Recently I’ve been contemplating selling my rental property. It is paid off and the only purpose of selling would be to put a downpayment on a bigger property with more units. Is it worth selling a paid off property? It’s nice to have the cash flow yes, but I feel like I could do even better by advancing with a bigger property
Sell property using a 1031 exchange to get a better property sounds like a good direction to go. Sort of depends on how long you plan to continue doing this.
If you want to buy more property, I'm betting if you run the numbers, your cash flow would be higher on a multiunit property than a single family (assuming similar level of rental-ie not a high end single family and low end multi).
@Karla Simmons I would like to keep doing this for as long as possible. The property is currently a 2 family so my goal would be to put a down payment down on a 4 or 5 unit place and once that’s paid off down the line, use that as a down payment on a 10 unit property and then so on and so on. It seems like a smart idea in my head, I just wanted to get some other people’s opinions on it
Sounds like a great plan!
@Jake Fumagalli be sure to know the rules and timelines on 1031 exchange (have several options lined up before selling the current asset).
You are 100% correct in selling.
Too many investors look at the property as the asset. It's not. The asset is the equity and CF from that property, and the equity has no true value until you access it...which means sell. Until it's the cost you are paying for that property...much like the $5k deposit you have to keep in a checking account to get free checking (what a joke). That $5k is a cost to you. In both cases, you may own that equity (or $5k), but the property and the bank controls it. That means, in both cases, the equity and the $5k has no real value to you...unless you sell.
100% equity means you have paid 100% for the property, and you bought a property value equal to your cost. 20% equity means you only paid 20% for the property, and your PV is 5 times what you paid for it. If you sell that 100% equity property, you can turn it into a 20% property and convert the value back into 5 times what it was when it was dead. Your total equity doesn't change. What changes is the location.
...and, your cash flow should increase dramatically.
You don't have to sell in order to cash out on a rental. If it's performing well, why would you? Best bet is a HELOC, in some instances a cash out refi works well too. If you do sell, a 1031 can be awesome as long as you qualify.
Best of luck!
@Jake Fumagalli - seldom sell, it's called buy and hold for a reason.
I am not going into capex and location and the potential future of the property, because you did not give the context - just know that plays certainly into it, but provided those things look good, don't sell, rather refinance and take out 75% of it's current value to buy an additional property (or 3!).
The best part - refinancing is not a taxable event, the money you receive in your bank account is 100% tax free.
1. Are you tired if the property?
2. Do you see issues in the near future (mechanicals/roof coming to end of life)
4. Are you only comfortable with one property or want to expand?
Refinancing it to put a downpayment on another property is an option as long as it cash flows enough to pay It's own expenses.
Do a cash out refinance of the property. Then you can keep it, and use the money to buy more property.
If you want to play it safe, and you don't have a threshold for stress/pain, then play it safe and just keep what you have. But... if you want to keep significantly building your net worth and your income, start looking at properties that are worth 2-3X as much.
Good luck- it's exciting!
@Jake Fumagalli , @Patrick Shawn Faherty , has some good advice for you. In this market focus on your replacement property first. Even get it under contract before you close the sale or put your old property on the market. The hardest thing is not to sell your old property. It is to find and purchase a good replacement. So focus on that first.
The statutory order of the 1031 only requires that you close your sale before you close your purchase. You can go into contract before. And this will mitigate a lot of risk.
Refi'd and cashed out a part of it, put balance in VA loan, left cash sitting until started rehab on a wonderful old home that I am happy with, would never sell, its wonderful and now has all new paint, wood laminate flooring, orig hard wood floors, dishwasher (not operating currently thanks WHirlpool) Made about a dozen offers last year got nowhere so am lurking like a spider!
Sell. The math doesn't lie.
The property isn't the asset...your equity and cash flow is. You can replace the cash flow with the next property you buy with the equity. The equity now buys you 2 of the same property you are selling. The math doesn't lie.
Don't get emotional about the property, fall in love with the money, and...the math doesn't lie.
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