Should I continue holding an appreciated property?

27 Replies

I am an amateur when it comes to real estate investing. However, in 2012 I made a homerun deal that if managed properly it can get me to my new realized dream of becoming an actual investor. Here's the deal:

I bought a single family 1900 sqft, 3 bdrm, ranch-style house with an attached mother-in-law suite. I converted the property into a 2-family 5 bdrm (2 & 3) which I house hacked for 3 years. The purchase price was $77,500; I put 3.5% down; did a 203k loan which got me $30,000 from the bank for the rehab and put $10,000 out-of-pocket for the balance. All together i was $12,700 out-of-pocket and had a mortgage of about $108,000.

In 2015 the house appraised at $185,000 and I eventually refinanced for $130,000; I got my original investment out of the deal and use the remainder along with a VA loan to buy my primary residence. This property now cash-flows close to $1,000/mo. which is helping me pay down both my mortgages.

The property value is now $285,000 and I owe about $118,000 on my mortgage. Would it be smarter to sell the property, cash-out big and use the capital to invest in other properties? Or does it make more sense to refinance again and have less capital to invest?

My concern is that a refi would drop my cash-flow/equity and I'm not sure if the current market is the best time to invest.

Let's do some very simple, very hypothetical math:

If you sell for 285k, let's say you pocket 250k after closing costs, fees, and commissions. Paying off the remaining mortgage of 118k leaves you at 132k before taxes. I'll leave taxes out of it since I'm not an accountant and am not familiar with your financial situation.

Measure that 132k cash vs the 1k per month you're currently cash-flowing. You cash-flow 12k per year at this current clip without appreciation being factored in. If you never cash flow a cent higher than this, and have no CapEx or repairs, it'd take 11 years to earn 132k.

A bird in the hand is worth two in the bush. I'd sell and take that hypothetical 132k profit and 1031 it into more properties or a larger property if it would earn me more cash-flow. Think of it like Monopoly and turning houses into hotels.

Every market is good to invest in if the numbers make sense. You just have to be more diligent in an up market vs a down one.

I totally agree with @Bob Okenwa !  I wouldn't sell.  If you're goal is build up your portfolio keep your great cash flow properties.  

From there I'd compare you cashflow opportunities if you refinance.  1. do you have another property in mind?  2. what do you need down and what will it cash flow.  

Can you just start saving up some of your $1000 a month for a down payment?  Or does refinancing work?  You just want to make sure if you refinance and your cash flow goes down to $600 a month, your new purchase will cash flow for at least $400/month.  

If the cash flow numbers will still balance out to cash flow of $1000, I'd go for it with the refinance.  You would then be paying down mortgages and increasing equity on two properties instead of one.  However, I prefer to do that without sacrificing cash flow.  

Best of Success!

Originally posted by @Andrea Weule :

I totally agree with @Bob Okenwa !  I wouldn't sell.  If you're goal is build up your portfolio keep your great cash flow properties.  

From there I'd compare you cashflow opportunities if you refinance.  1. do you have another property in mind?  2. what do you need down and what will it cash flow.  

Can you just start saving up some of your $1000 a month for a down payment?  Or does refinancing work?  You just want to make sure if you refinance and your cash flow goes down to $600 a month, your new purchase will cash flow for at least $400/month.  

If the cash flow numbers will still balance out to cash flow of $1000, I'd go for it with the refinance.  You would then be paying down mortgages and increasing equity on two properties instead of one.  However, I prefer to do that without sacrificing cash flow.  

Best of Success!

 I agree with both Bob and Andrea.  Let me add this to the mix.  That equity you have in the current property, when you sell it, doesn't go away...it just goes into the next properties.  You won't lose it by selling...you just move its location.

Now this.  Right now that equity is generating 1000/month.  Bob laid out the financials on that so I won't repeat them...except to add this to it.  If you used your cash (150k) from the sale as a 20% DP on other properties, that would mean the property value would go from your current value of 285k to a little bit higher number...how about 750k.

Also, if you assume these other properties would be the same value as your current one (or close), with the same (or close) cash flow, you could have about 2.5 as many properties, and thus about 2.5 as much cash flow.

Let me also add that paying down the mortgages out of pocket is NOT in your best interest. you're now buying equity. Your tenants are already doing that for you for free...don't help them. Any money that comes out of your pocket is a cost to you. When you come out of pocket to pay down your mortgage, you are voluntarily paying more for your property, Don't do it.

