Hello BP, I am still new to BP and this is my first time really seeking advice. I have a rental SF home in Virginia. The home has a positive cash flow of $200/month and I have excellent tenants who treat the home as if they own it. The lease doesn’t expire until 8/19 and I feel as is these particular tenants will renew and want to rent here for a very long time. Property values in the area have surged recently which created my dilemma. I could sell the home and clear 100k+. The home is in fine condition but big expenses are coming (roof being the biggest). Do I replace the roof and keep renting it for the long term, or do I sell and use the profits to buy two more properties?

@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!

@Chris Lambert right now, i'm in the same predicament you were in last year. Soon I have to replace the roof in my Manassas townhouse but also installing a new sump pump system this month which is quite expensive. It's been a great rental bringing about $500 and there's $150k in equity. Some days, I just want to sell the darn thing with all the money I've been putting into it! A few years back, I replaced the HVAC, added a hot water heater and remodeled the bathroom. It's never ending with the repairs. Then there's the question of what direction the housing market's headed. Most of these factors point to selling it but I'm still trying to figure out the best avenue. Oh and I forgot, if I don't sell it within the next few months, I will have to pay capital gains tax unless I move back into it! Decisions....Decisions

@Jasmine Feeney , why would you pay capital gains if you don't sell it in the next few months? 

@Jasmine Feeney I decided to sell my property. I did a 1031 and was able to buy 3 additional properties from the equity. I went from a negative/break even cash flow situation to $800/month cash flow after PM, vacancy and maintenance. I think I was slightly attached to the previous property but once I stepped back and only looked at the numbers, selling it and buying better properties made the most sense.

@Jon Arsenault in order to qualify for the exemption you have to live in the property for two out of the past five years and my two years is almost up!

@Chris Lambert great point! This makes me feel much better in that I no longer need to worry about rushing this decision. I will look into the 1031 exchange. I would love to sell this, buy multiple properties and increase my cash flow!

@Jasmine Feeney do you mean the 5 years is almost up and you lived in it for 2 years when you bought it? So you have been renting it for almost 3 after you moved out?

@Jasmine Feeney , Right now your return on equity is less than 5% before you account for those expenses.  That's probably the biggest reason to reposition it - looming cap ex and a sub par return.  

But I'd move it now and not wait on the 1031 (and I'm the guy who does 1031s!!).  Tax free is always a better way to go.  And I think you've probably decided it's time and are looking for the trigger.  You probably even have some debt at higher than 5% that you could pay off and actually better your net personal cash flow simply by paying off higher interest debt.

Tax free is always better than tax deferred.  In addition You'll totally eliminate any time pressure from the 1031 and the need to even reinvest at all if you don't like the market.  If you don't hesitate now . you can sit back and wait all you want later.

Know that you will have a smaller tax bill for depreciation recapture.  But again, by taking the tax free now instead of the 1031 in a few months you'll be able to start a completely new depreciation calendar if you buy something later.