Request for Advise HOLD or SELL

27 Replies

I own a SFH.
Bought it in 2009 at 385K + 50K in rehab = 435K
Current Market Value 785K
Current NOI = 32K Annual = 7.7 % Cap Rate on my investment, 4 % Cap Rate at current market prices

should I continue holding it or sell it or other ideas?
I am open to ideas.

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Originally posted by @Ravi S. :

@Joe Villeneuve 435 into it

Sell it!!!!...and never buy all cash ever again. I don't think you realize how much money you lost over the last 12 years. Keep in mind, the total cost of a deal isn't, and never should be, what a deal costs the REI. The total cost includes mortgage pmts, taxes, insurance, ...etc... Your (the REI) cost is ONLY what comes out of your pocket (as long as you have positive CF). When you pay all cash, you paid full price for that deal, you established a much higher number you have to recover before you make any profits (you have to recover all of your cost before you start making a profit) with less funds to use to recover your cost, and dramatically reduced your total CF and total Property Value.

Originally posted by @Joe Villeneuve :
Originally posted by @Ravi S.:

@Joe Villeneuve 435 into it

Sell it!!!!...and never buy all cash ever again. I don't think you realize how much money you lost over the last 12 years. Keep in mind, the total cost of a deal isn't, and never should be, what a deal costs the REI. The total cost includes mortgage pmts, taxes, insurance, ...etc... Your (the REI) cost is ONLY what comes out of your pocket (as long as you have positive CF). When you pay all cash, you paid full price for that deal, you established a much higher number you have to recover before you make any profits (you have to recover all of your cost before you start making a profit) with less funds to use to recover your cost, and dramatically reduced your total CF and total Property Value.

 Don't forget to mention lost opportunity costs.

Originally posted by @Mike Hern :
Originally posted by @Joe Villeneuve:
Originally posted by @Ravi S.:

@Joe Villeneuve 435 into it

Sell it!!!!...and never buy all cash ever again. I don't think you realize how much money you lost over the last 12 years. Keep in mind, the total cost of a deal isn't, and never should be, what a deal costs the REI. The total cost includes mortgage pmts, taxes, insurance, ...etc... Your (the REI) cost is ONLY what comes out of your pocket (as long as you have positive CF). When you pay all cash, you paid full price for that deal, you established a much higher number you have to recover before you make any profits (you have to recover all of your cost before you start making a profit) with less funds to use to recover your cost, and dramatically reduced your total CF and total Property Value.

 Don't forget to mention lost opportunity costs.

 OK.

Right now, that $785k in cash is buying $785k in Property Value...and $32k in Cash flow (NOI - no debt = Cash flow). If you sold it, that same $785k (minus closing costs ~= $600k) could buy you $2.4M (25% DP...assuming this is a commercial property) and at least and additional 2.5 times the current CF (new CF = $110k).

If you were to REFI, your current CF goes down (16k), you walk away from closing with about $400k in cash, which buys you an additional $1.6M in PV, and about $40k more in CF (new cf ~= $56k)

Make sure you consider the tax implications of selling it. You should also look at cash out refi. Looks like you clear 2500 a month NOI. That is good money.

The other issue is will you be able to sleep at night if you leverage or sell the property?  No judgement, you have held the property for 12 years and have not considered selling it up to this point.  Miami is an overheated market, can you find a property that will suit your investment requirements to replace this property?  

@Ravi S. Have you run the numbers on doing a cash out refi?  Not sure what kind of rents you can get but I try to keep everything I buy.  Whenever I'm thinking of selling something (to generate cash to buy something else) I always make sure to consider a cash out refi instead.  You can get 75% of the equity in the property back out but the great part is, it's all considered a loan.  So not only is that money you pull out not taxed, you get to deduct the interest on that money...and you continue to reap the benefits of cashflow and appreciation.  If you sell, you're taxed on the profits (capital gains) and your asset is gone.  Weighing the pros and cons of both it's very rare that I end up selling a property from my portfolio.

@Ravi S.   Certainly some great advice here to consider but if you sell make sure to connect with a QI with a reputable 1031 exchange company.  Many of my clients have used @Dave Foster who is awesome to work with.  You have some great choices to make and I think you may have learned a thing or two about using OPM, not your cash!  Keep us posted with your plans!

Best of Luck!

David

Originally posted by @Chase Lowry :

Sell! Sell! Sell! Then Leverage! Leverage! Leverage! Once you take a hit of OPM… mhm mhm mhm… you will never buy cash again.

Loan on your own home is taking on risk.

Leverage on an investment property is transferring risk

Buying all cash, is taking on ALL the risk.

