Should I move on from a good cash flowing property?

Question

First time poster with what may be a fairly basic question.

I own a duplex which over the past 7 years has doubled in value and cash flows about $350 per unit per month. While this is good, the downside is the area may be in decline and recently had a group-home start next door.

I’m not sure if I should keep a good cash flowing house, or do a 1031 and move into a different area and risk losing the same cash flow. I’d really appreciate input as this is my first property and I’d like to buy more but not before developing a strategy for this property first. Thanks in advance.

Chris Levarek · Answer

@Michael Always a good idea to review property returns. In order to help with this question, it helps to understand the velocity of money and return on equity. For velocity of money, is your capital or are your assets working as best as possible for you? For return on equity, what is your equity in the property giving you as a return?

To calculate return on equity, divide the cash flow / equity in property = Return on equity

Now can you achieve a better return on equity in another property? If yes, then move on to another property with same equity, if no then hold the property.

Check out additional posts on the subject :

• what-is-your-return-on-equity
• roi-vs-roe-when-to-re-evaluate-a-rental-property
• return-on-equity---analysis-and-strategy

Hope that helps!

Dan Bryskin · Answer

@Michael , Let me give you one of the angles you should look at: i'd suggest looking at your return on equity (ROE). Question you are asking can be re-phrased as: what's a good time to sell the property. To answer this question, one of the first things I look at is ROE. Your initial investment in the property does not change over time, but you equity does. Say you have a place you paid 100k for with 20k down. You equity = your investment = 20k. Say your return 5k per year. You ROE = 5k or 20%, same as you cash on cash. 7 years later property doubles in value, but say your return stays the same 5k. Now you have 120k of equity and your ROE =5k or 4.1% while you cash on cash stayed the same at 20%. Next question: can you invest 120k for more then 4.1%? If answer is yes - sell. Good luck

John Teachout · Answer

While "on paper", changing properties may sound like a good way to go but don't forget to factor in sales costs, 1031 fees, purchase costs and most importantly the time, effort and expense to stabilize additional properties and place new tenants.

John Teachout · Answer

If you've owned the property for a while, have you adjusted rents to be at or near market rents? There may be additional opportunity for increased profitability in that already owned property. I just bought a house that the tenant was still paying the same rent she paid upon move in 17 years ago. (not a rent controlled area)

Dave Foster · Answer

@Mike Pastoor, a good return of $700/month on a $100K property becomes a not so good return when that property is worth $200K. If your property has doubled your ROE has halved. That by itself might make me think about repositioning. Here's some other keys that I'm hearing that are common reasons why investors sell, 1031, and reposition.

1. Changes in the neighborhood that threaten your appreciation.

2. House that has doubled in value. Many investors have a sweet spot they understand. They like a certain price range of house. But they're not as comfortable managing or owning a significantly more expensive asset. The 1031 gives you the opportunity to sell a higher price point and purchase multiple units at the less expensive price range you may be more comfortable working with.

3. Along with that also comes the opportunity to increase NOI dramatically by purchasing less expensive but more properties.

If your spidey senses are tingling about the neighborhood quality you probably ought to listen.

Should I move on from a good cash flowing property?

Should I move on from a good cash flowing property?

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