10 year old investment. How to evaluate if it is still worth kee

Buying & Selling Real Estate
8yFollow

10 year old investment. How to evaluate if it is still worth kee

Ryan Wilson
Hesperia, CA · Member since 2017 · 18 posts · 4 votes

I am trying to decide if it is time to sell my 1st (only) SFR Rental. I want to do more deals, but currently I have just been reinvesting everything back into the first to pay down the mortgage. My property has about doubled in value in the 10 years, but rent has only slightly increased. It has good cash flow, but if I was to have to purchase today, at its value, it would not make sense. SO, is there a formula to calculate current equity value or resale value vs income, I should look at. Also, depreciation is obviously only based on half the current value, so I think that would come into consideration somehow. I have a good tenant with no issues, and do not pay a PM, so it is very easy that way.

Looking for opinions on how to proceed. Current options 1.) cash out refi and purchase in other markets, if I can find deals, 2.)  look to do a 1031, 3.)  sell, pay the CG tax and look at all investment options, ( Realtyshare or other crowdfunding) 4.) do nothing, continue to with current cash flow.  Additional info, I am a business owner, very busy with my business, no time to handle flips or that kind of thing, just looking for solid investment / cash flow, and need tax benefits.  

Also, found Bigger Pockets a few months back and love it, just wish I would have found it sooner!

Thanks for all your help

0Reply
30 views

Most Popular Reply

Kyle McCorkel
Rental Property Investor · Hummelstown, PA · Member since 2015 · 638 posts · 653 votes
8y
Ryan Wilson Figure out your Return on Equity (ROE): total annual cash flow divided by equity in the property. Compare that to the cash on cash returns of other properties. Cash on cash = total annual cash flow divided by total cash invested. Total cash invested would be down payment plus closing costs. Your ROE will be very low since you have been paying down the mortgage. Listen to Get Rich Education podcast, episode 6, and let me know if that makes you question your decision to pay down your mortgage.
1Reply
See this reply in the discussion

13 Replies

Jump to latestLatest
  • Kyle McCorkel
    Rental Property Investor · Hummelstown, PA · Member since 2015 · 638 posts · 653 votes
    8y
    Ryan Wilson Figure out your Return on Equity (ROE): total annual cash flow divided by equity in the property. Compare that to the cash on cash returns of other properties. Cash on cash = total annual cash flow divided by total cash invested. Total cash invested would be down payment plus closing costs. Your ROE will be very low since you have been paying down the mortgage. Listen to Get Rich Education podcast, episode 6, and let me know if that makes you question your decision to pay down your mortgage.
    1Reply
  • Aaron K.
    Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
    8y

    I think it depends on how comfortable you are with investing out of state and how far you want to push your returns.  If you are comfortable with a property a plane ride away then your predicament is just a math problem to determine where your money/ equity earns a better return.  If you are more comfortable with your current market or other markets you know well that is not really quantifiable and is more a gut feeling than anything else.  Not sure if the rental property is in the same location as your location tag but if it is the high desert more or less rides or dies with the overall RE market, you have a lot of owner occupants out there now because they can afford to buy reasonably nice homes out that way but not on the other side of the mountain.  Hope that helps.

    0Reply
  • Ryan Wilson
    OP
    Hesperia, CA · Member since 2017 · 18 posts · 4 votes
    8y

    @Kyle McCorkel 

    Thanks for the input.  I love podcasts and will be sure to listen to that one.

    I did those quick formulas.  Current ROE and ROE / Cash on Cash after a Refi and they both came out essentially the same, at about .072.  This seems like actually a decent # but is it compared to what others are seeing?  

    Also, I realize there is a lot of cost associated with sell and buy of another property that would cut into profits, but is the any other benefits.  As I mentioned, depreciation is based on original cost, so purchasing a different property at today's current value would offer high depreciation.  I realize that is not a huge amount, but just trying to up my game and see if there are other considerations, I might be missing.

    Thanks

    0Reply
  • Kyle McCorkel
    Rental Property Investor · Hummelstown, PA · Member since 2015 · 638 posts · 653 votes
    8y

    @Ryan Wilson

    Can you outline your numbers for the ROE and cash on cash calculations? After refinancing your ROE should be higher...

    As long as you are assuming a 30 year loan with a nice low interest rate.

