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I rent out a duplex for $3,000 a month with $240,000 left on the mortgage and a 3.5% interest rate. It’s a hassle. Should I sell?

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Dear Big Move,

I have a duplex rental property which brings in just over $3,000 a month in rent. I have a 3.5% mortgage with about $240,000 left to pay off. I net about $900 a month cash flow. There is potential for big-ticket maintenance items because the furnaces are 30 years old. 

Managing the property was easy when we lived locally, but now we live across the country, and rely on our family to help out occasionally (we pay them). I’ve interviewed property managers with no success. They are not responsive or don’t have the required licenses and experience. 

It’s becoming a mental drain every time we have to deal with something even though we have decent tenants. I couldn’t even find a real-estate agent to show the unit last time it turned over; they just don’t really do leases in this area (I’m in the Midwest). 

Investing in the stock market

I believe I could sell the property in the range of $390,000 to $425,000. A comparable property just sold for $430,000 last week. We only put $9,000 down at closing and paid $272,000 a few years ago. Appreciation isn’t great in this area, but it is a nice neighborhood near a city center. 

The problem is with the popularity of remote working, fewer people are living there and instead they are moving towards the suburbs. We’ve noticed less demand for it; the last time we turned over a unit we had to lower the rent by $150 a month. 

Does it make sense to sell it and invest the proceeds in the stock market? I know the returns are good, but I think our efforts could be better utilized elsewhere. I realize we’ll take a tax hit, but could we exchange the proceeds for a REIT or something more hands off?

Landlord

The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.

Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Aarthi Swaminathan at TheBigMove@marketwatch.com.

Dear Landlord,

With the home being in need of major repairs, and with weak rental demand in the area that has led you to lower your rents and cut your profits, I understand your urge to sell. But you could be missing an opportunity, because netting $900 a month is not insignificant. 

If this duplex was part of your retirement plan, proceed carefully. If you sell now, you won’t have an asset to cash in on when you retire. The home also gives you a safety net if there are other expenses, or you lose your job, or face any other financial adversity.

Additionally, if you sell and reinvest in another home, you will be giving up your 3.5% rate for a mortgage double that. If you want to roll it over into a Real Estate Investment Trust, read all the fine print, and it may not give you a similar rate of return.

Furthermore, the rental market is pretty soft, given a significant increase in the supply of properties on the market. Nationwide, the median rent fell by 0.3% in January, according to Apartment List. It’s the sixth straight month of negative rent growth. 

The company also noted that the fastest rent growth is ironically in your neck of the woods, in the Midwest, in cities such as in Chicago, Grand Rapids, and Milwaukee. Finally, the weaker-than-usual demand could be temporary. 

Even if you need to lower the rent you charge and only net a profit of $750 a month, it could be worth holding on to the investment until demand potentially turns around. More companies are calling workers back to the office, which could boost demand in the medium- to long-term. 

Talk to a like-minded investor in the area to get their take. You don’t want to look back with regret.

Reasons to sell 

On the flip side, being an out-of-state landlord is tough, and relying on family to check up on your property is a hassle. You’re in a position where you’re calling in favors all the time, which must be uncomfortable. So let’s assume you sell. 

If the house is sold for $425,000, given your outstanding balance as well as the 6% in commissions you will pay, in addition to expenses from property taxes and fees, you could roughly net $150,000. 

Since it is not your primary residence, you don’t qualify for the capital-gains tax exemption under Internal Revenue Service rules. But you are in a position to do so, if you can move into the home and make it your primary residence for at least two years. Read more here.

There are ways to defer taxes. With that $150,000 could also pull off a 1031 exchange, in which you swap one investment property for another and, thereby, defer capital-gains taxes.

Don’t be spooked by your tenant experience, if you are able to buy a property in a hotter market with more demand for rentals, you could have an easier time finding not just renters but also property managers to help you out.

Or you could find alternatives, like investing in a Real Estate Investment Trust, to defer paying taxes. Make sure you read the fine print, because you will no longer own a rental home, but rather shares in a REIT that invests in real estate.

What’s more, if you want to reinvest the gains through the REIT shares, you won’t be able to pull off another 1031 and defer paying taxes again. So talk to your tax adviser and weigh your options before you proceed.

While the problems you describe are common landlord-related, you may have reached the point in your life where you don’t want the grief. Ask yourself: Is it worth being a landlord and retaining a good cash-flowing property, or is it worth having mental peace? 

Just don’t make a long-term decision based on short-term stress.

By emailing your questions, you agree to having them published anonymously on MarketWatch. By submitting your story to Dow Jones & Company, the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.

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