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Should I Sell my $565,000 Duplex and Invest the Money — or Continue to Collect Rent?

Lorraine offers tips on how to decide whether to sell a rental property and invest the proceeds, or keep the property and continue receiving rent.

Dear Moneyist,

I purchased a duplex 20 years ago and am considering selling it.

I paid $150,000 for the duplex, and spent about $55,000 on updates and renovations. A real estate agent has suggested selling it for $565,000, as a duplex, or converting it to condominiums and selling each for $300,000.

Each unit currently rents for $1,900 per month. There is no mortgage and the largest annual expenses are taxes and insurance which total about $6,000 per year. The property is in good condition and I do not anticipate any major expenses in the near future. There are minor repairs and maintenance throughout the year which typically cost no more than $1,000.

I own two other properties, my primary residence and a vacation home, and my work income is sufficient to live on without the rental income. (I travel a lot and use some of the rental income for that and invest whatever is left.) I am semi-retired at the age of 60 and plan to fully retire in two years. I have a number of retirement accounts including traditional, SEP and Roth IRAs and have no debt.

Should I sell the duplex and invest the sales proceeds or keep the property and continue to collect rent? The recent market volatility has me wondering how I would invest the sales proceeds. The main question is whether I would get a better return by selling the duplex and investing the money or by keeping the property and collecting rent.

Peggy in Louisiana

Dear Peggy,

I can’t tell you to sell or not. You have no doubt seen the wild ride the Dow Jones Industrial and S&P 500 has had over the last two weeks.

That said, I can answer your question with some more questions. Currently, you’re roughly getting a 8% rate of return on your original investment on each unit or 19% on both, when taking into account your purchase price, renovations and other annual costs. That’s not bad at all, given that your property will likely continue to increase in value. That’s slightly more than the 7.2% rate of return you would receive if you had 40% of your 401(k) account in stocks and 60% in fixed income.

You are debt-free and — barring any financial catastrophes — you are gliding nicely towards retirement. Your investments are diversified: Stocks, bonds and property. A financial adviser can take a closer look at your assets to determine whether, based on the value of each, this is a smart and comfortable arrangement for someone in your age group. You should be happy with your investment risks regarding your various retirement accounts and property investments.

Gerald Wolanin, a CPA in Willoughby Hills, Ohio, has one solution: Sell the property under IRS Code Section 1031 tax-free exchange requirements and invest the proceeds in a Real Estate Investment Trust that accepts IRS Code Section 1031 funds. “That will defer federal capital gain taxes due on the sale of the property, continue to receive monthly/quarterly income and eliminate any requirement to manage the property,” he said.

“Estate beneficiaries of the REIT shares should enjoy a step up in basis on the value of the REIT shares, thus permanently eliminating federal capital gains taxes on both the sale of the original property and future appreciation of the REIT shares,” Wolanin added. If you want to go this route, one caveat: Not all REITs will accept IRS Code Section 1031, so your options may be more limited. Consult a tax and real-estate attorney, as the IRS requests very specific language.

On the one hand, it’s hassle to manage this apartment. But it’s steady income and, given the large appreciation in value over the last 20 years, it’s a relatively safe bet. On the other hand, you will have to pay capital gains tax when you sell it and you’re then faced with an equally, perhaps more, difficult task. Where should you invest this money wisely and safely, so you have peace of mind over the next 20 to 30 years? You may find yourself back at where you started, with a similar rate of return.

Lorraine Ell, chief executive and senior financial adviser at Better Money Decisions in Albuquerque, N.M. has other questions: “Do you have capital reserved for future property improvements, which will be needed? What if the rental is vacant for a period of time? Is there enough income from other sources? You mention you can live on your income without using the rental income, but how does that change in two years when you retire? At your age, will you want the additional work involved in managing rental properties?”

You could also refinance the property and take that money and invest it elsewhere. Bottom line: These are all good questions. My gut tells me you that you’re absolutely right to question what you should do with this rental and, as you turn 60, there’s no better time to shake up your financial situation and ask tough questions. But maybe 2018 isn’t the year to do it.

About the Author

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Lorraine Ell

CEO and Senior Financial Advisor

As the CEO and co-owner of Better Money Decisions (B$D) Lorraine is excited to help others solve challenging financial problems. For those experiencing dramatic change such as divorce, retirement, or the loss of a loved one she is a dedicated advisor and acts as equal parts investment manager, financial planner, coach, and personal guide. It’s her mission to help families lead their best financial lives.

Author of the book, Bozos, Monsters and Whiz-bangs: Bad advice From Financial Advisors and How to Avoid it!, Lorraine is also frequently quoted in MarketWatch, Investment News, Investor’s Business Daily, Yahoo Finance, and The Wall Street Journal.