Should I Keep or Sell My Rental Property? (Huge Equity Gains) (Rookie Reply)

Ashley:
What if the deal your mentor told you to buy is actually a trap, a cheap property in the wrong neighborhood that eats every dollar you thought you’d cash flow?

Tony:
Or maybe you’re house hacking and your roommate just trashed the place, but you never had them sign a lease and now you have zero legal protection.

Ashley:
And what if you’re sitting on three rentals with $700,000 in equity and sub 3% interest rates? Is it smarter to sell, borrow against them, or just let them ride? Today we’re breaking down all three of those questions. This is The Real Estate Ricky Podcast and I’m Ashley Kehr.

Tony:
And I’m Tony J. Robinson. And with that, let’s get into our first question, which comes from the BiggerPockets Forums. This question says, “I’m looking to acquire my first property in 2026. I’ve been eyeing a few markets in the Midwest and came across this deal. The purchase price is $70,000. Closing costs are just over $1,000. My down payment is 30%, which is $21,000 at a 7.1% interest rate. Property taxes are $612 annually. Insurance is $276 annually. That is a crazy low insurance cost. The rental income, it’s currently occupied at $750 per month. It’s about a 7% cash on cash return. Home is turnkey with the option to do a slow bur. Looks like it could use some basic cosmetic updates. It’s located in a C-class neighborhood in Indianapolis. I have my vacancy rate higher than I would expect due to the C-class neighborhood. Even at 15% occupancy, it’s still cash flows solidly at 5%.
Anything as a beginner that I’m missing. As an FYI, I would be an out- of-state investor as I live in California. I feel like I always get the California investors looking to invest elsewhere with the questions. But I think a few things jump out to me on this deal. Number one is first insurance at $276 a year. That seems super cheap. Ash, have you ever had a property where insurance for the entire year is only $276?

Ashley:
No, and that was going to be my first thougt or question too as to where did this number come from? Is it an actual quote that from the seller or where did that come from? Because in my experience, when I was looking at buying a campground, I asked, “What was your insurance you pay each month?” And he told me or whatever and he sent me the policy. And every single cabin was a wood burning stove and this policy did not cover wood burning stoves. And if any of those wooden burning stoves caused a fire, they wouldn’t have covered a thing. So I think one important thing is if you are getting that information from the seller, ask to look at the policy and see what is actually covered on the policy. Maybe it’s just a liability policy, maybe they don’t have a mortgage on the property so they don’t have any property coverage, which I’ve bought in houses like that where the investor just says, “I self-insure, it’s a $30,000 duplex.
If it burns down, it burns

Tony:
Down.” Yeah, that’s a great point. And again, I’ve never invested in Indianapolis, so maybe I could be wrong, but that feels incredibly, incredibly low for any piece of real estate to be insured for an entire year. I think the other thing too is that when we talk about class of neighborhoods and they’re A class, B class, D class, D class, we’re talking about a few things. Sometimes you can look at things like the average income of folks in that area, the school ratings in that area and just the general kind of demographic makeup, socioeconomic makeup maybe of the folks who would be coming into those units. And in a A class neighborhood, we’re talking premium rents, typically higher income earning individuals. And in a D class neighborhood, it’s the inverse of that. It’s typically lower income individuals, lower end of the rent spectrum. And the kind of wear and tear on the property is kind of higher on the low end if you’re in a D class neighborhood and it’s maybe a little bit easier in an A class neighborhood.
So I guess I just want to make sure that we’re accounting for the fact that if this is a C class neighborhood, A, can you validate that it actually is given that you’re in California and that you’re not actually walking into some kind of war zone in Indianapolis? And then B, if you have validated that it is a true C class neighborhood, just making sure that you’re actually accounting for some of those things. He did say 15% vacancy rate, which maybe that’s enough, maybe it’s not enough, but just making sure that we’re accounting for the fact that different class neighborhoods operate in different ways.