Hello @Bob Okenwa and thank you for your perspective. I've heard a lot about how a 1031 can help you save money on taxes when you sell, but haven't done much research on the matter. I will definitely look into that. Your idea of flipping the $132,000ish profits into something bigger that will cashflow more is a very interesting option.

@Andrea Weule I think you meant to say you disagree with @Bob Okenwa and would rather hold the property unless an opportunity to supplement the cashflow through a second property in which case you would refi to supplement the lack of capital for a down payment. Correct? The only issue I see I would have with your scenario is that in my limited experience I have found the refi process to take too much time. If I don't have the funds readily available to me, it would hinder my ability to jump on a good deal when it presents itself.

Why try to snatch defeat from the jaws of victory?  You are obviously in a high growth, fast appreciating area and minting cash while you are at it.  This sounds like a "forever" keep.  Once it is paid-off, you will have a retirement annuity coming in.  Your kids will be able to take it with a stepped-up basis when you die and pay no tax on the appreciation.  Figure out some other way to generate cash for future deals.   You won.  

@Joe Villeneuve It would be ideal to find something that cashflows  2.5 times as much, but its probably not ideal in this market. However, if I can cashflow the same or slightly better, while paying down my Property valued at $750 rather than the $285, that does sound much more enticing. 

I also hear you on the portion of paying down the mortgages. I only pay the mortgage on my primary residence out-of-pocket as it doesn't produce income. My tenants pay my mortgage at my rental property.

Not sure about your age/income/needs/goals, but from the perspective of a recently retired person in his mid-50's (mine), I focus on the amount of cash flow necessary to fund a happy retirement.  

I have no idea about your numbers, but it seems to me you will be cash flowing at least $18,000 from this property once the mortgage is paid off. You will also have a boatload of appreciation to tap through a HELOC if/when you need some emergency funds (or to fund a reverse mortgage). Say, you need $100,000 in today's dollars in retirement, you are about 20% of the way there with this property based solely on expected cash flow. If your number is $80,000 per year, you are 25% of the way home. Pretty darn good for one investment. Add in social security, 401(k) and other investments. How close are you?

Balance this against the risk of chasing better cash flow and potentially losing ground.

We each have our own risk profiles.  I am just sharing with you mine.

Good luck.

   

   

What is your current focus and needs?  Cash flow or increasing asset base?  I personally do not need the immediate cash flow to support my life style so I am more focused on accumulating assets that will provide increasing future cash flow.

With an accumulation mind set, I would refinance (or get a line of credit, this will get funding in place but allow time to find a deal before having to pay for the financing) on the current property up to an amount that still allows for some cash flow and take the proceeds to purchase more properties.  This will still allow for the full cash flow of the property once the mortgage is paid off.  This process forgoes current cash flow until you stop making new purchases, the mortgages will payoff quickly and have great cash flow in the future.

With a cash flow mind set, I would 1031 exchange this into the largest multi family property deal that makes sense. Then when this property increases in value through normal or forced appreciation, then you could exchange again into an even larger property. This process will allow for incremental increases to current cash flow upon every exchange/stabilization cycle.

It is not that any one idea is better than another or that any one idea is a bad one.  It is just what fits with your goals and comfort level.

Hello @Michael S.  I appreciate your response and your insight. I would say my current focus is on cash flow. The more I can cash flow, the better positioned I will be to accumulate assets for future cash flows. However, if I decided to do a HELOC, does the bank allow for the credit to be used on an investment property? Do you know how long the process is to withdrawal the funds once the HELOC is in place?

Originally posted by @Dennis Soto :

@Joe Villeneuve It would be ideal to find something that cashflows  2.5 times as much, but its probably not ideal in this market. However, if I can cashflow the same or slightly better, while paying down my Property valued at $750 rather than the $285, that does sound much more enticing. 

I also hear you on the portion of paying down the mortgages. I only pay the mortgage on my primary residence out-of-pocket as it doesn't produce income. My tenants pay my mortgage at my rental property.

That's not what I said.  You're not looking for something that cash flows 2.5 times as much.  Your cash flow would be 2.5 times as much as you are getting now because you would be buying properties worth 2.5 times the current value.  In other words, you would be cash flowing at the same ratio, you would be buying more property.

