Rent (24% return) or sell ( 75% gain )?

Question

Hi,

I recently purchased a investment property and originally  planned to rent out, which is why I used a mortgage instead of cash. If i sell it, I may make about 20k (rate of return is about  75%). And I can rent it for cash flow of around $5000 a year (around 24% return).   The reason I am thinking to sell is so that I can buy another property with a mortgage ( lenders are not willing to give more than 4 mortgages for investment properties).

What's your advice? Thanks a lot!

Wendy

Wendy BK · Answer

Hi, Helen,
     The cost is the purchase price+ closing cost+repair + vacancy loss, and the gain is the lower end selling price + transaction cost ( closing + commission ), minus the cost.   I asked my realtor to estimate the selling price, and I also have been closely watching the market price at a daily basis.  The problem is that I cannot find deals like this one anymore. So even I can get money be selling this house, I may not be able to secure a new deal 100%.

Helen W. · Answer

Wendy.  I think the key is how you are computing the potential gain on the sale of this property ? 75% gain is quiet signficiant, did you take into account the remodelling costs, the selling transaction costs ? How do you come up with the potential sale price? What kind of research ?

Chris L. · Answer

Hi Wendy,
You will need to check with your local banks on the details on the portfolio loans for your area.  
My recommendation was based upon creating a bigger down payment by selling the existing property and to use those funds as a down payment to purchase two properties at once.  The advantage to a portfolio loan is that you can purchase more than one property per loan. 
Here is another concept to consider: When do you sell?  I sell when I have a better place to put those funds.
Chris

Wendy BK · Answer

Hi, Bryan,I understand that appreciation shouldn't be considered as ROI, which totally makes sense. But to decide when to sell, is it reasonable to consider the possibility of price appreciation be one of the factors, together with cash flow?

Wendy BK · Answer

I know people here in general emphasize cash flow, instead of price appreciation.  Let's say a property with market value of $175k with loan amount of $120k. If sell it now, you get about $35k in cash after cost; if you wait one year, the house can be sold at $185k, and your rent covers all the cost with zero cash flow during the year, do you sell it now or later? My logic is that maybe later is better, giving you can generate $10k over $35k in a year.  Can somebody point out the flaw of my logic here? ( this is another property I have, and it was my primary property before ).

Wendell De Guzman · Answer

Wendy BK, consider selling the properties that you have that have the lowest cash-on-cash return or properties that have the lowest ROE (return on equity). By doing this, you can generate cash that can be used to acquire properties with higher cash-on-cash return.

Bryan H. · Answer

You are using fuzzy math to get higher looking returns, be careful not to fool yourself.

Since ROI is 10%, I'd sell.

But make sure you aren't using fuzzy math on the sale of the home. Don't forget all carrying costs until it closes, all closing costs, realtor fees, etc.

Wendy BK · Answer

Yes, but for the mortgage, I only counted interest, not the whole payment. ( it is a 15 year loan ). Here is the detailed number:

Purchase cost ( downpayment + cost ) = 21000
Rent: 1100
HOA fee: 220
Mortgage: 500 (250 interest, 250 principle )
Maintenance : $100 ( I management myself, so this is just for potential repair)
Vacancy : 1 month
Return: 2260/21000 =10.7%
Return(only consider interest as mortgage cost): 5260/21000= 25%

Patrick L. · Answer

When figuring the cash flow on the property how are you figuring your expenses?   Are you just subtracting your mortgage, taxes and insurance from the gross rent or have you figured for reserves, vacancy, management, etc?