Ashley:
This is one mistake that I made when I first started investing was I was only looking at cashflow and I realized 10 years later that the real wealth is from appreciation and that mortgage paid on and the equity you’re building up in the property and you can get a lot farther over time by also focusing on appreciation. I bought at first really small duplexes for 20, 30, $50,000 in these class C neighborhoods and they cash flowed pretty good, but they were headaches. The tenant pool wasn’t as great. A lot of people in these areas struggled to have a great credit score, so it really made it hard to screen someone that had a great credit already, lots of turnover. Then these properties, they had cosmetic updates, but just like this property, over time it’s going to need repairs and maintenance because it was just never done correctly.
A lot of DIY behind the scenes on these properties. So in that scenario, it sounded great. I’m getting these cheap properties. I’m getting into real estate investing. And yes, they were the foundation for a long time of my real estate portfolio and got me to where I am today, but they saw very low appreciation. So for example, one of the $20,000 duplexes I bought, I was able to sell it for four years later for $40,000. So I doubled my money on it. Wow, amazing. But that’s only $20,000 I made on that. Another property, the same time period, got over $100,000 in equity because it was in a better area, a better class of tenant, and just a better property overall. And looking back now, what I would’ve done different is I would’ve not as bought as many properties but bought better quality properties and not have had as many, but I was too focused on cashflow and not thinking about appreciation at all.
I missed an opportunity there. The only reason that my classic properties sold for double is because the market was perfect and that was no timing on my part. That just happened to be I got to buy my properties from 2013 to 2018 and then I was able to offload a lot of those dumpy duplexes, I call them in 2020, 21, 22 when the market was super hot and that was the only reason I probably ended up making money on them.

Tony:
Great, great point, Ash, about quality of the portfolio versus quantity. I also just want to quickly cover the math because if we look at the numbers that this person gave on the rent amount of, what did they say, 750 bucks per month, principal interest, taxes and insurance again, use the numbers that you gave us is about 400 bucks per month. Vacancy at 15% is just over a hundred bucks, repairs, 10%, another 75. CapEx, even if we’re being conservative 5%, which I feel like you might need more is about 40 bucks per month and then a property manager at maybe 10% is 75 bucks. So the actual cash flow on this thing is when you account for all of those expenses is like 50 bucks a month. So you have to ask yourself if 50 bucks per month on a $21,000 investment, is that worthwhile to you?
Oftentimes rookie investors, they just think about principal interest, taxes, and insurance is all of their expenses, but you’ve got to account for everything as well, maintenance, CapEx, property management piece as well.

Ashley:
Coming up, if you’re house hacking and your roommate isn’t on a lease, you might already be in legal trouble. We’ll break down how to protect yourself. We’ll be right back. Okay, welcome back. Our second question today comes from a SoCal investor in the bigger pockets forums. I have four rentals, all single family homes bought starting in 2013. Three are in Southern California and have appreciated quite a bit. In the three SoCal houses total, I’m now looking at $703,000 equity split among the houses, 162K to 4K and 336K. The cash on cash return is good compared to my original investment, but if I do an ROE Cal return on investment, it’s really only around three and a half to 4%. All of them were refinance and have 30 year interest rates between two and a half to 3.5%. This was a VA home loan. I’ve considered lots of options, selling and getting something local in SoCal, 1031 exchanging into out- of-state cashflow markets or cash out refinancing.
I feel like the big equity gains are already realized here, there isn’t much point holding up for more. What would you do? I think before we even get into answering this question, we need to break down a little bit of the metrics here, ROI, ROE, cash on cash return. So let’s start with return on investment. So this measures the total return that is relative to your original investment put into it. So he bought it in 2013. The property has doubled and he’s earning cashflow on top of it or tripled for some of the properties. And so for return on his investment, this actually has been a great decision on his part to buy these properties.

Tony:
And return on equity or ROE, as he stated in the question, measures what your trapped equity in this property is actually earning you right now. With $703,000 in equity sitting in these properties generating 3.5 to 4%, the question is, is that the best use of this $700,000? And I think that’s what we’re trying to answer here. So the key point here is that ROI looks backwards. Was this a good deal? ROE looks forward saying, is this still the best use of the equity and the money that I’ve generated? Both matter, but the return on equity helps drive your next decision.

Ashley:
So let’s look into one of the scenarios here. What if he decided to sell one property and 1031 into another property in the MedWest? So let’s, for example, take the 336K equity property. We’re going to sell it for 500,000 and we’re actually going to net 460,000 after cost. So we’re going to do a 1031 exchange. A 1031 exchange is where you sell the property and you’re deferring your capital gains tax. So not eliminating tax, you’re just deferring it. So you don’t have to pay any tax on that gain when you sell the property, but you have to follow the 1031 exchange rules. So you have to identify another property that you’re going to purchase with those funds. So we’re going to say he does the 1031 exchange and he’s going to go ahead and buy two $230,000 properties each in the Midwest with putting $115,000 down on each of them, which will give him 50% loan to value.

