Investor · Philadelphia, PA · Member since 2016 · 87 posts · 29 votes
I've been listening to a lot of the BP podcasts and I frequently here people, (who categorize themselves as buy and hold investors), saying they don't hold a property for longer than some designated time, 7 years for example. Is there a reason to sell a property that is cash flowing just because you have a held it a while? Some strategic advantage or protection?
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
10y
I would never sell a property that is cash flowing if it continues to cash flow. However, that 7 year mark tends to be the time when those pesky CAPES repairs start to show up, like roof, etc... If you sell the house, you don't get hit with it in a lump sum.
If you are out of pocket for a new roof, for example, and it cost $4k, and your cash flow per year is $3600/year, you are negative that year. This is one reason why I try to put a new roof in if it looks like I will need to within 5 years of buying. I can bury the cost in the financing at a few bucks per month, that my tenant pays out of their rent every month...instead of a lump some all at once, that I pay...all at once.
Property Manager · Peoria, AZ · Member since 2016 · 117 posts · 50 votes
10y
The short answer is reduced ROI. Due to a number of factors for which there are also a number of calculations, at some point your rate of return starts to decrease. When that happens will depend on factors such as interest rate, down payment, cost of rehab, etc.
I'd recommend picking up a real estate investment book that focuses on the math behind the deals as they tend to go into great detail on this subject. "Investing in Duplexes, Triplexes, and Quadraplexes" by Larry B. Loftis is a good example of the type of book I'm referring to.
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
10y
I would never sell a property that is cash flowing if it continues to cash flow. However, that 7 year mark tends to be the time when those pesky CAPES repairs start to show up, like roof, etc... If you sell the house, you don't get hit with it in a lump sum.
If you are out of pocket for a new roof, for example, and it cost $4k, and your cash flow per year is $3600/year, you are negative that year. This is one reason why I try to put a new roof in if it looks like I will need to within 5 years of buying. I can bury the cost in the financing at a few bucks per month, that my tenant pays out of their rent every month...instead of a lump some all at once, that I pay...all at once.
Quincy, MA · Member since 2016 · 9 posts · 6 votes
10y
I understand about ROI and I do need to learn more about all those factors for when that ROI does drop. Are rents raised yearly at 3-4% ? Maybe a crazy question - pull the equity out to finance the next deal.
Baltimore, MD · Member since 2016 · 30 posts · 7 votes
9y
Off the top of my head I think of a couple of reasons.
1. better opportunities - selling a few smaller houses so you can gun for a bigger house. Maybe an apartment.
2. planning for the future - some want to wind down from 50 properties with a mortgage to 25 properties without any mortgage and pocket every penny. No mortgage, no risk of default.
3. economic risk - your geographic location either doesn't have a diverse set of jobs, or the jobs are susceptible to economic recession. Think Detroit in the 1980s or the rust belt states. Leverage works both for you and against you.
It could be due to rental market rates not keeping up with appreciation in certain areas. A properties cash flow reduces as equity grows. Smart investors know this and will sell knowing that either leaving equity dead in property or refinancing kills cash flow. Once the appreciated value of a property rises above a descent rent to value ratio investors know to sell.