When to sell an investment home
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesWhy did you pay it off? You just paid full price for the property.
Why are you concerned about the gross? The gross doesn't matter.
36 Replies
@Amir B. it depends on a lot of factors...If I were you, I'd be asking myself these types of questions:
-Why did the first tenant stay for such a long time, but now you're having trouble finding a new tenant? ...what do you need to do to find a new tenant?
-What grade is the neighborhood (if B or higher, I'd lean more to keeping it, if C or lower, I'd lean more toward selling it)
-What type of tenants will this property attract, and how much of a headache will it be to manage?
-What's your return on equity? (if you don't know, read up on this topic)
-What's the forecast for appreciation in this area?
-What capex items do you anticipate in the relatively near term?
-If you get a new tenant, what will the cashflow look like?
-If you sold it, what types of returns could you get on the new property you would buy?
...and, the other items that others have mentioned in the thread are also great things to consider...as others have mentioned, it often doesn't make much financial sense to pay off an investment property if you have a low rate locked...but, you can't turn back time--so, try to educate yourself on that issue and learn from it so you can become a better investor in the future.
Good luck out there!Quote from @Leo R.:
@Amir B. it depends on a lot of factors...If I were you, I'd be asking myself these types of questions:
-Why did the first tenant stay for such a long time, but now you're having trouble finding a new tenant? ...what do you need to do to find a new tenant? Tenant stayed a little over 5 years. School district. Kids were in school. Hire a PM company instead of leasing agent.
-What grade is the neighborhood (if B or higher, I'd lean more to keeping it, if C or lower, I'd lean more toward selling it) B
-What type of tenants will this property attract, and how much of a headache will it be to manage?
Blue collar. Hmm I had one tenant but he was going to be a pain so we mutually agreed to end the lease.
-What's your return on equity? (if you don't know, read up on this topic)
I don't know this but I will read up on it.
-What's the forecast for appreciation in this area?
I bought it for $86,500 including closing costs and now zillow is estimating $164,000+.
-What capex items do you anticipate in the relatively near term?
waterproofing, hot water tank was replaced last month.
-If you get a new tenant, what will the cashflow look like?
$772 with PM service
-If you sold it, what types of returns could you get on the new property you would buy?
$164,000-$86,500=$77,500 not including realtor fees, closing costs, capex, etc.
...and, the other items that others have mentioned in the thread are also great things to consider...as others have mentioned, it often doesn't make much financial sense to pay off an investment property if you have a low rate locked...but, you can't turn back time--so, try to educate yourself on that issue and learn from it so you can become a better investor in the future.Yes, will educate myself on those topics. Still learning. I have a long way to go.
Good luck out there!@Amir B. ...this is a complex one...there seems to be some good stuff, and some bad stuff here...
The good:
It's a B neighborhood
You had a tenant stay over 5 years (which is usually a good sign)
It sounds like the property has appreciated
It sounds like you can get a PM to manage it for you
The bad:
it's vacant
you have some looming capex (though, if all it is is a $4-6k to waterproof the basement, that might not be the end of the world)
you seem to be misunderstanding gross vs. net rent income, and you also seem to be misunderstanding the principles of using leverage/debt in real estate (regardless of what you decide to do with this property, you'll want to study up on these topics)
you paid off a mortgage that was locked at a low rate, and now rates are substantially higher
You have a LOT of money tied up in this property
The market is falling in most areas, and cash buyers are already finding good opportunities (and they will probably see even better opportunities over the next 6-12 months)...if you can get cash out of this property and use it to buy another property (or invest it elsewhere), that might be a viable course of action, but you'll want to run your numbers carefully... you could get that cash by selling, cash-out refi, or heloc, but of course if you do a cash-out or heloc, you'll have to factor that new debt service into your calculations...
Calculate your ROE and you CoC return, and you'll probably find that they're pretty poor, and that you can get much better returns elsewhere...
Good luck!
