Trapped equity, hold or sell?

Question

Long time listener, first time caller.I bought a SFR as an investment property in 2013. It was a REO foreclosure sale, with a tenant, and needed some work. Long story short, in 2020 my tenant moved out, I did a cash out refi with a 3.875% rate, remodeled, and increased rent and overall value. It currently cash flows $700/month after taxes, HOA, insurance, etc.If I sold, taking into account the costs to sell, I could make between $390-$440k in profit. I would 1031 exchange that into another rental property. I would like to get into a 4plex, or even a 5-6 unit apartment building.

Is it a crazy idea to sell? I want to level up into a multi family property that can cash flow ~4 times what I’m making now, and can build more equity.

What would your advise be for someone in my position? “They” say never sell…

Chris Seveney · Answer

The answer to this question is do you have a better place you can invest this money that will yield you a better return than this asset? If the answer is yes then sell it, if the answer is not sure or no, then I would hold on to it.

Dave Foster · Answer

@Brian Szykowny, Your workload relative to income should decrease along with some other scaling.  Opportunity cost which would be the additional interest you would pay could be relatively small compared with putting yourself in the best position.  Commercial loans reset more frequently anyway.  I hate giving up good loans.  But if you have another "why" for selling the property then that could tip the scales.

Alec Zielinski · Answer

Another option is to look at a HELOC. Most likely you will have to shop around. Personally I called 13 different lenders and two had the option for a HELOC as a investment property. If you are not familiar with the process I would look at articles/videos to understand the process. IF this is something that would be feasible.

Jake Baker · Answer

@Brian Szykowny

I agree with @Chris Seveney. Look at your ROE - return on equity. If you feel you can move that money somewhere else to get a better return then that is the move.

Bradley Buxton · Answer

@Brian Szykowny

Deciding to sell is a nuanced decision.  It depends on your investment vision or why you are investing.  If cash flow is the most important then your decision might change.  Where would you invest next and would the cash flow to equity trade-off make sense for your vision?  Could you cash out refinance some of the equity, buy another property, and keep this one?  Other factors to consider are management and maintenance.  Is the property hard to manage and will large capital expenditures be coming up in the next few years?  In the Reno, NV, and Tahoe markets, the multi-family properties are seeing premium prices because of the low inventory and higher demand. There are still good buys but the best deals will need repairs to bring up to market rents. To level up in your investing and get more units it might be worth it to look at your next market and if a deal pops up that makes sense make a move. We work with CA investors who want the CA appreciation, low taxes with a more landlord-friendly environment in Nevada. Happy to connect and share some knowledge.

Alex Olson · Answer

No it is not a crazy idea to sell. Ignore the rate and look at what kind of cash you put in your pocket each month and how you are building wealth in the long run.

Trapped equity, hold or sell?

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