Should I Sell my Cash-Flowing Rentals?

Question

I live in California and own SFRs in a small central PA town since 2017. My cash-on-cash return with 40% leverage is about 11-12%. The rental market seems good, and each property is < $100K and exceed the 1% rule. However, I don't expect the home value to appreciate and am unsure if it makes sense to keep them there long term due to the town's declining population.

Thoughts?????

Alex Deacon · Answer

@David Lao I do like the approach of asking yourself what are you going to do with that money after you sell. What kind of return will you get elsewhere? You will have capital gains tax to pay so account for that also. If the population is declining and there is no sight of any major economic development in sight for the area then you may want to consider cashing out. Most markets across the nation right now are a sellers market. It may be the right time to liquidate. Nobody can answer your questions. There are too many variables. I have invested in the Pittsburgh PA market for nearly 30 years and if I had a crystal ball there are many properties I would have kept long term and many I would have sold. Some micro markets within the Pittsburgh region have exploded and some have flatlined. There is no way to know 100% which one will be the gold mine and which one will be a flop.

Aaron W. · Answer

@David Lao Whether or not you should keep the properties depend on what your goals are with investing in real estate? Are the properties currently advancing you to this goal? If not, where do you need to invest to accomplish your goals?

What is the reason for the population decline? Is it a temporary dip or long-term trend? Does the market have plans to develop its economy to encourage investment or improve itself?

Have a great day!

Jeremy Taggart · Answer

@David Lao I would look at it from an opportunity cost and return on equity standpoint. What is your return on equity with the current properties versus what you could get if you sold and utilized that equity elsewhere? Also consider your long term strategy. Whether you want to get more into nicer/higher appreciating areas versus a more cash flow non appreciating market. Or consider selling the smaller SFR's and getting into an apartment building with all of the units under one roof. Maybe sell some and keep others so you have a nice mix of both. Also need to decide how overall leveraged you want to be. Being more leveraged will increase your return but that might not be the direction you want to go if you are not trying to continue to add more units to your portfolio. Lots of things to consider. If you don't have the greatest feeling about that market long term but feel like it's a good time to sell there right now that plays a role as well outside of purely looking at just the numbers.

Account Closed · Answer

Pay them off and invest the cash flow after you have paid them off. Get a LOC on them so you have cash to work with.  the are many questions that need answered so you'll have to do your own analysis of where you are going and the best way to get there. most everyone I know that bought them right always regret selling, unless the local conditions change in the wrong direction.

David Lao · Answer

@AJ H. The local economy doesn't seem sturdy. The coal industry was once popular there, but has since moved out. The population has been taking nearly double-digit losses each decade for the last few decade. I started investing in this city and when I was close to broke, which was why I overlooked some indicators. My original goal was to buy and hold there forever, but I now have second thoughts about whether that's the kind of area that is safe for a long-term hold.

Account Closed - I would think that population decline is a major indicator of real estate prices (supply-and-demand). Agree or disagree?

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I was thinking about selling it now while the market is hot due to COVID-19. Locals there told me that in the last year, the market has been hot, which is uncommon for that town. I would be parking the sales proceed in stocks or CA real estate, which are both at all-time highs right now.

The options I'm seeing are:

1. Keep them as is.

2. Sell now when PA RE is hot and reinvest in CA RE.

3. Sell later when CA RE is cold and reinvest in CA RE.

4. Take out loans and reinvest sales proceeds

Elise Bickel Tauber · Answer

I've had a few investors recently who invested in areas that aren't declining, decide to sell their single families and either invest in other single families in areas with a better appreciation, or large multi-units. At the end of the day, you do need to look at your short term and long term investing goals and decide what is best for you.

Carlos Ptriawan · Answer

@David Lao I disagree. What you need to worry more about is only price appreciation and cap rate. I'm sorry but based on the question I think you're worrying too much perhaps because of some reading material. I will worry more if the house is broken or the tenant not paying.

Carlos Ptriawan · Answer

You should care more about future prices rather than the declining population. A population can go up and down but that doesn't mean the price will go down too. I see the decline population in PA is not a big issue, sometimes, a boring market is the best.

Should I Sell my Cash-Flowing Rentals?

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