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesYou do realize if you have positive CF, then you're not paying the interest...your tenant is. They also were paying your principle. When you paid all cash, all you did was pay 100% of the cost of the property,...instead of just 20%. You lost out on 5 times the property value, and cash flow that goes with the additional properties you could have bought with the other 80% you spent on this property. That same cash you spent here probably would (should) have gotten you at least another $2-3k in cash flow, and around $400k more in PV,...all for the same cash you spent just buying this one property. You didn't save anything, you just spent 5 times what you should have,...and you lost a ton of money doing so.
Quote from @Amir B.:
Quote from @Joe Villeneuve:
Why did you pay off your property? The more cash you spend on a property, the more you paid for that property. 100% equity means you paid full price for the property.Quote from @Amir B.:
Quote from @Joe Villeneuve:
That still doesn't answer either of my questions.Quote from @Amir B.:
Quote from @Joe Villeneuve:
Could you let me know why you paid it off? You just paid the total price for the property.
Why are you concerned about the gross? The gross doesn't matter.
June of 2018. After buying the house, I used another $3,500 to fix it up for the renter. I meant I wanted to gross $5,000 monthly on top of my W-2 income ($13,000).
Sorry I don't understand.
Why are you concerned about the gross profit? The gross doesn't mean anything on its own. What matters is the net profit/cash flow. The only thing that matters is what you "keep".I paid it off because I didn't want to pay interest. Positive cash flow was $762.50.
Quote from @Leo R.:
@Amir B. ...this is a complex one...there seems to be some good stuff, and some bad stuff here...
The good:
It's a B neighborhood
You had a tenant stay over 5 years (which is usually a good sign)
It sounds like the property has appreciated
It sounds like you can get a PM to manage it for you
The bad:
it's vacant
you have some looming capex (though, if all it is is a $4-6k to waterproof the basement, that might not be the end of the world)
you seem to be misunderstanding gross vs. net rent income, and you also seem to be misunderstanding the principles of using leverage/debt in real estate (regardless of what you decide to do with this property, you'll want to study up on these topics)
you paid off a mortgage that was locked at a low rate, and now rates are substantially higher
You have a LOT of money tied up in this property
The market is falling in most areas, and cash buyers are already finding good opportunities (and they will probably see even better opportunities over the next 6-12 months)...if you can get cash out of this property and use it to buy another property (or invest it elsewhere), that might be a viable course of action, but you'll want to run your numbers carefully... you could get that cash by selling, cash-out refi, or heloc, but of course if you do a cash-out or heloc, you'll have to factor that new debt service into your calculations...
Calculate your ROE and you CoC return, and you'll probably find that they're pretty poor, and that you can get much better returns elsewhere...
Good luck!
"you seem to be misunderstanding gross vs. net rent income, and you also seem to be misunderstanding the principles of using leverage/debt in real estate (regardless of what you decide to do with this property, you'll want to study up on these topics)"
Do you mind giving me an example, please?
- New to Real Estate · South Africa, Pretoria · Member since 2022 · 11 posts · 6 votes3y
- Member since 2019 · 1 post · 2 votes3y
@Amir B. I had a similar situation. My property is in Massillon Ohio. Although it wasn't paid off but I had to decide to make repairs or sell it. I chose to waterproof the basement which actually increases the value of the property and add a new roof on including some minor additional repairs around the property. I kept the property and increased the rents and now my cash flow is even better. I am constantly getting offers to purchase the property so I feel that doing the repairs definitely increased the value of my investment. My suggestion for you is to do the same thing. Do the repairs and do a cash out refi and go buy another property.
- Rental Property Investor · Dallas, TX · Member since 2020 · 161 posts · 88 votes3y
@Aaron B., you may want to discuss this with your CPA what the income tax will be on the depreciation recapture and capital gains.
I wonder if you had an idea of how long you wanted to keep the rental before you purchased it. In my opinion. If you had a "forever perspective" going into the deal, you'd be more selective of the rentals you buy. For example, kinda like what Warren Buffett says, his favorite holding period is forever. So, he's very careful to buy great stocks, not junk.
Something else to consider, the more variables you have in your business, the more complexity, and the harder it becomes to successfully identify problems and root causes to find real solutions. Case in point, investors chasing low-quality rentals to increase their door count, only to realize later mistakes when they're in too deep or hit major problems they should have avoided. Investors that keep having problems need to take a look at how much complexity they have.
