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Updated over 6 years ago on . Most recent reply

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Timothy Casallas
  • Real Estate Agent
  • Queens, NY
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Should I Sell my appreciating home for more cashflow?

Timothy Casallas
  • Real Estate Agent
  • Queens, NY
Posted

Hey BP,

I have a feeling that I already know the answer to this but I want to make sure I am not missing anything or making an emotional decision. I have a home in Jacksonville, North Carolina that I bought back in 2016 for 135k with no money down using a VA loan. It is now worth around 160k and I owe 129k on it. It doesn't cashflow very well, around $100 at most when I up the rent in a few months so even less now. It is pretty much breaking even.

I am closing on a property in Milwaukee that is going to cashflow a little over $200 and there are more homes available from the turnkey companies portfolio. If I was to sell the house in NC, I can use the cash to put a downpayment on possibly 2 homes and practically quadruple my cashflow. The only real thing that stops me is that the NC house is really appreciating pretty nicely and I don't know if I should just pull my money out when I am not sure if its near the ceiling of growth yet. What would you guys do?

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Marcus Auerbach
#2 Managing Your Property Contributor
  • Investor and Real Estate Agent
  • Milwaukee - Mequon, WI
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Marcus Auerbach
#2 Managing Your Property Contributor
  • Investor and Real Estate Agent
  • Milwaukee - Mequon, WI
Replied

@Timothy Casallas I don't know enough about your Jacksonville property to tell what migh be best, but here is how I would look at it. You have three sources of income on a buy and hold deal.

#1 Cash Flow - passive income that shows up in your bank account. It also keeps the lights on and pays the bills. Can't go without positive cash flow, it is literally the difference betwenn speculation and an investment. CF is the most attractive part to new investors and many look at REI as an ATM and a means to quit their job and travel the world. It is typically also the smallest source of income for a buy and hold investor.

#2 Equity - provided your investment is leveraged, it will de-leverage over time as you are paying of the loan using the rental income and grow your equity share. After your loan is paid in full you own the property free and clear. As long as you keep paying off your loan this is guranteed ROI. When you start out investing this part does not seem very exciting, but once you own properties for a while and your principal portion of your mortgage payment starts to increase you start to see the accumulating effects. The interesting part here is, the larger your mortgage, the higher the dollar impact. This is why you see some investors define their acquisition goals in $$ rather than units.

#3 Appreciation. Comes in two flavors, forced and natural. The certainty is much higher with forced appreciation, improving the property will almost alsways increase the value of the property. The effect starts to get flakey with low end properties in cheap neighborhoods - they will typically not chnage much in market value, remodelled or not. Natural appreciation is never guaranteed and as we have seen in the last 10 years the rollercoaster can go both ways. The longer your time frame and the better the neighborhood you invest, the more likely you will see appreciation.

Your two biggest expenses (often not very much considered by investors) are vacancies and - hate to say it - cost of sales aka agent comission. Brokerage fee's are usually paid by the seller, which is part of the reason why it's often better to @Jonathan R. 's point to refi or HELOC than to list and sell.

A frequent question on BP is what is everyone using for vacancy rates. Using someone elses vacancy rate is utter nonsense - it very much depends on your property, not even on your market. If you have a very attractive property and you target long term tenants (like families with kids in good school districts) at an attractive rent you will have close to zero in vacancies. Which by the way also helps you to reduce turnover cost (one month vacancy, one month re-leasing fee, some paint and repairs = 3 months in lost rent). With a little management effort you can find a new tenant before the old one moves out.

Hope this helps you with your decision; let me know if you have any questions!

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