 

This is the answer to the question "how do I scale?" that everyone asks. @Joe Villeneuve is giving good advice here. Sell and use your proceeds for a down payment on a larger property. This is a no-brainer in my book. 

@Dennis Soto I have a very similar situation with numbers super close to yours on a 2 unit property in CA. In our case we really like the property for multiple reasons, it cash-flows like crazy and our property taxes are locked in super low relative to the value of the property (CA prop 13 limits the increase/year on prop taxes). We decided to hold rather than selling and we took out a Heloc on our property to invest in more property. Just another option. Hope you make the right decision for you!

@Brian Gerlach that sounds like a very good option. How long does the process take to withdrawal the funds? In other words, if I found a good deal I needed to move fast on, how long would it take to get the funds?

@Dennis Soto A HELOC is kinda like opening a credit card but secured with real estate. The amount and terms are determined when you open the line of credit but you do not start paying until you actually charge something (in this case withdraw funds). One you have the HELOC open, then you really just write a check to get the funds for your purchase. You will need to research the different lending institutions on what their requirements and terms are as they can vary a lot.

The refi would drop your cash flow, but you are still paying down the mortgage.  Run the numbers.  If you took the money and bought another place, when looking at both properties (the new and existing one), do you come out ahead.  Your market seems to be going up and if it keeps doing that, you may be priced out of the rentals.  I'd pull out some of the money and invest it in another rental.

@Michael S. Thank you for that explanation. That sounds like the more attractive option than the Refi. A HELOC would give me the opportunity to continue cash flowing while I find the deal that will fit the numbers to continue or better my cash flow rate as @Theresa Harris explained. With the Refi I would be losing potential cash flow until I find the deal.

I didn't read all the replies in detail but I have a general rule of thumb that I use for myself.  It's actually pretty simple (and somewhat flexible depending on factors).

The basics are this.  When I look to sell a property I look at what I expect to make over the next 5-7 years.  I try my best to factor in things like future repairs (if I think a big expense is coming soon, like a roof, HVAC replacement, etc is coming, that factors in too), future rent increases, etc.  If the money I can make after taxes (let's ignore the possibility of a 1031 exchange for now since that's a whole other conversation, but of course is a consideration) when selling exceeds what I can expect to make in a 5-7 year period, I usually sell.  I had one property that I could make ~$50k after taxes if I sold and it was only making me about $300/month in cash flow ($18k - $25k over 5-7 years).  So roughly a 14 year period overall if I didn't sell.  Even factoring in future appreciation and rent increases, maybe 10 years at best.  So I sold.  I can turn that profit into more than $300/month cash flow with new properties, hence increasing my overall cash flow.

I do think about other items like future appreciation (if it's potentially huge, I may hold off and sell later), the area where I am in (If it's an area I don't plan on being in the future or at present, that factors into the "sell now" column), etc.  Bottom line is I try and take it all into consideration and barring anything gregarious, I can take the cash and use it to increase my cash flow now (which is my goal - highest cash flow possible as soon as possible).

So with my goal of creating the highest possible cash flow as soon as possible, that process usually works well for me.  Also, to be clear, I've been doing this a while and thus far, this decision has only even been thought about for properties I've own for 5+ years.  It usually takes mortgage paydown + good appreciation before I even think about selling a property (because of my goal of cash flow above all else).

And most of the time, I actually consider taking the cash-out refinance option for more properties vs selling. I usually sell when those factors like big expenses coming, getting out of an area I no longer want to be in are more prevalent. When it comes to cash-out refinancing vs selling, if I like the property and it's in an area where I'm happy, cash-out refinancing is usually the way I go (being tax-deferred and all).

@Justin B. That makes a lot of sense. Without running the numbers I already know it would take me well over 10 years to cash flow what I would make by selling. I'm going to run those numbers anyway just to see the difference. In addition, I'm running the numbers to see how much I can HELOC and still cash flow and maybe go that route instead. Thanks for you insight.

I want to say that higher property values dont always mean more cash flow. you need to be very careful where you invest - if you move your funds to a place with a lower cap rate (ie safer investment) you may make less.... so carefully weigh the costs and benefits.... including cost to finance, taxes, etc etc etc


good luck!:)