Tony:
And if we look at the Midwest rents, and I’m using just some examples, obviously, but let’s say that they rent between 1,800 to 2,000 bucks per month at 7% interest rates that we’re probably seeing today. The cash flow per property after all expenses might be somewhere around between 300 to 400 bucks per month. That’s six to $800 per month in total versus maybe the 200 bucks per month that the SoCal property was generating. So the return on equity jumped from 3.5% although you up to maybe seven to 9% on the deployed capital so that the cashflow basically triples or quadruples from this decision. Now the cash here is that we’re giving up almost irreplaceable 2.5%, 3% interest rate. That sucks because that debt is locked in for 30 years, but you have to ask yourself, what makes more sense? Is it maybe losing some of that interest advantage on that deal over the long term or is it getting the additional cash flow and better return on the investment today?

Ashley:
Okay, let’s look at scenario two. And scenario two is where he is going to take a line of credit to actually tap into the equity of these properties without selling. Okay. So on the $336,000 equity property, most lenders will go and lend you up to 80 to 85% of the loan to value minus the balance you already owe on the mortgage payment. So your property’s worth 100,000, they’ll lend you up to 80, but say you have a mortgage of 40, that 80 minus 40 leaves $40,000 of a line of credit that you’d be able to get on that property. Okay. So for this one, he might be able to access between 120 to 150,000. Now he’s going to use that as a down payment on a new property in the Midwest and he can keep his 3% mortgage on that other property and add a new cashflowing asset by using the line of credit.
So interest rates on lines of credit between 8% to 9%. Actually, I just got a notice in the mail that my one line of credit went down to 7.75%. I was so excited. I was like, “Oh my God, is it that low forever?” I think when I first got that line of credit, it was like 6.5 line of credit. So it’s working its way back down for me, hopefully. Okay, 8g to 9% in this scenario, we’re going to say 130,000 borrowed for that down payment and that would be about $870, maybe a little more, 975 per month in interest only payments. So your new rental has to cash flow enough to cover that payment and still leave you positive. Plus you need to have a plan in place to actually pay off that line of credit. So I would look into it to make sure that you’re going to be able to make some principal payments on that line of credit also.

Tony:
Yeah. I think the other thing too, we didn’t like model the math on this one, but as you’re talking, actually came to mind. I think the other scenario that will work here as well, and this kind of ties into the first question is, well, maybe you use your line of credit and the funds from that to not to put it directly into a down payment, but to put it into a BER opportunity. And maybe you’re taking that money, combining that with some hard money and now you’re going out there on your Burring properties in the Midwest and now every time you close on that refinance for the BIRD property, you can pay back your line. So now it becomes this almost reusable source of funding that you can use to continue to build your portfolio. And with 700K in equity right now, I mean, that’s a lot that you can go deploy from these different lines to hopefully bur a lot of properties in a short period of time as well.
So the upside there is that you keep all the SoCal properties, but then you’re leveraging that equity to Burr additional properties in these other markets. And every time you close on a refinance, you’re paying back that line of credit. So it could be maybe the best of both worlds. You get the SoCal properties, equity continues to grow there. You keep the super low rates, you get the appreciation and the portfolio grows without actually selling anything.

Ashley:
Okay. So let’s go to scenario three where it’s just you hold everything and let it ride. Socal has averaged five to 7% annual appreciation if you’re looking at the past 30 years. So on 703,000 in equity, that’s about 35 to 49K in annual wealth building just from appreciation alone, that’s also tax deferred. So now if you add in mortgage pay down across the three properties, that’s every year you’re going to increase more equity, maybe five to 8,000 per year in cashflow you’re also getting and plus tax benefits of owning real estate. So your total annual return of just looking at that maybe 55 to 75,000.

