General Real Estate Investing

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Nicholas Acevedo
  • Cleveland, OH
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Keeping or selling our property

Nicholas Acevedo
  • Cleveland, OH
Posted May 16 2022, 20:15

Hello BP Family!! I'm undecided on holding our rental property or selling it. We are moving out of state. If we hold onto it, we can cashflow about $450 a month & with the neighborhood doing a lot of changes & improvements. If we sell, we could make about $50k. Just seeing what others think. Thank you in advance. 

Cleveland, Ohio

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Dave Foster
  • Qualified Intermediary for 1031 Exchanges
  • St. Petersburg, FL
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Dave Foster
  • Qualified Intermediary for 1031 Exchanges
  • St. Petersburg, FL
Replied May 19 2022, 15:50

@Nicholas Acevedo, from a tax perspective there's no reason to decide now.  You can move out and rent that property for the next three years and still qualify for the tax free primary residence exemption.  And you like the rent then hold it longer and the 1031 exchange will still be available even after that.

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Rodney Sums
  • Laveen, AZ
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Rodney Sums
  • Laveen, AZ
Replied May 19 2022, 21:30
Quote from @Joe Villeneuve:
Quote from @Rodney Sums:
Quote from @Joe Villeneuve:
Quote from @Rodney Sums:
Quote from @Nicholas Acevedo:

@Joe Villeneuve that’s something we did think about that. (it would take us at least 10 years to hit $50k) been thinking of what could we do with $50k?? Thinking about teaming up with someone to invest in a short term rental in TN.

It may not necessarily take ten years. Did you calculate your $20k cash in to come to the 50k? If not then it's really like getting 30k profit before taxes (if applicable). 

So long as the market allows:
Your rents will increase over the course of those ten years.
Your debt will be getting paid down The property will appreciate

You stand to benefit more than just 450/mo over ten years. I presume the rate you have on that VA loan is lower than current rates.

unless I'm missing something you may stand to benefit holding it unless you can take your profits and invest in something that will give better returns than what you have already. 

No, that's not how the math works.
Rent increases rarely gain higher CF, they are usually increased to cover increased expenses (taxes, ins., etc...)
Debt paydown is minimal, appreciation isn't a given, and both are separate issues. 
Whatever the starting CF is, unless there are improvements that will increase rents, will remain pretty much the same throughout.  If you do improvements to increase CF, the cost of the improvements add to the cost you have to recover, so the added CF is just paying back that cost, and not an increased profit.  It's actually putting your further behind.

In making my point I specified if the market allows.  That covers the fact nothing is a given. Also I was not arguing cash flow alone.  

I am not saying you're completely wrong. I don't agree with the rigid perspective that one year's cash flows are a static representation of future earnings.  

It's possible that rent increases, debt pay down and appreciation outpace expenses, are on par with them, or are in a deficit. I wouldn't consider 1/3rd of the mortgage term paid down "minimal".

Lastly he didn't specify whether or not the 50k was exclusive of the 20k he put in to it.

My main point was to give him some perspective rather than say definitively yes he should sell or no he shouldn't.  He will have to compare how an alternate investment will perform in comparison to the current property. 

Here's the most important perspective.  If the $50k includes his $20k cash he put in or not, he has at least 37% equity...which means he's losing money.  That $50k is at best buying him $114k in property value, and worse $134k (yes I have those numbers in the correct order).  The value of the equity for the $114k would only be 2.28 to one ratio,  and the $134k is only a 2.68 to 1 ratio.  The equity should be buying a property worth 5 times its face value...or in this case, a property worth $250k.  That's just the PV part of it.  If he's getting $450/month in CF with a property worth $114k or $134k, imagine what he would be getting with a property worth about twice that.

 Fair points made.

Just because another property costs more doesn't mean it'll perform better.  Doesn't mean it won't either.

The most important perspective, which I said in the first place and you reinforced with your last point is, compare the current investment to an alternative.  

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Joe Villeneuve#1 Innovative Strategies Contributor
  • Plymouth, MI
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Joe Villeneuve#1 Innovative Strategies Contributor
  • Plymouth, MI
Replied May 20 2022, 00:44
Quote from @Rodney Sums:
Quote from @Joe Villeneuve:
Quote from @Rodney Sums:
Quote from @Joe Villeneuve:
Quote from @Rodney Sums:
Quote from @Nicholas Acevedo:

@Joe Villeneuve that’s something we did think about that. (it would take us at least 10 years to hit $50k) been thinking of what could we do with $50k?? Thinking about teaming up with someone to invest in a short term rental in TN.

It may not necessarily take ten years. Did you calculate your $20k cash in to come to the 50k? If not then it's really like getting 30k profit before taxes (if applicable). 

So long as the market allows:
Your rents will increase over the course of those ten years.
Your debt will be getting paid down The property will appreciate

You stand to benefit more than just 450/mo over ten years. I presume the rate you have on that VA loan is lower than current rates.

unless I'm missing something you may stand to benefit holding it unless you can take your profits and invest in something that will give better returns than what you have already. 

No, that's not how the math works.
Rent increases rarely gain higher CF, they are usually increased to cover increased expenses (taxes, ins., etc...)
Debt paydown is minimal, appreciation isn't a given, and both are separate issues. 
Whatever the starting CF is, unless there are improvements that will increase rents, will remain pretty much the same throughout.  If you do improvements to increase CF, the cost of the improvements add to the cost you have to recover, so the added CF is just paying back that cost, and not an increased profit.  It's actually putting your further behind.

In making my point I specified if the market allows.  That covers the fact nothing is a given. Also I was not arguing cash flow alone.  

I am not saying you're completely wrong. I don't agree with the rigid perspective that one year's cash flows are a static representation of future earnings.  

It's possible that rent increases, debt pay down and appreciation outpace expenses, are on par with them, or are in a deficit. I wouldn't consider 1/3rd of the mortgage term paid down "minimal".

Lastly he didn't specify whether or not the 50k was exclusive of the 20k he put in to it.

My main point was to give him some perspective rather than say definitively yes he should sell or no he shouldn't.  He will have to compare how an alternate investment will perform in comparison to the current property. 

Here's the most important perspective.  If the $50k includes his $20k cash he put in or not, he has at least 37% equity...which means he's losing money.  That $50k is at best buying him $114k in property value, and worse $134k (yes I have those numbers in the correct order).  The value of the equity for the $114k would only be 2.28 to one ratio,  and the $134k is only a 2.68 to 1 ratio.  The equity should be buying a property worth 5 times its face value...or in this case, a property worth $250k.  That's just the PV part of it.  If he's getting $450/month in CF with a property worth $114k or $134k, imagine what he would be getting with a property worth about twice that.

 Fair points made.

Just because another property costs more doesn't mean it'll perform better.  Doesn't mean it won't either.

The most important perspective, which I said in the first place and you reinforced with your last point is, compare the current investment to an alternative.  

Agreed, however when you sell and collect a larger DP, that doesn't mean it has to go into one bigger property.  It could be split into 2 properties just like the original one that was just sold.  This is why Market Analysis is so important.