Should I Sell or Should I Hold?

19 Replies

Hey BP. Have a house we're just about finished rehabbing up Duluth way. I'm all in for around $195,000. ARV back in March when I bought it was around $245,000 but the market's appreciated a ton since then and there's some comps nearby that support as high as $275,000. Keep in mind the appraisal was done on the house prior to it being fixed up and based on the scope of work my contractor had put together.

So, if I were able to sell it for $275,000, after paying realtor fees, capital gains, and the mortgage I have on it (construction loan of $192,000), I'd clear around $50,000. '

Keeping it as a long-term rental, I would be cash flowing around $425/month. At that rate, it would take me a little under 10 years to end up earning $50,000 in profits from cashflow. 

Now, I realize the other benefits of buy and hold including debt pay down, equity buildup, tax depreciation, all that jazz. I prefer to go buy-and-hold and have never done a flip. 

But that do you all think? How do you decide whether it makes sense to keep it long term or sell it for a quick-ish profit? 

You could start a new entity "abc corp" and flip it to that entity. You'd realize the same "profit" and still be able to hold it, if you're really on the fence with it. 

If you want to sell it and cash out, just do it. There are other assets out there to acquire if you're willing to pay today's prices.

As stated in a someone elses' posts, your answer depends on the math regarding whether or not you could use the profits to make more money buying another property and flipping or holding the 2nd property.

My answer is a little different. The answer also applies to my first paragraph, but the 2nd part to answer your question is in regards to what your business model is in regards to how you want to build your real estate empire.

I am a 100% believer in buy and hold and that is exactly what I did for the past 55+ years, but since the price of real estate is currently far beyond the point where earning money from appreciation seems nearly impossible for the short term, I am personally changing my business model to buy properties at auctions and flip them. My goal is to purchase properties at auctions for about $1 million per property because there is far less competition when a property gets to the $1 million range at an auction and the ARV for many of these properties leaves me with a $500,000 to $800,000 profit.

So, this is the answer to your question. You need to look at paragraph 1 and since it looks like earning money from appreciation in today's market is too tight then change your business model to buy and flip, but always keep your eyes open for a super sweet deal for a buy and hold.

My business model is to earn 50% to 100% on my investment capital every 1 to 2 years. That means; if I sold the property you currently own and walk away with $50,000 then my business model is to look for an investment where I can earn $25,000 (50%) to $50,000 (100%) on that $50,000 within 1 to 2 years.

Here is the main part about your answer. If you cannot earn 50% to 100% on the equity for the current house within 1 to 2 years then dump the house. That means if the cashflow, appreciation and depreciation does not look like it will net you $50,000 in 1 to 20 years then dump the house if you can find another investment that will.

It is all about the risks you take and doubling your money every 1 to 2 years. Don't sit forever on a stagnant investment.

Let me start by saying I'm not a fan of single family rentals. I prefer multi-family just because I don't want to come out of pocket for the note when someone moves out. But my son has renting down to a science now and he can usually move someone in within a week after the other person moves out. So I'm softening on my attitude toward SFR rentals. There a couple other things you might want to add to the equation. The 50k is subject to being taxed as regular income. So you can figure out how big of a hit you're going to take. Second the depreciation on 275k is 10k/year. So you get a great tax offset. You can even consider a HELOC in a few years assuming the property keeps appreciating which will give access to the equity. But I think the most important question to ask yourself is how does this fit into your overall strategy. What is your goal for investing. If it's to create wealth through passive income, which is a long term goal, then you have your answer. I'd it's to generate a lot of cash as quickly as possible to buy something like a 40 unit apartment complex then again you have your answer. The bottom line here is you have a "problem" most of us would love to have. Either decision will be a win. Good luck. Let us know what you decide.

@Matt J. Good problem to have! If the market was what you were predicting (original ARV of $245k), would the same sell/hold question be on the table? If you sold, would there be any time pressure to do something with your profits if you sold at $275k?
If you sell and have time pressure to park your profits, I would think about your deal flow. If you have strong deal flow and it would be fairly minimal effort to find the next deal, I say sell the property. If deal flow isn’t very strong and you have take time to go get a deal and your making decisions in a vacuum, I say hold your property. Good luck! Let us know what you decide!

Matt I love this question!!!  

It's always good to be objective - and I think this is one of the differences between good and great at this game.  There are some good answers here, but many are anecdotal. I struggled with this question for a long time - searching for a better than anecdotal answer.  I.E. what you set out to do when you bought it x amount of months ago is irrelevant to what "is" today - and being aware and objective is smart.

An investor can do well either way, sure - but there is a right answer here. This is money and time which equates to math, so there must be a right answer...

Here is what I landed on: The issue is that all investors should have an IRR standard that they earn on their equity. For example, I started out wanting at least 20% annually, that was my IRR standard. As I achieved it and more I pushed my standard up. Whatever your IRR goal is, the point is with this clarity the decision is easy, but with out the benchmark no answer feels right. So, the question really is - what has your past annual IRR performance been? What is the IRR as a buy and hold in this deal? Does it meet your standard? If the IRR is not good enough, flip it or refinance and lever it up.
Actually - this analysis should be done on all properties and investor holds every year. This guides me to when the time is right and I should refi and re-lever up the swelling equity in properties I hold. I've learned over time, between appreciation and pay down most of my holds are below 50% LTV at 6-7 years and my IRR drops below my standard.

So - long story short. I'd create an IRR goal, and then calculate the IRR factoring in your cashflow, principal pay down, and nominal appreciation and make a decision based on that info.

