How to know when's the right time to sell

Question

I've really been enjoying BP - from podcasts to blog to forum, it's been extremely valuable. This is my first post to the forum so go easy on me. :-)

I have a question about a rental property which used to be my primary home. Currently, it's worth about $360k (Zestimate, which seems fair).  I have 10 years left on a 15 year mortgage at 3.5%. Rent is a market-reasonable $1995/mo and it's been vacant for just 1 month (due to breached lease) out of the last 8 years and 5 tenants. I self-manage and because of the aggressive 15 year mortgage I take home just $450/mo which just goes into a savings account, so I don't split out repairs and vacancy. I have tenants committed through next June.

So the question I'm wrestling with is....do I sell to pull my equity and buy many more cheaper properties, which I'd likely have managed for me and would likely be out of my area (near Portland) due to housing costs? This 2003 house is a fairly low-maintenance property and I realize that to buy other properties I'd likely be getting into more older properties which inevitably will require more maintenance. Or, perhaps it would be better to refi for a longer term to have more take-home?

Any help appreciated for this newbie investor.

Thanks!

Justin

Justin Ashworth · Answer

Thanks everybody for your input. It sounds like I need to evaluate my strategy. :)

Sam Shueh · Answer

If it is to  be cleared in 5 years, you can take HELOC or refin to get the equity out invest in another property.  I will hold on to a newer home knowing it requires little maintenance. The upside is more.

Some investors only look at the cash flow and are willing to become a slumlord.  When the recession hits (soon) the cheapies will worth less and expect to deal with delinquent rents.....

Mathew Wray · Answer

I agree with John. Define what you’re looking to get out of real estate before you decide on any course of action.

If your goal is massive growth-then get the money out through refinancing. If your goal is security and a retirement asset, then I’d consider leaving it as it is (if you can weather the coming Capex and any breaks in cash flow). In ten years, will you look back and kick yourself for letting the property go/re-starting the clock? Or will you look at it as a learning experience? What happens to the returns if you stop self-managing and are you okay with that as you scale or would you prefer to stay small and local?

You’re the only one with those answers.

Hope that helps, let us know what you decide!

Thomas S. · Answer

Your property is not a good investment as a income property. At a value of 360k your rent is far below what is necessary to cover long term expenses. It would need to be in the range of $3000 - $3500 to produce positive cash flow as well as cover your equity value. Without knowing it you are losing money every month and will continue to do so at a increased rate as your equity growes and your expences increase. The fact that the property today is low maintenance is irrelevant. I would be off loading this property asap since it is likely on the verge of becoming very expensive to maintaine.

If you have not done so already it will very soon need a new roof.

John Warren · Answer

@Justin Ashworth it sounds like you have a very good problem! I would say you need to define your goals for investing. Are you looking to create financial freedom on investing, or is this just a supplement to a holistic retirement strategy? If your goal is to hit some type of financial freedom number like $10,000 per month in passive income, then you will obviously want to sell and use a 1031 exchange to "trade up". If your goal is to retire and have a great asset that kicks of 300-500 per month until you sell it then I would refinance the property.

You could also blend the two strategies. You can refinance the current property and use the equity to purchase one or two more properties. This might be an interesting strategy for you as well.