Why shouldn't I sell???

Question

Happy Thanksgiving BP! I've been tossing an idea around and I'm hoping to receive some feedback.

Little background info: Our objective is to continue building a portfolio of passive income rentals. We've done pretty well thus far, only purchasing 2% deals or better. These are mostly in the small multifamily niche. The long-term goal is to move into apartment complexes.

Recently, I've been throwing around the idea of selling these and taking profits(we forced appreciation through raised rents and/or rehab). I've run all the numbers(I live and die by the excel sheet) and here's the long story short: we could sell our properties, net some cash, put that cash down on a larger property(hopefully 2% deal like we've been doing), and cash flow 60% more than we were on our previous holdings!

Quick hypothetical in case that the last paragraph didn't make sense:

• Purchase property at 50k
• It rents for $1000/mo
• It cash flows $300/mo
• Sell it for 75k because it's appreciated
• Net a 25k profit(we wouldn't actually, with commissions, closings, taxes etc, but I'm keeping this simple)
• Now we can put 25% down on a 100k property
• It will gross $2000/mo(2% rule)
• Now we net $600/mo cash flow.
• Our cash flow has doubled because of the snowballing!

So BP, poke holes in this plan please!! Is there any reason not to start snowballing now? Has anyone else been doing this? My biggest concern is selling these solid, cash flowing properties and then not finding that next larger property. On the other hand, maybe we locate it first and then 1031 exchange the older properties, increasing our new cash flow even more if we don't have to pay capital gains, affording us a larger property. I guess I'm thinking out loud at this point, but I'd love to hear your thoughts!

Rachel Steenland · Answer

I agree with @Mike Dymski buy up at the 2% deals! That’s what I’m looking for!

@Zak Parks where are you finding multi families for 100k that rent for 2k pm? This is what dreams are made of 👍

Mike Dymski · Answer

If you are finding 2% deals in stable locations, you should buy every unit you can put your hands on.

You can refinance instead of selling.  You can also use other people's money.

Rachel Steenland · Answer

@Zak Parks ohh bummer hahahahaha

Zak Parks · Answer

@Mike Dymski @Dave Foster great points about refinancing. We have done that with some. At this point, most of our properties don't have much more than 30% equity, so after banks costs, it would nullify.  You're absolutely right about using other people's money. Thinking that we need to sell in order to buy is a scarcity mentality and I need to stay away from that haha.

@Rachel Steenland Haha, that scenario was just an example. But properties like that are down here in the South in small towns that aren't likely to appreciate.

Dave Foster · Answer

@Zak Parks, 2% in this market calls for refis and buy buy buy and selling when they are below 1% (the residential equivalent of buying high cap rate and selling low).  If selling is warranted then a 1031 exchange will at least protect you from the taxes and depreciation recapture.

Why shouldn't I sell???

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