Sell cash cow to redeploy or keep the $$ coming in ?

Question

Hello everyone,

Background : My partner and I own a fourplex that is producing great cash flow with steady tenants. We had a couple of tenants related problems but overall it has been easy to manage.
it is a 25 years old building so obviously maintenance is required to upkeep it.
rent: $5550, expenses with mortgage: $2800, purchased for $350k in 2019, current value (we got an offer): $680k, mortgage balance $290k.

Cap rate 8%ROE 15%

The goal since we acquired it in 2019 was to build a portfolio but we haven’t done anything aside from buying a lot to build a new fourplex. With the construction cost we haven’t moved forward yet. We both have enough cash to continue to buy without selling and we find it hard to buy deals that make sense.

Dilemma: we feel that there are pros and cons to sell or to keep, and we really can’t decide which options is best.

Why sell when it brings good cash flow with low mortgage interest. Even if we sell and we end up with $350k in cash which will allow us to scale faster, will we be able to find properties that can perform as well

If you ever faced this situation, we would be grateful for your advice/insights.

Thank you

Theresa Harris · Answer

If you can buy without selling, why sell?  You have $70K invested in the property (though some of that may be paying down the principal), and look at what that is getting you.  I'd keep it and if you do find another property that requires extra money, then borrow against the equity in that place.  Your problem seems to be finding places-selling your cash cow, won't help with that.

I had a place that was doing well, but I'd had it for 20 years and was getting tired of dealing with the condo board and extra fees for different repairs/upgrades to the buildings.  I sold it and bought two places with the money from the sale.  In my case, I couldn't have bought those properties unless I sold one of my current rentals and given the condo board, and fees they levied after I sold it, I am glad that I sold it when I did.

Xavier Noel · Answer

@James Hamling very helpful comment. Two things you pointed out that are worth considering in our case, the Capex and market. We feel that it has appreciated a lot  (like most properties in the US), and don’t foresee that type of growth for the next few years, so I guess it would make sense to cash out, once gain with a tangible plan and investment that would justify it. As far as the Capex, it has been a thief and will continue to be since our property is 25 years old so while the profits are real, the theft is too!!

Capex is actually one of the reason why we decided to buy a lot to build a brand new property. We are now talking with a builder who seems to be more competitive with building costs.

@Dave Foster of we decide to sell, then a 1031 to a new build would most likely be our best option.

Thank you!

Chris Seveney · Answer

the proverbial million. Will you be able to find properties that perform as well. Since you're getting great cash flow, what have you done with that money? You mentioned you bought another lot to build. Probably not the wisest decision if you were looking to scale as that is time-consuming, I think you could've found a better deal already built, which would expedite your scaling. Just my two cents.

Xavier Noel · Answer

To everyone who responded, I truly appreciate your valuable feedbacks. I do agree that without a plan or without a deal available to purchase that cash will be useless. Plus this is strong foundation to build up our portfolio and eventually take cash out. thank you very much!

James Hamling · Answer

What I am going to say here is probably going to be taken as controversial to many, especially those with less than 10/20yrs experience in real estate and that's ok, it's not a readily understood concept unless one has been around the block for some considerable time and experienced the long term ebb's and flows of things.

When in a situation of can't find an existing "good" investment property, that is most often a great time to go and invest where "good property" is being CREATED.

You get 3 very unique attributes when do what we coin "Path Of Progress" Investing:

Forced Appreciation, Market Certainty via review of the development plan (cities not just individual builders) and my "Happy Place" 0-capex.

Now that last one of 0-capex isn't necessarily true, it's theoretical and to best achieve it does require structured operations and proper positioning to nail it. A good real life example, I have a townhome on yr4 that has thus far incurred $225 in capex. Had a chipmunk or squirrel that chewed thru electrical line on a/c condenser, and warranty doesn't cover damage via animals.

I've had turns, 1 repaint, all paid via damage deposits.

For myself, that is my "norm" of the experience in build-4-rent aka path Of Progress investing.

I leveraged into Build-4-Rent for the exact reason, there was nothing in existing areas and inventory that numbers were good. So I went where we were building what's next. Have enjoyed market appreciation + forced appreciation, best in market tenant class, lowest in market operational impactors.

I do not buy at random though, weather for myself or clients, we are ALWAYS Strategic and Tactical. I target specific builders and specific developments for specific reasons.

I target happen-stance tenants as my ideal tenancy class. I want home owners as tenants, and divorce is my majority pipeline for such. Relocation and up classing tenants infill the remaining 20% of tenancy demo. When get a home owner for tenant, in a new or nearly new home, it's a wonderful thing.

Call me a lazy-landlord; I don't like chasing rents, or coordinating repairs, dealing with tenant drama, really I don't like doing any of those time & $ wasting activities. I love the cruise control approach of getting a great tenant set and walking away for the next 24-36 months. My #1 hiccup I experience is when they do an early termination because they are buying a home. in which case I have 2-3 month's to find a new tenant without revenue loss.

On that 4yr+ old townhome, we've had a grand total of 1 month vacancy in rent revenue. This spring will be yr5 with tenant #3, and when we start gauging when to sell too rinse & repeat before capex starts coming home too roost.

I find selling ~yr7 is the sweet spot. Area has infilled and matured, property is still newish and sells well, and capex has not started landing yet. Things are generally not yet outdated per say, just more so last trends design.

It's not just different strategy, it's living in a whole different world of investment real estate.

I did my time in the D-class sec8 where chased squatters out, gun-play, chasing rents and all that noise. No thanks, even B-class feels a bit miserable after experiencing things on this side of the rainbow.

