When to sell - How many years of cash flow?

77 Replies

I know REI decisions are personal, I preach it all the time. I purchased the bulk of my portfolio between 2011 - 2014 and since then the properties have appreciated. So while the properties are performing from a cash flow perspective my return on equity is not great.

I am looking at my profit (after fees and capital contribution) VS the average cash flow over the last 3 years. So my question is when do you sell? If I can sell and profit 5 years of cash flow is that enough? Less? More? WWYD?

Example - I bought a property for $100k with a NOI of 9k and annual cash flow of $5k and after closing costs my net will be $125k

I am going to tag some of my smarter REI friends for advice @Chris Clothier @Brian Burke @Brandon Turner @Ben Leybovich @Jay Hinrichs

Brie Schmidt, Real Estate Agent in Illinois (#471.018287) and Wisconsin (#57846-90)

@Brie Schmidt I'm not sure where your market is, but it has been tough for me to find properties with high Cash on Cash return recently. If it were me, I would keep it unless I could find a better vehicle to park my money in. Also, I'd keep it since cash flow is my main goal. It really depends on your market and what you're looking for. 

@Brie Schmidt I bought 120 or so rentals in the SF Bay Area in 2011-2013. I’m selling now. But my situation is different—I raised money from investors to buy these and the plan was a five year hold. So I need to do my part and execute the plan, which means selling and returning capital.

The thesis behind this trade back in 2011 was that housing prices would double in five years. Well, as it turns out I was wrong. They doubled-and-a-half. Time to take the chips off the table.

This never really was a cash flow play. Sure, the homes threw off cash, but this is CA so it was like 4-6% CoC. But get this—now that the houses have appreciated so much the return on equity is so low it's almost embarrassing.

So the smart move for me (ignoring that it’s also my obligation) is to sell.  Those proceeds could be reinvested in larger assets and reset the return on equity.  

Of course the smart move for you could be different. But here's a little fact that people don't often talk about—when investing in appreciating assets your CoC return climbs (assuming rents are also climbing), but your return on equity declines over time. By selling and RE-investing, you reset your RoE back to equaling your CoC (but at a much higher basis).

By $125k net, are you saying you can make a profit of $125k on the property after factoring in down payment and associated costs of original purchase? If that’s the case, would you rather have $5k of yearly cash flow or lump sum of $125k instantly? Myself I’d prefer the $125k right now and reinvest that elsewhere. Takes a couple of decades at $5k to make $125k.

@Brie Schmidt how about a slightly different approach: Properties aren’t just numbers on a spreadsheet. Why don’t you go through and decide which ones you like for various other reasons. You know those reasons, you have lived every detail of these for 4-7 years. Pull some cash out of the keepers, get a little better ROE. Then take whatever is left and exchange them.

Personally, I'm always looking at which areas I could predict to be growing or appreciating in the near future, and thinking of how I can invest there. If you're not thinking of getting out of REI entirely but rather just make changes to your portfolio that would make it more promising, this seems like a good time to sell.

I'm selling my least favorite as they become vacant. They are selling easily by owner to owner-occs. They are my least favorite so the decision was pretty easy, always careful with tax implications, so not selling too many in one year unless exchanging.

They were (2) 10 yr rentals and a 2yr that almost doubled  that were more value plays than for cash-flow. Most single fams in my market are. Cash flow blows on houses here.

Seriously enjoying peace of mind with my least favorites off my plate. You are very right about it being a personal decision!

@Matt Hoyt - I am actually meeting with my PM to do that today.  The questions is, Which do I sell?

A - The property I bought a few years ago that has been easy to manage with tenants for 6+ years.  It has been a great rental but when the tenants go, it will probably require a lot of money to fix up and rent out.

B - The property I just sunk a bunch of money in after tenants left by renovating it, and will probably be expense free for the next few years.  On paper this has been a worse performing property due to capex and vacancy during the renovation.  

Brie Schmidt, Real Estate Agent in Illinois (#471.018287) and Wisconsin (#57846-90)

I carry both value and cash flow plays and am re-allocating to cash flow plays right now. The original property strategy drives decisions, as does projected future IRR.

I am also investing with others to a greater extent because deal flow is king in this market.

@Brie Schmidt I agree with what has been said by others about what your overall goal is. Real estate can be wonderful and great, but as an investor, real estate is a tool that helps us reach our goals.

Some people want cash flow. Some people want a few paid off properties for retirement. Others want to accumulate as much cash as they can by flipping until they have enough to do or get what they are looking for.  