And another thing, don't let everyone convince you into thinking you are wrong for paying off your rental. Taking on more and more debt and getting a bunch of doors increases complexity and can spread you thin. I hate how people are quick to assume everyone on BP only cares about getting more doors. It's ridiculous, people are out here with razor-thin cashflow and are living desperately from tenant to tenant. And what happens when COVID hits and you can't afford the debt service? The ones suffering the most are the new investors eager and unprepared.
Have you heard the saying quality is better than quantity? Or what about simplicity is better than complexity?
What sounds better to you... You have rentals in one state. In total you have 10 fully paid off A-class rentals cashflowing $20k per month. Everything set to run on autopilot with LLC ownership and a family trust for estate planning/inheritance purposes.
Or...
You have rentals if five different states. In total you have 30 maxed leveraged C-class rentals cashflowing $100 per door/$3k per month. There is lots of complexity with different team members living in different states. Maybe you transferred ownership into its own LLC too, against the due on sale clause because you never heard of anyone getting their note called.
What offers more freedom and peace of mind? What would be easier to hand off if you died? ...more complexity in probate court across different states/laws.... e.g. court appoints an executor in charge of liquidating everything to settle your debts and what's left for your family.
Let's not forget the average landlord owns three rental properties (30% of landlords own properties worth $400k or more, with 7% of the top landlords owning properties worth $1 million or more). Half of all the 'single-unit' landlords purchased their property initially as a primary residence (later transitioning it into a rental property). Landlords operating 2-to-50-unit buildings provide most of the affordable housing stock in the country. — Read all 29 Insightful Landlord Statistics (2022) here: https://getflex.com/blog/landlord-statistics
@Amir B.gross rent is total rent. Net rent is the same as cashflow--it's your profit (after all expenses). If a portfolio makes $10k/month rent, that's the gross...if that same portfolio has $4k per month in expenses, the net (profit) is $6k.
Earlier in the thread, you were mentioning your gross rent, but as others mentioned--gross rent isn't particularly relevant without knowing what the net is... if someone says "I gross 50k rent per month", that isn't very meaningful without knowing what the net is (their net might be 45k, or they could be treading water and netting $0...or, they might even be cashflow negative; losing $2k/mo, etc.).
re: paying off mortgages...assuming a property is performing well with a mortgage, and assuming that mortgage is locked at a low rate (esp. if it's lower than the current rates you could get on a new mortgage at a new property), then it often doesn't make much sense to pay off the mortgage yourself--especially if paying it off makes a minimal difference to cashflow.
Here's an extreme example to illustrate that point:
Let's say you have mortgage locked at 3%, and the property currently cashflows $500/month. ...and let's say there's $300k left on the mortgage, and paying off the mortgage would increase your cashflow by $100/mo...and let's also say that today's rates are 7%....paying that mortgage off wouldn't make much sense (you'd be paying 300k just to get 100/month more cashflow, and you'd be losing your low rate that you can't get again with a new mortgage, because rates are now higher). ...that $300k could be put to much better use elsewhere...
On the other hand, if you had a property with only $2k left on the mortgage, and paying off the mortgage would increase your cashflow $500/month...then yeah, in that scenario it probably makes sense to pay $2k to increase your cashflow $500/month (even if it means losing your low rate).
So yes--theoretically, in some scenarios, it CAN make sense to pay off the mortgage. But in YOUR scenario, either it didn't make sense to pay off the mortgage, or people on this thread are confused about something...based on the info you provided, at face value, most of us don't see how it would have made sense for you to pay off that mortgage on this particular property.
As I mentioned before--read up on cash on cash returns, and ROE, and then calculate those items for this property...also, review articles/forum threads/podcasts/etc. on the topic of "when to sell a property", "when to pay off a property", etc. ...doing these things will give you a better understanding of how this property is performing, and what course of action makes most sense for you...
Good luck!
- 3yDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 13k+ posts · 9k+ votes
You sell when:
1) You find a better investment
2) The property starts dropping in value
3) You want to retire
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