    0Reply
  • Ryan Wilson
    OP
    Hesperia, CA · Member since 2017 · 18 posts · 4 votes
    8y

    @Aaron Klatt

    I am in the High Desert and this is really the only market I know.  As you mentioned this market seems to swing up and down quit a bit.  It is definitely on the higher side now, and just not sure how much upside is left.  I am comfortable with everything now, but just trying to judge it by numbers, and see if it still makes sense to keep.  Really just trying to see how everyone else re-evaluates a property after a large appreciation, to see if there is info or formulas I may not be aware of.

    Any thoughts on current market, since you are semi local?  More upside or time to sell?

    Thanks

    0Reply
  • Kristina Heimstaedt
    Real Estate Agent · Newport Beach, CA · Member since 2017 · 259 posts · 293 votes
    8y

    @Ryan Wilson The thing that I wish more people would talk about is the cost to move your money and the tax basis associated with it. Are there still deals out there? Of course. However, if you are busy with your own business, you likely don't have the time to dedicate in order to weed out these great deals.

    That being said, the other challenge you will face is that if you are to purchase anything right now, your property tax base will be based on that. For investors in your predicament, I generally recommend that you have a minimum requirement in an ROI for a purchase. If you can identify a property that supports that math, you ought to have the flexibility to cash out and refinance to have equity for that down payment. Or option B is to list your property at a price that ought to generate multiple offers that way you can move your your existing property quickly and lock in your up leg property with minimized risk.

    Something to think about. I'm also recommending that all my clients invest in multi units as opposed to SFR's to minimize the impact of vacancy, if that were to happen, given how low most cap rates are these days.

    1Reply
  • Ryan Wilson
    OP
    Hesperia, CA · Member since 2017 · 18 posts · 4 votes
    8y

    @Kyle M.

    Current - Annual cash flow ( considering principle reduction) 10,800 / Equity $150,000 = 0.072

    Refi - Annual Cash Flow $4800 (considering principle reduction)/ cash invested $66,000 (30% down for 70% LTV) = 0.0727

    Am I missing something or doing it wrong?

    Thanks

    0Reply
  • Ryan Wilson
    OP
    Hesperia, CA · Member since 2017 · 18 posts · 4 votes
    8y

    @Kyle McCorkel

    Sorry, Currently 15 year about 8 left and refi figured off 30 year.

    0Reply
  • Ryan Wilson
    OP
    Hesperia, CA · Member since 2017 · 18 posts · 4 votes
    8y

    @Kristina Heimstaedt 

    Thanks for the response. As you mentioned, I have been thinking of Multi units and / or several SFR vs currently having everything in one SFR, to diversify. But at the same time I don't want to be the one that doubles down at the top of the market and then it have a pull back.

    0Reply
  • Kyle McCorkel
    Rental Property Investor · Hummelstown, PA · Member since 2015 · 638 posts · 653 votes
    8y

    @Ryan Wilson

    Principle reduction is not cash flow.  Cash flow is money in your pocket.  Principle reduction is not in your pocket.

    So when you figure cash flow it should be income minus expenses (vacancy, insurance taxes, maintenance, management) minus debt payments (both principle and interest).

    And for your ROE after refinance, you are saying that your remaining equity is $66K after refinancing, right?

    Will your debt payments really go up that much switching from a 15 yr. to a 30 year?

    0Reply
  • Justin Shum
    Rental Property Investor · Columbus, OH · Member since 2017 · 9 posts · 1 vote
    8y
    A lot of people have mentioned ROE which is fantastic because that is an excellent way to make your decision. As I am reading more into your strategy, I would start with your long term goals because there is no right or wrong decision. Some people elect to use rent money and aggressively pay down their mortgage. Others want to leverage the bank in order to buy properties, stay patient, and perform 1031 exchanges when the time is right to try to buy multi-family or commercial properties. if the math works out, another option is to leverage your equity for a cash out refi, use that to buy a duplex or 4-plex. that even is not taxable but i would say the decision itself has to fit into the larger, long-term goal.
    0Reply
  • Justin Shum
    Rental Property Investor · Columbus, OH · Member since 2017 · 9 posts · 1 vote
    8y
    If you are worried about doubling down, then it sounds like there is an area you are uncomfortable with. My opinion is if you aren’t great at something, then instead of doing it yourself, find someone who can do it well. then it’s up to you to have to find a better deal, or pull other experts in
    0Reply
  • Account Closed
    Registered Representative · Bend, OR · Member since 2018 · 91 posts · 38 votes
    8y

    If you plan to sell, consider doing a 1031 exchange.  Then purchase real estate that qualifies (lots of options there.)  Realtyvest/crowdfunding typically does not qualify for a 1031 ... there are other options.  Keep looking around if you go that route, or as your 1031 exchange accommodator for suggestions.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free