What was your goal when starting out with real estate? Has your goal changed or has it stayed the same? Will keeping this property help you get that goal or will selling or repositioning help you get your goal or get there quicker? It is always helpful for me to ask myself what is my goal here whenever I have a difficult question before me.

@Brie Schmidt Wow I feel like everyone at the bottom half of this thread is really making sense. I find myself usually just disagreeing with what people say on this site 80% of the time.

It's for sure a multi variable equation, there are a ton of factors. It's complicated if you haven't thought about it but easy if you're monitoring it all the time. I manage the entire portfolio and oversee the accounting, so I'm super in tune and I if you ask me what to sell first I've already thought about it and can just make a list in order.

Your A and B examples don't tell the whole story because if you do a look back A has better numbers than B. But on a forward look B likely performs than A.


@Steve Vaughan brings up a good point on vacancy for SFR. Not an issue as much on multi, certainly something to consider when your buyer is most likely owner occ.

@Mike Dymski brings up something I think about regularly which is a slight move or adjustment  from appreciation to cash flow type properties as the market continues to rise and rise. I do this within my market and without paying taxes as that is my model.

@Shiloh Lundahl talks about goals which I review daily, don't even have to put it on the list.


@Tyler Hayes makes a great argument on neighborhood not just the property itself.

I'm constantly looking at the whole portfolio. And we are adding regularly and I'm generally trying to get everything dialed and acquire more. But when I have a property where I have repeating issues that I can't seem to dial: constant bad tenants or trouble renting. Recurring over heavy maint. I just can't seem to get right, a bad loan or consistent trouble getting proper financing, an area I see headed in the wrong direction etc, then it gets marked for exchange.

Matt

Originally posted by @Brie Schmidt :

@Matt Hoyt - I am actually meeting with my PM to do that today.  The questions is, Which do I sell?

A - The property I bought a few years ago that has been easy to manage with tenants for 6+ years.  It has been a great rental but when the tenants go, it will probably require a lot of money to fix up and rent out.

B - The property I just sunk a bunch of money in after tenants left by renovating it, and will probably be expense free for the next few years.  On paper this has been a worse performing property due to capex and vacancy during the renovation.  

 When you think of property A, what is your first reaction? Close your eyes and think of it now. Do you flinch? Sigh? Get excited? My 3 were 'flinches', so the for sale signs went up.   If you already have #b retail-ready, this exercise will help deciding that one especially.

I went through 3 major renos on a 7 plex a couple years ago. A 10yr, 8yr and 6yr tenant all moved out the same summer. And we needed new gutters and fence work. Because my first reaction when I think of that property is to smile and get giddy (lol), I kept it and am glad I did. 

I also remember the dark days of the GRC when nothing was selling. Being able to sell at retail by owner is not the norm, so I was happy to exit. Longs make money. Shorts make money. Hogs get slaughtered.

@Brie Schmidt I agree with @Steve Vaughan theory of trimming the fat. If the property is one of worst performing or is just a problem child, then now is the time to dump it. 

If the property is good and you sell, ask yourself what better investment will you move money into? If there is nothing better, then selling probably doesn't make sense.

I would also challenge you on property A, where you think it may require some rehab money. I just had one go vacant after a 6 year tenant and I had to sink about $8K into the property. Rents went up $200 per month and I got a much better tenant. It is a little over 3 years to break even, but the improvements will last much longer. Even if I wanted to sell, I would have had to make the same improvements.

Return on equity can kind of skew your view of a property. It may be worth more today, but your return is still based on your original investment. That is one of the great things about rental properties. Over time your return gets better as rents increase. There is also acquisition/closing costs of a property, which are a one-time expense. The longer you hold the property, the less significant those expenses become.

One other thing to consideration would be "Would i buy this property for what I can sell it for?". I recently thought about selling the first property i purchased becase it's value has come up so much recently. But then i realized that even with the increase in value, that it's still worth buying again if I could buy it at the new value. 

We all talk about the different ratio tests and equations to run before buying a property. But I would encourage you to run the same tests before selling. For example, let's say you bought a property that met the 2% rule at the time of purchase. However now the value has increased more than your rents have over the past few years. So if you recalculated and used the new  market value/what you could sell it for and it only come in at 1.2%, should you then sell and invest those funds into a new property that meets the 2% rule? Some would say yes, others would say no. But it is another tool you can use to help you decide.

Originally posted by @Brie Schmidt :

I know REI decisions are personal, I preach it all the time. I purchased the bulk of my portfolio between 2011 - 2014 and since then the properties have appreciated. So while the properties are performing from a cash flow perspective my return on equity is not great.