Tony:
Yeah. So there is kind of an argument for doing nothing as well, right? Your sub 3% debt on strongly appreciating assets in California might be the best financial position and trading that for 7% Midwest cashflow might look smart on a spreadsheet today, but you’re trading an asset that builds long-term wealth for one that just pays you monthly. So I think a lot of it depends on what this person actually needs. Do they want monthly income right now, portfolio growth without necessarily messing up their current equity or just continuing to build long-term wealth. And I think each one of those kind of lends itself to a different situation. All right. We’re going to take a quick break before our last question, but while we’re gone, be sure to subscribe to the Real Estate Rookie YouTube channel. You can find us @realestateRicky. And if you want to be a guest on the Real Estate Rookie podcast, head over to biggerpockets.com/guest, be sure to apply and we’d love to get you as a guest on our next episode.
We’ll be right back after this. All right guys, welcome back. We’re jumping in with our final question and this is one that almost every single house hacker should be hearing because if you get it wrong, it could cost you big time. So this question says, win house hacking, do you have the hackee? I haven’t heard that phrase yet. The tenant who would be saying with you, sign a rental agreement. If so, does anyone have advice on where to get one drawn up or have an example of one that they have used? Now Ash, I know you haven’t house hacked with roommates in this sense. I haven’t either, but I’m assuming both of us would have a very strong answer to this, which is yes, even if you are house hacking, there is still a landlord-tenant relationship and because of that, you should 100% still get them to sign a lease.
The lease is the backbone of that relationship between you and the tenant. And you said hack-y, but they’re still your tenant. So a lot of those laws still apply. So the short answer is yes, go out, get a lease. We’ve got so many episodes in the archives. If you just search real estate rookie and house hacking, you’ll see so many different folks who have come on, shared their stories, shared their experience about how they put together their leases from a house hacking perspective. I think that’ll give you a lot of the insights you need about what to put into that and then go sit down with an attorney, let them review it and give you the once over and the final approval on what that lease should look like.

Ashley:
Tony, I’m honestly shocked and maybe a little disappointed in you. You’re a entrepreneur businessman and your son just turned 18 and you do not have a lease agreement with him yet to be renting a room in your house.

Tony:
That is very true. I need to get him on a lease. That’s my first house hack.

Ashley:
Just so we have content for the podcast, you need to now have experience house hacking by renting to your son when he’s 18. BiggerPockets, if you go to biggerpockets.com, there’s the lease agreements that you can use that are state specific. If you’re a pro member, you’ll be able to access those for free or you can pay for whichever state that you need. But I think that’s a really great starting point is looking at those lease agreements that were drafted by attorneys in your state that you’re investing and then reading through every single thing. And I want you to think of outside scenarios that may not be in there, especially with house hacking as to what are the rules of the kitchen, what are the rules for parking or do they have a parking spot? Is it shared parking with you? Are they parking on the street?
Try and think of different pain points and just draw it out as to put it into the lease agreement so it’s just clear, it’s clarified. Even how should rent be paid? If they say, “Oh, I left it on the counter for you and it’s not on the counter.” That’s not the best way to receive rent. So if you can think of every little scenario and add them in AI, put the lease agreement into AI, say, “This is my situation. I have a roommate. We share a two bedroom house. What are some things that I should be putting in this lease agreement to avoid conflict with each other and to protect myself and just see what it says. Put it in there and see what feedback it gives you. ” And there might be some things that you find useless and some things you think like, “Yeah, actually that is a great idea.” And go ahead and plug it into the lease agreement.
And then final thing, I would send it to an attorney and ask the attorney to review it. So much cheaper than asking an attorney to draw up something for you from scratch. They usually have a template anyways, but this way you’re not paying for them to send you something and you revising it all so that it fits your property specifically, but actually drafting it up and then sending it to them to review will be a lot cheaper too.

Tony:
Ashley made a really good statement about reducing conflict and I think that’s a big value prop of a strong lease is that it does reduce conflict because you’ve already outlined how certain situations will be handled if they arise. I think the better job you can do of communicating the lease clearly, I think the easier it becomes. And we’ve had so many folks who we’ve interviewed on the podcast, Dion McNeely, Grace Gutenkoff, Amelia, Grace and Amelia and they talk about how they have those conversations with their tenants when they first become their tenants to make sure that there’s clarity in what the lease actually expects of them and then what they can expect of for them as a landlord as well. And that helps reduce a lot of that conflict and friction. So I just wanted to highlight that because it was really well said.

Ashley:
But it’s from my own experience, not wanting to have to deal with conflict between tenants. Thank you guys so much for joining us for this episode of Real Estate. Ricky, I’m Ashley, Hughes, Tony, and don’t forget to check out becoming a BiggerPockets Pro member. You can go to biggerpockets.com/pro and check out our pro perks. We’ll see you guys next time.