Final note - I've learned at a handful of lenders up here if you hold the property over 1 year, they have no problem doing a cash out refi and levering a project gone well up to the new 80% LTV. So, you might be able to tap half that equity and get your IRR back up above your mark as a buy and hold.

Haha - I feel like this was a complicated answer!  I hope it makes sense - maybe I talked myself in circles!

Cheers!

Originally posted by @Michael Schraepfer :

Matt I love this question!!!  

It's always good to be objective - and I think this is one of the differences between good and great at this game.  There are some good answers here, but many are anecdotal. I struggled with this question for a long time - searching for a better than anecdotal answer.  I.E. what you set out to do when you bought it x amount of months ago is irrelevant to what "is" today - and being aware and objective is smart.

An investor can do well either way, sure - but there is a right answer here. This is money and time which equates to math, so there must be a right answer...

Here is what I landed on: The issue is that all investors should have an IRR standard that they earn on their equity. For example, I started out wanting at least 20% annually, that was my IRR standard. As I achieved it and more I pushed my standard up. Whatever your IRR goal is, the point is with this clarity the decision is easy, but with out the benchmark no answer feels right. So, the question really is - what has your past annual IRR performance been? What is the IRR as a buy and hold in this deal? Does it meet your standard? If the IRR is not good enough, flip it or refinance and lever it up.
Actually - this analysis should be done on all properties and investor holds every year. This guides me to when the time is right and I should refi and re-lever up the swelling equity in properties I hold. I've learned over time, between appreciation and pay down most of my holds are below 50% LTV at 6-7 years and my IRR drops below my standard.

So - long story short. I'd create an IRR goal, and then calculate the IRR factoring in your cashflow, principal pay down, and nominal appreciation and make a decision based on that info.

Final note - I've learned at a handful of lenders up here if you hold the property over 1 year, they have no problem doing a cash out refi and levering a project gone well up to the new 80% LTV. So, you might be able to tap half that equity and get your IRR back up above your mark as a buy and hold.

Haha - I feel like this was a complicated answer!  I hope it makes sense - maybe I talked myself in circles!

Cheers!

I definitely don't stick to a clearly defined IRR very well yet. So far I've been really focused on targeting a certain amount of cashflow and being happy if I achieve that. As I progress further it seems like it gets to be more and more important to understand your target and adjust as necessary, just like you said, Mike! I think a cashout refi after a year might be my best bet. I just can't justify letting a house go when they're so hard to come by right now lol. Thanks Mike!

In this game, the allure of "quick profits" will kill your long term passive income goals. I wouldn't sell that place for all of the tea in China. 

Have you had a long term rental before? The tax benefits alone are worth it- the appreciation and cash flow are the icing on the cake. 

Think of it this way- in 10 years what are the chances you'd regret NOT selling it? I know lots of people who wished they'd held on to properties like this, or bought one in the first place. Throw a tenant in there and duplicate that 10 times and you'll never have to work again if you don't want to. That's better than $50k.

Originally posted by @Kevin Mosier :

maybe take the cash from the flip,pay the tax chunk, and report back to us the gains? Seems like you could win 

I could, but I don't have another place lined up to buy and am thinking long-term hold is what I'm going for at this point. Maybe do a cash-out refi so I can buy another place. Thanks for the tips, Kevin! When I'm in Duluth next we'll have to get together. 

Originally posted by @Corby Goade :

In this game, the allure of "quick profits" will kill your long term passive income goals. I wouldn't sell that place for all of the tea in China. 

Have you had a long term rental before? The tax benefits alone are worth it- the appreciation and cash flow are the icing on the cake. 

Think of it this way- in 10 years what are the chances you'd regret NOT selling it? I know lots of people who wished they'd held on to properties like this, or bought one in the first place. Throw a tenant in there and duplicate that 10 times and you'll never have to work again if you don't want to. That's better than $50k.

Hey Corby, 

Yup the quick profits are enticing. I have 4 long-term rentals right now and you're right. All of them have appreciated very nicely, I've realized the great tax benefits, and the cash flow is stacking up. 

Great point about looking 10 years into the future. This place could be worth twice what I paid for it with rents up quite a bit too, plus I'll have a good chunk of equity that I can leverage into more places. 

The goal is to get from 5 places now to 15 places in 2 years. 

Originally posted by @Jeff Rogers :

@Matt J. Good problem to have! If the market was what you were predicting (original ARV of $245k), would the same sell/hold question be on the table? If you sold, would there be any time pressure to do something with your profits if you sold at $275k?
If you sell and have time pressure to park your profits, I would think about your deal flow. If you have strong deal flow and it would be fairly minimal effort to find the next deal, I say sell the property. If deal flow isn’t very strong and you have take time to go get a deal and your making decisions in a vacuum, I say hold your property. Good luck! Let us know what you decide!

Yes it is a good problem to have, for sure! Right, if the market stayed at 245 I wouldn't even be entertaining selling. And there would be pressure for me to recycle that money fast because that's just how my brain works and that could lead me to investing in something less than stellar. 

Thanks Jeff! Like I said to Kevin, next time I'm in Duluth we should meet up. Hope all is well!

The question I always ask is what will do you with the money?  If you don't know, then keep it in the property as a savings account.  If you do, then great, go for it.

Everyone's goals are different.

Update - just got an email from my property manager. They have it leased up starting September 1st to a family for $1950 a month plus all utilities. $425/month with little of my own money into the deal thanks to the construction loan and upcoming refinance. I love real estate!