I am looking at my profit (after fees and capital contribution) VS the average cash flow over the last 3 years. So my question is when do you sell? If I can sell and profit 5 years of cash flow is that enough? Less? More? WWYD?

Example - I bought a property for $100k with a NOI of 9k and annual cash flow of $5k and after closing costs my net will be $125k

I am going to tag some of my smarter REI friends for advice @Chris Clothier @Brian Burke @Brandon Turner @Ben Leybovich @Jay Hinrichs

I do not sell, unless the block or neighborhood has deteriorated and I am no longer able to attract my target tenant quality.

Why would you ever sell a quality property that is generating positive returns and is in a good area? 

My yields are composed of 2/3 appreciation (tapped through use of cash out refis) and 1/3 cash flow.  In total ~ 20-40% IRRs.

The problem with Chicago is that there is little to no appreciation.  And because it neither has strong population or job growth forecasts, it is unlikely to experience significant appreciation for years to come.

Originally posted by @Brie Schmidt :

@Matt Hoyt - I am actually meeting with my PM to do that today.  The questions is, Which do I sell?

A - The property I bought a few years ago that has been easy to manage with tenants for 6+ years.  It has been a great rental but when the tenants go, it will probably require a lot of money to fix up and rent out.

B - The property I just sunk a bunch of money in after tenants left by renovating it, and will probably be expense free for the next few years.  On paper this has been a worse performing property due to capex and vacancy during the renovation.  

Never let good tenants "go".  It is financially better for you to keep market rents below normal than to experience a turnover.  Avoid turnovers at all costs!  

If you communicate a rent raise and tenant says that they will move, ask them "Why are you moving?  X is the current market rate for this unit...What rate would be affordable for you?"  Negotiate with them and keep them in place. AVOID TURNOVER!

I did this recently and surprisingly I raised rent by $400 and tenant agreed to a rate just $50 short if my target.  I was fine with that and avoided a $5-7K turnover expense.

Originally posted by :

"...but your return on equity declines over time. "

Why would that be the case?  This would depend on the appreciate rate that the property is experiencing, would it not?

Also, if appreciation is significant and you are consistently able to cash-our refi and pull out tax free cash how.

I think your comment would depend on the specific investment strategy you are executing.  If you are completing a significant rehab up front then the big value increase would be once the rehab is complete and would diminish... but there are many other variables involved (ex. areas experiencing revitalization, so you rehab and significantly increase rents), etc.

Originally posted by @Jay Hinrichs :

@Jon S.  not sure if this was addressed to me.. but the reason I was selling is I don't want to be a landlord anymore and I can make more than 20 to 40% with my cash... simple as that.

Thanks Jay. That makes sense.

No, my comments were for Brie.

I have asked myself this question many times. For now, for me, cashflow is king. Moving forward it would certainly be a case by case basis both on goals and property performance. Looking forward to learning quite a bit from this thread. 

(775) 800-6126

if the cash flow supports it- why not just re-fi and cash out. 

If I am getting is that you right, you will have a net profit of 125K when you sell. 

- If you have a dependable tenant, why sell? Isn't vacancy one of the biggest hustles in landlording?

- Refi and move on to a bigger profitable venture, a flip or a monster cash flow ATM.

5% is not that bad if you have equity that you can cash out..still better than parking it in a CD account.

I am having the same issue with some houses I have had for the last 8 years or so.  The return on my initial investment is great, but appreciation has caused me to acquire some dead equity that I would like to put to use.  

Doing a cash out refi is fine, but that negatively impacts the cash flow for the property in total, doesn't make it as good of an investment when it comes to actual cash in your pocket and there is no guarantee that I can take that equity and use if for a productive use.  

For example, I cash out refi a property cash flowing at $500/mo and reduce the cash flow to $250/mo. I could use that down payment to purchase another property at 75% LTV that might cash flow $250/mo. At the end of the day, I it is simply diversifying my cash flow at the expense of adding the risk of another property. If I self manage, I essentially have twice the work for the same cash flow. At this point, I would need to hope that rents and values continue to rise or remain stable as a compression in rents or values will hurt me twice as much as it would if I had one property.

If you consider the cash out refi approach, you would need to figure out how you will use the funds and if the additional debt service would be supported with the cash flow you get from the property.  In my case, I can qualify for a 75% refinance, but it would wipe out most of the cash flow for the property so I wouldn't consider taking that much cash out.

If you decide to sell, I would figure out what your net would be after tax and options would be for using those funds for another investment (assuming no 1031).  Depending on the property, you might not be able to find a good replacement for what you already have.

The decision would be so much easier if the homes would not appreciate!  Not the worst problem to have :).

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.