, what is it worth for me be for me to continue operating this thing. And we know this to be true. Money is nothing more than a tool that allows us to achieve the goals that we want to have. Well if one of your goals is low stress and low maintenance and not having to worry about a bunch of different things and not having an asset that I have to think about all the

different stuff that goes into it. Well, if your goal is not to have that, then no one would suggest, Oh, you have to keep it simply because it has a solid rate of return, even though I do think the solid rate of return should factor into the equation. Yeah, I wrote down three quick things for Alex to kind of consider, and the first two are somewhat related to each other. First of all, let's talk about the risk of this, because good things can actually turn into bad situations if you're not careful. And what do I mean by that? He said that this is specifically rental property. So, I've dealt with rental property people my whole career when I was preparing taxes. Right now, he's getting cash flow from it, you know, and he's even said he's got a 10% rate of return built on that from a cash flow perspective. But I'd be curious how much leverage is on this, how much debt there is that you're counting on the rent to cover that note every

month that if the tenant left, it would be a completely different situation if they left, and an extended period of time that you couldn't put somebody in there, and that ties into this second point I wrote down, is where are you specifically, Alex, in your financial order of operations. We love real estate investing and being a part of it, but you got to make sure you have your financial foundation underneath you. That's why you want to make sure you've completed steps 1 through 7, even in the financial order of operations, because real estate is more of an abundance goal in Step eight. So, I'd ask where you are, and then what's the why, and I think this is really the crux of your question, is that you've got good things going on with it, but when you look at your life and what you actually have after you've gone through the financial order of operations. By the way, if you want yours, you can go to money.com/resources, download it for free, but does this fit into how you want

to use your time because I've shared with you guys. I grew up in a household where both my father and my brother were very handy. They could fix anything, the cars they drove, you know, anything in the house that broke down. I'm not as gifted in that, or I've not leaned into that aptitude. So, just things breaking down on rental properties, I usually have to hire somebody for. If you, if the hassle factor, you by your own words, $300 a month, this seems like a lot of work. I would listen to that voice, but you got to make sure you do the 360 analysis to say, okay, is it not only the cash flow? How much is this property appreciated? What are going to be the tax impacts? But then, after you kind of gather all the inventory of all the decision points that you might have financially, then you can figure out, yeah, let's see if there's a path out if this doesn't check all the boxes for where I want to be in the long term.

think you just said something right there. I think understanding the tax impacts of the transaction is going to be huge because if this was a property that you inherited, you want to make sure that the appropriate step-up and basis was accounted for if you do sell it. And this was your primary residence. Are you still inside that window where you could get a tax-free exclusion on gain up to The Last 5 Years? If you in the house for two out of the Last 5 Years, you want to know those going in. So because when you sell the house, it might be subject to capital gains. If you've been depreciating it, it might be subject to depreciation recapture. So you want to make sure you understand those things going into the sales transaction because again, that will affect the math in terms of what makes the most sense with this particular asset.

"We Hate Our Rental Property!"

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The Money Guy Show

Considering the Sale of an Accidental Rental Property

Alex is making a 10% cash on cash return from his accidental rental property, but finds the $300 monthly profit to be insufficient for the work involved.

The property may still have debt, contributing to the low cash flow.

Alex should consider the opportunity cost of capital and evaluate the value of his time and stress level before deciding to sell the property.

Considerations for Rental Property Investment

Rental properties can provide a solid cash flow and a 10% rate of return, but they come with risks, especially if there's significant leverage or debt involved.

It's important to have a strong financial foundation and complete the financial order of operations before focusing on real estate investing.

Understanding the purpose and alignment of the investment with personal financial goals is crucial for long-term success.

Managing Rental Properties: A Personal Perspective

The speaker grew up in a handy household but struggles with fixing things, often hiring help for rental property issues.

They emphasize the importance of a 360 analysis, considering cash flow, property appreciation, and tax impacts before making decisions.

Gathering all financial decision points can help determine the best path forward for long-term goals.

Understanding Tax Impacts of Property Transactions

The tax implications of a property transaction are crucial, especially if the property was inherited.

It's important to consider the step-up in basis and the tax-free exclusion on gains if the property was your primary residence for two out of the last five years.

Additionally, factors like capital gains and depreciation recapture should be understood beforehand, as they can significantly impact the financial outcome of the sale.