Do I fear a collapse or things won't appreciate? No. because I am riding the coat tail of HUGE developers with insane resources in analysis, so it's not just my insight, I'm just confirming what they've already pegged and put countless millions into betting on. Aged areas, your on your own. And it's an alignment, the local government want's us to profit at it because it's how they profit. Path Of Progress investing is an alignment of interests.

Hope these insights of experience help in your consideration of avenues.

While what I do is very complex with a huge amount of math and data into it, it really comes down to a very simplified ethos of things; have what people value, where people want to be, and they will happily reward you for it, care for it. Things of value get valued.

James Hamling · Answer

@Xavier Noel Ok your 1st step is defining this first analysis phase; what time constraint do you have to make a decision within.

For this there is 2 primary items that dictate these terms; market and capex.

For market; where does it project out in next 6mnths, 12mnths, 3yrs, 5yrs etc.. Is there any looming big-thing in works, or of recent, that presses a time urgency to act? Aka a "rug-pull".

For capex; where are you in the cycle of things. You need to have a capex schedule knowing what, as defined by math and expected life expectancies, is up and coming in next months and years. And by the #'s, how much is those capitol investments going to be, when.

These 2 items will detail when major decision points need to be made by.

And next, for the decision we should use what's famously taught at Harvard Business's. You know what you could get as FMV, you know when these forecasted changes will land. Instead of looking at what is in hand to decide, instead look at it as if you sold, had that $ in hand you'd have from selling, and instead ask if you had that $$$$, would you buy that property as an investment asset vehicle?

Or, would you do something else with the capitol?

If the answer is something else, you should strongly consider selling and digging into that something else.

If the answer is you would by this property, at that price, in that condition, with that $ to get to the place are now, then your probably best to sit it out.

Last advice point is; a CORRECT investing plan ALWAYS has exit strategies built in from day one. A plan without an exit is not a plan, it's an idea, a notion. All investing plans have an indicator to know when it's time to walk away. And for what next.

Growing a portfolio will always require selling. If for nothing else then the capex factor. Capex is a profit thief. Appreciation is the empowerment of scaling, 1031 is the super-charge to that, and deferred maintenance the erosion force.

To best grow a portfolio it's important to get appreciation to chip-in, and not rely solely on ones own capitol investments.

This requires a good comprehension of what is your $, and what is OPM. Your $ is the capitol you have invested, the $ our of your pocket. That is the actual investment capitol. If property appreciates $300k, no that is not your capitol investment until you've paid Uncle Sam for it, then it becomes yours and it's now you capitol investment.

So say you instead refi, and get another let's say $250k from that. And use that $250k to secure say a townhome you run for rental. No, that is not new capitol investment, that is from the same $-pile it's just an expansion of the AUM and gross revenue potential and all that operational factoring.

The rare exceptions to selling for appreciation harvesting too pyramid is when the asset has a special factor to it's specific positioning, such as water-front or something similarly special and very long enduring to it's placement. A factor that is measurable to it's anchoring.

These rare exceptions are where reaping capex is more then worth it, and factored in, to fully renew a property every 15-20yrs as a great ROI for holding that specific placement on lock as getting another is cost prohibitive.

And never "invest" in land to build upon unless that build is factored in day1, otherwise your just speculating not investing.

Personally if it were me, I'd consider it a no-brainer and I'd at minimum do a refi of some type to access equity and get it deployed. Via taking that as cash-flow you cutting returns via tax impacts on cash-flow. Deployed into another property, taking returns via equity and appreciation accrual, you lowering tax impact and getting it via a "tax avoided" return structure.

Same premise why Elon and others take compensation in stock vs $. Taking compensation via asset's allows capitol access via loans on assets which even at 7%, is a heck of a lot less then tax implications if got paid in ca$h isn't it? Heck yeah, a lot less, by multiplication factors.

So unless you need it, why not take your compensation via equity and access it via loans (tax free) just like Elon and every other bazillionaire does.

Heck, you could take that capitol and park it in a money market account or treasuries, whatever uber low return and you'd still be coming out ahead just for fact of tax savings alone.

Dave Foster · Answer

@Xavier Noel, whatever direction you choose should make the most sense with your financial situation and align with your future goals as a RE investor. Its tuff when you've got a good thing going, but you can definitely explore some potential options.

If you did choose to sell the property, you can consider doing a 1031 exchange, which would allow you to defer all of the capital gains tax and depreciation recapture and reinvest it into another investment property/properties. This would allow you to take advantage of the tax and use it to scale into larger investment opportunities.

You could also do the opposite and reinvest in multiple smaller investment properties. This is what we call a diversification exchange, and it allows investors to diversify and scale their portfolio or reach better-performing markets.

The strongest argument for the 1031 that I could see is the risk you have now for capital repairs on a 25-year-old building.  We have clients all the time who 1031 their older buildings into newer construction to avoid that risk.

Peter Sosnow · Answer

@Xavier Noel

I never sell unless I or investors need the cash or I don’t like the property.  Instead cash out refi leaving reasonable leverage in the property.  Don’t be wed to the current mortgage.  Cash out refis is a solid tested strategy for scaling.

Ryan Spath · Answer

If this were my property:

• I would not sell without a specific replacement plan
• I would treat this fourplex as a foundation asset
• I would focus on: Optional equity access, expanding deal criteria, and letting the market come to me rather than forcing scale

Scaling slower with strong assets almost always beats scaling fast with regret.

Caleb Brown · Answer

I'd keep unless a deal comes up. You can 1031 into a larger asset or multiple, have you looked at larger deals or another asset class? If it's out producing what is currently in the market then I don't blame you for holding. Another part is finding a value add play, initially your cashflow might be lower but overtime it'd out perform.

Sell cash cow to redeploy or keep the $$ coming in ?

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