My formula to decide when to sell to buy something else - is in this right?

7 Replies

Hi BP,

I have property with built-up equity, and I was planning to sell and trade up (refinance doesn't work for me).

The problem is, that I believe that the costs associated with trading a property are too high.

Please see what you think of this calculation:

  • Property value (i.e. sell at): $200,000.
  • Loan: $100,000
  • Equity after sale (assume 8% cost of sale):  $84,000
  • Cost to buy a new property: $6,000
  • So, my equity in the new property is: $78,000
  • Assuming I need to put 30% down (investor, >4 mortgages, buying 2-4 unit), this allows me to buy: $260,000

To keep things simple, let's say I cash flow $200 more a month in the new property, and let's say I pay down the same amount of principle, and the expected appreciation in the same in both properties.

Additional gain: 

  • Cash flow: $200 * 12 = $2,400
  • Appreciation: At 3% appreciation, the new property makes $1,800 more

So I make $4,200 more per year, but I lost $22,000 in equity !! (take 5 years to make that up).  Does this make sense?

It seems that once you own a property, you've paid the buying cost, and committed to paying the selling cost, so the longer you hold the property the more real gain. i.e. every extra trade is quite expensive.  Obviously, at 6% appreciation, the trade looks better, but you can count on that, and I can't predict if I'll have better appreciation at the new property.

What do you think?

Thanks,

Ron

Ron

I see where you are going, and I understand the strategy, I just dont like it. 

The true path to wealth is in creating piles of cash flow based passive income. What you are doing is you are expensing your buying and selling costs with your cash flow. 

I will suggest a different strategy, keep this property and save up you cash flow, then use that cash flow to buy the next property.  That way your cash flow keeps expanding geometerically after the 2nd property.  That is the key to building wealth. 

To your success

Josh

I think you're being a little to smart on the numbers. as Josh mentioned indirectly, the most important thing is to find out how far you can make your money bounce and your ROI.

Personal example, I bought a house for 100k, dropped 15k in renovations, and did a cash out refinance of 150k. After closing costs were rolled in I had about 30k in equity and it cost me 5k for the refinance.

so: equity (30k)/ cost (5k) : 600% ROI.

Now I can take my original 110k, add in the cash flow from this property, and buy another house. Long story short, find out which option gives you the most immediate cash on hand to add to your portfolio.

I've been following some topics on when investors sell realizing there is the buy and hold and then selling after a considerable amount of time to that of the person that is flipping the house.

Is this discussion based on purchase, rehab and then flipping?

@Greg Saunders

I'm curious as to the understanding of "cash out refinance"? When you pay for an appraisal, I'm assuming you did to find out the market value and your equity, is this to say that when you sell you know it will be at the amount you had it appraised for?

"Personal example, I bought a house for 100k, dropped 15k in renovations, and did a cash out refinance of 150k. After closing costs were rolled in I had about 30k in equity and it cost me 5k for the refinance."

@Daria B.  Hope this helps!


The appraisal is relevant to the property in it's current condition and does tell you what the property could be worth with renovations. In my example, my house was a foreclosure that had not been updated since the 80's, but other homes in the area were fixed up and selling for 150-160. By renovating the property, and brining that value in line with other updated homes, I was able to build in the equity.

A bank will let you refinance after a party has been on title for 6 months. 

What ends up happening is that rather than selling the house to someone else and having the equity provided to me as cash, I "sell" it to myself and use the equity as the down payment for the new loan. This allows me to regain the cash I put into the property originally and keep the property in my portfolio. 

Thanks @Josh Caldwell and @Greg Saunders . Sounds reasonable, I'll just keep trying to increase the cash flow, even if I pay for it in the short term.

Originally posted by @Greg Saunders :

@Daria B. Hope this helps!


The appraisal is relevant to the property in it's current condition and does tell you what the property could be worth with renovations. In my example, my house was a foreclosure that had not been updated since the 80's, but other homes in the area were fixed up and selling for 150-160. By renovating the property, and brining that value in line with other updated homes, I was able to build in the equity.

A bank will let you refinance after a party has been on title for 6 months. 

What ends up happening is that rather than selling the house to someone else and having the equity provided to me as cash, I "sell" it to myself and use the equity as the down payment for the new loan. This allows me to regain the cash I put into the property originally and keep the property in my portfolio. 

Ok I get it, I think. Original financed $ amt, you fix it up, refi at a higher $ (due to appraisal), then get the equity that that is the difference between your original financed amt and the current value.

Is the refinanced amount the original amount or higher amount because of the new appraisal? 

the Refinanced amount would be the higher amount.

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