Originally posted by @Salvatore Lentini :

@Ravi S. Have you run the numbers on doing a cash out refi?  Not sure what kind of rents you can get but I try to keep everything I buy.  Whenever I'm thinking of selling something (to generate cash to buy something else) I always make sure to consider a cash out refi instead.  You can get 75% of the equity in the property back out but the great part is, it's all considered a loan.  So not only is that money you pull out not taxed, you get to deduct the interest on that money...and you continue to reap the benefits of cashflow and appreciation.  If you sell, you're taxed on the profits (capital gains) and your asset is gone.  Weighing the pros and cons of both it's very rare that I end up selling a property from my portfolio.

 Capital Gains is pushed back if you buy forward with the profits.

You don't lose your asset...it's just transferred to the next deal.

Refi's are a step backwards and then forward.  It's a linear return.  Selling allows for an exponential return.  It increases PV, and cash flow on a larger scale than by refinancing.

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Originally posted by @Salvatore Lentini :

@Joe Villeneuve - no exceptions?

 There are exceptions to everything in life, but there has to be a strong reason for that exception to be valid.

I will give you one though. I love the refi at the "end" of your REI, and the last thing your cash does...for all the reasons you mentioned above. I think it's a backwards (math proves it) move during the process, and a terrible one to start out with. I'm not saying it doesn't work, but at a very minor scale compared to the option of selling.

@Joe Villeneuve - it works for me.  I had high interest rates on most of my loans when I started out.  Now I'm refinancing to lower rates, pulling money out to use on acquisitions, lowering my monthly payments and increasing my cashflow (on existing properties in portfolio and by adding new ones).  And because of the lower rate, I'm paying more toward principal each month.  The remaining 25% equity left in the properties is not really 25%.  I'd lose 5-6% in realtor fees, 1% in transfer tax, not to mention the amount I'd have to spend to prep the properties for sale.  I'd really only net maybe 15% more than a cash out refi.  And unless I was able to successfully able to 1031 all of the money from every refi in the designated amount of time, I'd pay capital gains.  Most of the investors I know that have wanted to 1031 end up not doing it for one reason or another.  So for me, cash out refis work really well.  In a perfect world, on paper, a 1031 provides more bang for the buck but I'm more interested in real world applications.

Originally posted by @Salvatore Lentini :

@Joe Villeneuve - it works for me.  I had high interest rates on most of my loans when I started out.  Now I'm refinancing to lower rates, pulling money out to use on acquisitions, lowering my monthly payments and increasing my cashflow (on existing properties in portfolio and by adding new ones).  And because of the lower rate, I'm paying more toward principal each month.  The remaining 25% equity left in the properties is not really 25%.  I'd lose 5-6% in realtor fees, 1% in transfer tax, not to mention the amount I'd have to spend to prep the properties for sale.  I'd really only net maybe 15% more than a cash out refi.  And unless I was able to successfully able to 1031 all of the money from every refi in the designated amount of time, I'd pay capital gains.  Most of the investors I know that have wanted to 1031 end up not doing it for one reason or another.  So for me, cash out refis work really well.  In a perfect world, on paper, a 1031 provides more bang for the buck but I'm more interested in real world applications.

You have your real world, others have theirs.  Refi does work, but not as well as selling.  The math doesn't lie.

Originally posted by @Salvatore Lentini :

@Joe Villeneuve - agreed. Math doesn't lie on paper but doesn't always translate to real world application.

 True, but why doesn't it?  It seems to me that if you include the reasons why the math doesn't translate, in your math analysis, then you can increase the number of times the math does translate.  When the math doesn't translate, I find the reason is usually faulty math...and the fault lies when the math doesn't include options to bring bad reality back to good.

@Joe Villeneuve - well for 1) the reasons I gave above, there's not all that much more equity to get out of a property once you take into account the additional costs to sell vs refi. 2) And that remaining equity is only not taxed as capital gains if you can successfully 1031 into a new property in the specified time period, and if the property you are selling is ONLY in your name and not shared with a partner or two 3) Being under the gun with a 1031 puts you at a disadvantage from a negotiating standpoint.  I get calls all the time from brokers stating that their client is under a time crunch because they're trying to buy another property with a 1031 but the property they're selling hasn't sold yet.  They give me specific dates.  Does that help the seller?  I've also gotten calls from brokers asking if I'd be interested in selling one of my commercial properties because their client NEEDS to identify a property asap.  

So, again, I'm not arguing the calculations and growth projections but there is always a difference between paper and reality.  Numbers on paper are clean and perfect.  Real life is hairy and imperfect.  That's why I always keep my original projections for a property and then compare them to the actual numbers in the first few years of ownership so I can try to improve on each subsequent acquisition.

@Salvatore Lentini   Not Arguing about reality.  I'm just saying part of a good analysis is being able to control the negative impact of reality.  Planning should be included in the analysis.  There are ways of profiting from sales with using a 1031.

Equity is just cash, some of it you paid for (DP), and some of it was gifted to you (tenants paying down and appreciation) that's locked up.

The reason why REI have a hard time finding the next property for a 1031 is they are looking for properties, one at a time, instead of looking for markets filled with those properties. I prefer to look for stacks of needles instead of needles in haystacks.

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