I am a fairly new real estate investor in the Cleveland area. Last year I purchased two properties that are performing well, providing roughly 18% CoC return, which I consider to be pretty solid for my first two investments. Despite getting what I consider to be solid performance, I am seriously considering selling the houses at the end of the current leases (both are under two year leases signed in June). Between the sweat equity from the rehab and market appreciation I have about $50k in equity per house, with each house profiting about $6k per year. Rent in the area has not come up nearly as fast as prices, so using the equity to refinance and purchase more similar properties is not an option at the moment. I know that many of the members of Bigger Pockets don't believe in selling rental properties, advocating growing the rental portfolio in almost all situations. However, when I look at the Net Present Value (NPV) of a property that is profiting $6k per year I get about $60k (assuming an 10% ROR on my alternate investment). If over the next two years the properties appreciate another $10k (which may be wishful thinking) then I will be right at the $60k equity level that would make it worth selling according to NPV. Obviously a lot can happen over the next two years and everything could change, so I'm not making any decisions now, but I wanted to throw this scenario out to the forums to get some feedback on whether I'm analyzing this properly.
A more concise and abstract version of my questions is: Does it make sense to sell a solid cash flowing rental property to take advantage of appreciation (especially if refinancing to buy additional properties is not an option)?
In a rising market, I say no. If you can accurately predict the peak of a market, it might make sense if the tax implications are dwarfed by your redeployment of the equity, because you may be able to buy properties at fire-sale prices. Beyond that, real estate buy & hold is a long term strategy; otherwise, you're more of a flipper than a landlord.
Thanks for your feedback JD. Your point about tax implications and having a viable method of redeploying capital are well taken.
While I do consider myself to be a buy and hold investor (not only of real estate, but of stocks/index funds as well), there has to be some price at which even a buy and hold investor is willing to sell right? I am certainly not trying to predict the peak, but if cashing out and reinvesting in index funds (or whatever else) can net me more cash flow than I am getting from the house why not do it? If the price to rent ratio comes back into profitable territory later great, I can get out of my alternative investment and get back into profitable houses. If the prices continue to rise without corresponding rent increases, I'm still better off from a cash flow perspective than I would have been, right?
I think these questions can and should be answered before you even make your first investment. The real question is not whether you should sell or hold, the real question is what should your strategy be? And if your original strategy was to buy and hold a cash flowing property, why are you deviating from that strategy?
There is no clear-cut answer here, which is why I like to lay this out before purchasing a property. I set clear standards that look something like this: I am buying this property for cash flow and will only sell if the house appreciates to $XXX,XXX value. This way, anytime I get the idea of selling and buying a small island in Fiji, I look back to the statement I made when I had a clear, rational thought process and stick to it.
Thanks for the response. I agree that having the strategies in place beforehand is a good move, but I wouldn’t want the strategies to be too rigid, in a way that would cause me to not be able to adapt to changing markets. For example, I wouldn’t want to say ahead of time “I will sell if the price reaches $xxx,xxx dollars, because my decision isn’t based on sale price alone, it would depend on other variables such rental rates and interest rates, and what I believe I can get in alternate investments. I guess my overall strategy is to maximize return over a time horizon of 20-30 years. That strategy may lead me to sell and reinvest, refinance and buy additional properties, or simply hold depending on what else is going on.