I'm really interested to get some opinions from other BP members for what price point you would sell to cash out vs hold for cash flow. I'm considering selling two properties located in smaller towns outside Charlotte, NC (one small apartment building, the other a portfolio of houses):
1. An 8plex generating $3,850 per month revenue ($500 per unit, will be $4,000 per month as two older leases renew later this year). Taxes and Insurance are $3,500 per year together, property management 8%, no mortgage. Normal maintenance and vacancy, no special appreciating foreseen.
2. A portfolio of 1 duplex and 4 single family homes generating $3,750 per month in revenue (all close together in a small town). Taxes and Insurance are $4,500 per year together, property management 8%, no mortgages. Normal maintenance and vacancy, no special appreciating foreseen.
I look forward to seeing how other investors make this decision. Thanks!
@Chris Sellers Hey that's a hard question to answer because we don't know what your goals are. How much equity do you have in both deals, how many years are left on the mortgages. It's a much different question if your in the first year of a mortgage or the 25th. What does your vacancy look etc, I think we need more info on your goals in this question.
Thanks for the reply.
I have no mortgages.
My goal is to steadily increase passive income. From time to time when the market heats up, I sell things to increase this passive income (buy more properties with the sell proceeds, making step increases in passive income). Market seems hot now is why I'm considering it.
I'd estimate vacancy at around 8%.
I can never figure out how to direct message someone in the app. If you decide to sell the multiplex, I would like to get more information and run the numbers to see if it would make sense for me to buy it from you.
I currently have a duplex, SFR, and commercial rental and looking to expand my portfolio to multiplexes. Would like to hear more about where this is located and what price you are considering to list it.
You can contact me directly - ben(at)drinvestmentpartners.com.
Thanks for the interest. I'll let you know.
I've also been thinking about this topic, but more with regard to SFH. What my thought process has been is: how many years of cash low would I get it I sell? I'm thinking if I could get 7 years of cash flow immediately with no additional work or investment by selling I might do so. Interested to hear others thoughts.
@Chris Sellers , at least two things you haven't told us yet: Their current value (so we can see your gross % return per month), and, what on earth would you do with the proceeds?
ie. How will you better invest all that instant cash - soon?
If you're already in the habit of timing the market before selling, what's holding you back at this time (April 2018)? Has any time in the past been better, dollar-wise?
[If you're just trying to get us to give you a few month's notice before the next GFC hits, then forget it - you can't afford the carefully guarded insider-information!] Cheers...
The logic is to always sell HIGH and we are at an all-time high. You will very likely NOT pick the most ideal time to sell but if you are interested in selling then now is the time.
Thanks for reply. The 8plex worth $380k or so. The portfolio about the same. I’d re-invest the cash into other properties will value add potential with goal of increasing cash flow. These are tougher to find in today’s market, but they’re always there.
Nothing holding me back. Just seeking wise counsel before acting.
Updated about 1 month ago
"with value add", not "will value add" <typo>
Thanks Steve, so true. I'm definitely putting them "for sale". Identifying that "lowest acceptable offer" versus just keeping them for cash flow is always a question for me going in.
Originally posted by @Chris Sellers :
Not that this is a criteria you are using....but do you have an idea of how many years of cashflow your profit on a sale might be?
I would challenge you to find that mythical "other" value add, first (as an exercise). I liquidated a portfolio and am paying the price for that decision as it was a sideways move for a lot of stress.
Now if you want to jump classes or get into notes etc, it might be worth it, otherwise, good luck
I'm not sure, will have to figure that one out. I'll definitely keep your 7 year figure in mind. The concept makes sense. We can calculate a break even point between a lump some of cash and payments of cash.
Good point. I've done that too. Liquidated, then sidelined my cash for a year until I found the right "value add" deal. Knowing I lost all that rent in between was tough.
Have you considered a LOC or cash out refi? Yes you would be incurring debt but if you can reinvest that money for better returns than the interest rate you make money and get to keep your properties long term. Since the market is so hot you could take out a smaller amount of equity and still have a big chunk of change to start buying more property.
