Sell property while the market is hot?

Question

Me and my wife are new to rei. We are looking to buy our second property for long term rental (mixed from traditional rentals to nightly rentals). We are looking to scale to 10 doors in 5 years. We have a property in Utah that in the last year has increased so much in value that we are sitting on around $200k worth of equity. Should we sell now and use that money to scale other rentals quicker? Or keep it? It is currently earning about $800 a month after expenses.

Bob Okenwa · Answer

Using round numbers and simple math, lets just say you'll get all 200k of that equity if you sale the property. 200k/9600 is 20.8. So it'll take you another 20 years or so (would be shorter with rental increases over time of course) to make that 200k in rental income. I'd cash out and turn that 200k into multiple properties.

Ryan Gross · Answer

Hey man! I have 8 units throughout Ogden, and I'm in a similar boat as you. I'm slowly looking to move the properties. Realistically buying rentals in Ogden (or surrounding areas) doesn't make sense from a cashflow sense. Why buy a run down house for 250,000 that rents for 1200 when out of state you can buy a 100,000 house that rents for 1200?

I'm still hesitant about out of state investing, but I'm looking much more into it or looking to invest in other vehicles. In the end you just have to decide if the numbers make sense to move out of your comfort zone. Good luck, you'll grow fast!

Bob Okenwa · Answer

@Josh Brimhall

Math is math and cash flow is cash flow. Can't let fear of being not close to home prevent you from expanding your business. There are plenty of people here on BP that do OOS investing and do very well at it. I too would have a preference to own close to home, but at the end of the day, in-state and out-of-state money all spends the same.

Kammon Hiatt · Answer

@Josh Brimhall, if you think you have $200k equity based on the market value, you may have even more.  In today's market, you can add about $20k onto the fair market value and you'll likely get even more.

I agree with @Bob Okenwa that leaving that equity in your rental is just dead money that won't earn you the kind of return that it could.  I would either sell or get a HELOC and turn it into more rentals.  I just purchased my first property with a turn-key company out of state because the numbers made sense.  I also quadrupled the HELOC amount that I have on my primary residence because the value has increased so much and I don't want "dead money" or equity just sitting. I want it to work for me on other properties.

I also love to invest locally and I would bet on our market here in Utah anytime, so we are buying a townhome here too because the numbers make sense.

Jason Terry · Answer

@Josh Brimhall

Same boat here as well - I am just east of you in Layton! I have three properties between Ogden and SLC all of which have just been appreciating like crazy this last year. Ogden, UT was #3 in the top appreciating cities this last year on a CNBC article published this week. (https://www.cnbc.com/amp/2021/04/13/when-is-the-housing-market-going-to-crash-consumers-ask.html)

I definitely think the return on equity (ROE) is one of the most important metrics for growth. $800/mo is great and you are making 4.8% on that equity. So if you can find ways to make more than that, then you know you want to access the equity. The next step is to decide how to get the money out, I personally lean towards refi or HELOC to keep the asset long-term.

As far as what I did... I opened up a HELOC on 2 of the properties in 2020, bought the third rental property off market with 20% instant equity and cashflowing $500/mo and then put a large amount into a development deal out of state. But most of it is sitting idle as it is very hard to find something that makes sense right now in Utah. (Even wholesale deals are going way above asking) That’s why I chose the HELOC is that I don’t pay interest until I find a deal. You want to have the cash available but selling now means you miss out on the 4.8% rental returns and potentially double digit appreciation on your home value, among other benefits. I am hoping for a correction with every one else, but if it continues to drag on with supply/demand constraints and money printing, then it is better (in my opinion) to have access to cash when opportunities come but not lose the current returns and possibility of appreciation.

Also, if it is a rental property that you haven’t lived in 2 of the last 5 years you have to consider that you will lose a big chunk of that equity to fees and taxes. At 15% for long-term capital gains and 6% realtor fees you will lose $42k of your $200k equity by selling. Just something to consider as I was on the fence for quite a while. I did also do a cash out refi a few years ago and that was great but I knew beforehand where the money was going.

Still early on my own investing path, but free to reach out if you have questions.

Scott Bowles · Answer

Thought I would add that a few years back we sold an out of state property and bought a fourplex here in Utah. The returns both in terms of cash flow and appreciation on that property have been outstanding.

Scott Bowles · Answer

Everyone is pretty adamant about out of state investing but one thing to keep in mind is that its much more expensive. Repairs will be more expensive, vacancies take longer to fill. No company is going to manage it with the same sense of urgency you do, even the best ones. We recently sold here in Utah and bought multi family out of state and 6 months in I am still unsure how it will work out. In my head the bare minimum amount to justify a 1031 exchange is around $200K after all fees associated with selling. I think the HELOC as everyone mentioned is a good idea to have available just in case and it is something I may look into as well!

Josh Brimhall · Answer

@Jason Terry Hey Jason, thanks for the input. Its awesome to see so many people close to home on here!

The whole state has been appreciating like crazy! I guess my concern is when does the bubble burst? I can't seem to wrap my head around a home in layton or Ogden being worth half a million dollars from here on out. I tend to think once the demand is met, once the market is able to stabilize that home values will drop.

The more research I do, I actually lean towards a heloc or refinance. I guess it depends on what we are going to do with the money, and how much a bank would loan out.

Would be great to link up with like minded people. I will shoot you a message.

Ryan Gross · Answer

@Josh Brimhall

I feel much apprehension towards airbnb or other short term rentals for a few reasons. First, you are at the mercy of any government change (new laws, ordnances, tax changes) that can instantly change your profitability. For example, my parents live in the valley next to pineview and they passed a covenant banning short term rentals. Second, short term rentals are subject to higher taxes for a few different reasons. (property tax being a big one, once a property is not a primary residence you are taxed at the full value of your property in Utah). Third, short term rentals are subject to extreme volatility in vacancy rates. For example this pandemic last year lost a lot of people money in the short term rental world while not one of my units went vacant.

All of that said, I have a friend who does short term rentals in Utah county and he is killing it! So while it may not be for me, thats not to say that you couldn't knock it out of the park!

What is your wife's fears of out of state investing?

Josh Brimhall · Answer

@Ryan Gross Hey Ryan, thats exactly what I have been thinking. I love the idea of investing in state but it just doesn't make sense in this market. That is why I have been drawn to airbnb rentals. Much higher cash flow opportunities, but I'm assuming more risk? The problem is convincing my wife to be onboard with out of state investing it makes her more nervous than me.

Sell property while the market is hot?

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