@Chris Lambert This is a great question man but the answer is it really depends. What are your goals? Do you need capital to invest elsewhere? Would that money be used to create even more cash flow per month? Why not refinance or use a HELOC? You could get money and still keep the property and cash flow. If I were in your shoes I would first sit down and figure out what you want. What are your goals and how can you get there? I would hold the house. Whenever someone asks an investor what their biggest regrets are it is usually that they sold a property instead of holding onto it. If the properties are surging and appreciating like crazy why not hold onto it and clear 300k 10 years or so down the line? Patience is a virtue and you have to play the long game if you want to be an investor and be financially free. Cash flow is king and should always be the #1 priority. However if by selling that house, you can buy a 4 plex that cash flows 1000 a month then by all means go for it! Don't just sell the house to sell the house to sell it, because you could make a lot of money. That seems really short sighted to me. You have great tenants which are very hard to find btw, and you are cash flowing and getting good appreciation?! Many people here on BP search endlessly to be in the situation you are in. Just weigh the pros and cons of your decision and do what you think is best man. Good luck!
Thanks Michael Guzik! If I were to sell it, I would like to use half the profits to buy another cash-flow property and the half to do a fix-flip. I hadn’t considered doing a heloc. I’m going to look into that, it sounds like it could solve my dilemma.
Regardless of your decision you need to pull out the money since your equity now is either earning next to no return or it is killing your cash flow and turning the property into a liability. My guess is that the rent is far too low for the value of the property and it is therefor no longer a smart investment.
On the surface it is a property I would definatly liquidate based on solid business practices. Appreciation speculators would probably advise to hold however I have learned you can not buy food or pay your bills with dead equity and accessing it results in the property no longer being a positive investment.
When a property does not produce cash flow with a hypothetical 100% financing it will never produce true positive cash flow. It is only your own money that is buying your income.
Thanks Thomas. I don’t understand though. How does my positive equity kill my cash flow and make the property a liability?
@Chris Lambert It sounds like you don't actually make $200/month in cash flow. If so, the roof replacement wouldn't be a question, it would already have been budgeted for and have reserves ready. Without more numbers I would expect this property is cash flow negative, but that the appreciation has been good. In that scenario I would look to sell it and buy 2 or 3 rentals with good numbers that provide real cash flow. Of course, that assumes that you are willing to spend the mental energy to manage more doors and tenants or managers. There is always a trade-off.
@Thomas S. is saying (feel free to correct me Thomas) that your equity is providing nothing for you. It does not provide a return, so it is like having a savings account that you don't have a way to tap yet. On top of that, if you run the numbers you will find that using leverage can provide higher returns. Basically, you could take that $100k of "dead equity" and buy 3 properties that bring you $1000/month of additional cash flow.
In your case, tapping that $100k would bring up the payment and cause you to be further in the red for your cash flow on that property. But the point is that your equity is giving you nothing aside from a number on a sheet of paper until you put it back to work.
What are your goals? If you want to be totally passive and don't need money until the future, then hold on to the appreciating property with great tenants. If your goal is to replace your other income to become financially free then this property is slowing you down. Once you know what you're after you can look at the paths to get there. Not a bad place to be in. Congrats and good luck.
I really appreciate everyone’s advice. The tenants that I have are great. They do all of the repairs to the home and they always pay rent on time. It seems like the best move for me is to continue renting to them, since they want to renew for the long term. I’ll take out a heloc and use that to invest in more properties. I haven’t done a fix-and-flip yet and I am ready to jump in to it. Seems like this is the perfect way to get started. Thanks again!
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