If you do it get the LOC/refi use the 8plex as collateral. Only one appraisal vs 5 keeps your costs down. Leverage is the name of the game. Just don't over extend.
Thanks for suggesting the LOC. I definitely need to toss that into the equation. Great idea.
A couple of thoughts I have are.....#1 what do you do with the money if you sell them? Do you have a better opportunity somewhere else for better appreciation, better rents, lower costs, better properties, better locations?
What is the outlook for the area where they are located? Does Amazon come to your town? Will rents go up?
I'm hyper tax conscious so I need to hold at least until day 366.
How long have you had them and what will the tax impact be, Chris? Will you 1031? I don't think I'll ever sell so many in the same calendar year.
I like the LOC path as it leaves you making the cash flow while you look for the deal. And leverage your equity when you find the deal, not before.
Take 300k LOC and get a 1.5 mil property that cash flows and still keep the rest growing your portfolio.
@Chris Sellers - I know we have talked recently but I thought I'd share my two cents.
In your case, as others mentioned, a LOC or a cash-out refi might be a great option. Using some rough numbers lets assume the following for your 8-plex.
Appraised Value: $375K
Term: 15 yr LOC (30 yr for Cash-out refi)
That would get you ~$280K with a monthly payment of ~$2300 (LOC) or ~$1600 (refi). Both should be tax free events if you reinvest the capital in another property(s). This should still leave your 8-plex cash flow positive.
This might be a simpler solution as there would be no time line or restriction like a 1031 exchange would involve with a sale. Plus you get to keep your cash flowing property while also expanding your portfolio.
I've done a few cash-out refi's in the past few years and am about to embark on my first 1031 exchange on a property a cash-out refi wouldn't make sense on. Hopefully we can find time to grab that beer and compare notes soon.
Based on your numbers the logical approach seems to be refinance to pull out all your equity to reinvest. Your properties, income wise are ideal for leveraging.
Are your rents at full market value of can you push them by an additional 10%. This would directly impact the value of you 8 plex for refinancing.
The dead equity on your plex is worth $3K /month so as it stands the property itself actually has negative cash flow. You need to pull that equity to reinvest to make it earn it's keep. Or not if you have no use for additional income.
Chris, just a thought.
Assuming your goal is increasing your passive income and building upon your net worth, I’d keep the 8 plex for the time being and put a line on it or consider a cash out refi with a loan to value at no more than 50%.
Interest rates are extremely favorable right now and lenders are throwing money at real estate investors.
Once we hit the down turn, credit will dry up and you may find yourself needing lots of cash to buy distressed deals from other investors who employed to much leverage. This was my problem during the last crisis. I had lots of equity and banks wouldn’t let me tap it to buy screaming deals.
Next, set aside the refi/line proceeds into a safe/liquid account and dub it your opportunity fund.
Next, I would focus on selling the single family portfolio one at a time to maximize the price. If you sell as a package, it may be at a discount.
Use the proceeds to trade up into higher quality 5-25 unit assets in solid areas that are known to appreciate over time.
The small multi family market is ripe for picking since most of the sellers are mom and pops and you are not competing with the syndicates taking down deals in the 50 plus unit range.
Better yet, single family and duplex properties are a hot commodity right now. You can maximize your sale price by putting these units out to first time investors or homeowners due to the housing shortage.
Understand, you will pay a premium right now to purchase more small multi properties. However, it is impossible to predict market cycles.
If your investment horizon is 10-20 years, you will be fine as long as you buy for cash flow.
I’m a huge fan of buy and hold along with 1031 exchanges so you can defer till you die. It is a pain structuring a 1031, but this allows you to purchase more property since you don’t have to worry about paying the taxes.
Obviously, if the taxable gain is nominal or you have loss carry forwards, skip the 1031.
You have a nice problem here. I bet a lot of BP folks would be happy to be in your shoes.
I would buy more properties right away. I bought these about 15 months ago distressed, mostly vacant and with low rents. I rehabbed, raised the rent and filled them up.
I'm an optimist, think I can find more good deals (I hope). They are in smaller towns, no Amazon coming in.
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