Should I Keep or Sell my Rental Property

Member since 2019 · 3 posts · 3 votes

Hello everyone -

I'm hoping to get some general input on what I should do with one of my rental properties (eg, do you think the amount of equity I have would perform better in a different investment). Also, what calculator(s) do you all recommend for analyzing current investment performance (rather then analyzing new investments). Some details on the property:

Location - Condo in Orange County, California

Current Value (based on zillow) - $520K

Current principal on loan - $100K

Monthly Rent - $2,800

Current Monthly Income (before factoring in maintenance and vacancy) - $1150

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Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

Sell...faster than you can this. You have $400k in equity just dying on the vine. Your equity right now is worth 80 cents on the dollar. IT should be worth $5 on the dollar. Sell the [property and turn that $400k into a PV of $2M...instead of just $520k.

Zillow's estimates are never anywhere near accurate, If (most likely) it is high, and way the actual value is $350k. That would mean your equity is only worth 70 cents on the dollar. As you equity grows, it value decreases.

Now the CF. Your CF is equal to about $13k per year. With an equity position of say $390k, that would mean it would take you 30 years for your CF to equal what you could have in cash right now with a sale. What could you buy with $400k in cash, even $350k in cash. What kind of (much higher) CF would that bring?

Did I mention something about selling?

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Sell...faster than you can this. You have $400k in equity just dying on the vine. Your equity right now is worth 80 cents on the dollar. IT should be worth $5 on the dollar. Sell the [property and turn that $400k into a PV of $2M...instead of just $520k.
Zillow's estimates are never anywhere near accurate, If (most likely) it is high, and way the actual value is $350k. That would mean your equity is only worth 70 cents on the dollar. As you equity grows, it value decreases.
Now the CF. Your CF is equal to about $13k per year. With an equity position of say $390k, that would mean it would take you 30 years for your CF to equal what you could have in cash right now with a sale. What could you buy with $400k in cash, even $350k in cash. What kind of (much higher) CF would that bring?
Did I mention something about selling?
12 Reply
Dominic Macchio
Member since 2021 · 2 posts · 0 votes
4y
It depends. What is the rate you are paying on your mortgage?
0 Reply
Josh Alexander
Real Estate Agent · Yorba Linda CA · Member since 2019 · 21 posts · 12 votes
4y
Depends on a lot of factors but if you are looking to invest close to the same area it might make more sense to look at opportunities in SFRs that don't have an HOA or a duplex and buying somewhere that is likely to appreciate at a faster rate than OC. Maybe check out SFR in the Corona/Murrieta area. You'll probably get a better return and you can get well maintained SFRs in the 600,000s there or find a fixer opportunity for some forced equity for less than that. If you are looking just for CF and want the same area might look into the possibility of short term rentals in the Big Bear/Arrowhead or Joshua Tree area as well.
1 Reply
Scott Winter
Costa Mesa, CA · Member since 2019 · 70 posts · 39 votes
4y
@Ben Mosh
Great question! I’d love to see an accountant or finance guru chime in here on the comparison and decision analysis.
@Joe Villeneuve has a lot of great points. The money sitting in equity is not working for you. If you’re looking to invest, I’d unlock that equity and put that money to work!
There are several options to use your equity—at least some of it. I took out a HELOC, you could cash out refi, or obviously…sell. I'm biased, but I don't think it is ever bad to own more property in Orange County!
13,000/400,000=3% return on equity. However factor in CA appreciation and your probably sitting closer to 15% return on equity currently. You could definitely do better if you put in the work. For example: I know you can invest that money into a syndication/partnership deal and get 15% while letting other people manage everything. Same return, less management.
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Peter MckernanBusiness Member
Residential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes
4y
@Ben Mosh what is your goal, and what is the plan with the money? Once you have that then there are a ton of options and you will be the one to really dictate what would be best for you. The easy answer is do not let that equity go to waste, and see what your options are to keep it and refi, keep it and continue renting it, and sell it to move it. All dependent on your goals.
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Daniel Poon
Wholesaler · Fountain Valley, CA · Member since 2015 · 5 posts · 1 vote
4y
Keep it and get a heloc on it to buy another with that equity.
1 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Originally posted by @Dominic Macchio:
It depends. What is the rate you are paying on your mortgage?

What difference would that make. The interest is attached to the mortgage pmt...which is paid by the tenant (rent). Now the interest rate is important as far as how it impacts the CF, but it has no meaning for this question.
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Originally posted by @Daniel Poon:
Keep it and get a heloc on it to buy another with that equity.

A HELOC isn't using the equity to buy another property. It's using the equity as collateral for the HELOC. The money from the HELOC is the bank's money. I know this because the bank is charging interest to use it. In order to use the equity you have to sell the property.
1 Reply
Chris Springer
Investor · PA · Member since 2021 · 20 posts · 15 votes
4y
@Ben Mosh
Consider doing a cash out refi. Do the math so you are okay with the new payments and how it affects your cashflow, then reinvest the cash you pull out. Rates are still low.
1 Reply
Salvatore Lentini
Rental Property Investor · Doylestown, PA · Member since 2008 · 1k+ posts · 1k+ votes
4y
@Ben Mosh - Would you buy the property now at $520K if you could get $2800/month rent? I wouldn't. You should be getting at least double that amount per month. That tells you your money could be better invested somewhere else. Why don't you just start looking at what $520K could get you in terms of rent if you used it as a down payment (or $520K-$100K). So $420K plus closing costs so maybe about $400K. What could you get with $400K down money? What kind of rent would you get with that? I think if you start looking at what that untapped money could buy you your eyes will open wide, your jaw will drop and you won't be able to sell the condo fast enough :)

1 Reply
Allan C.
Rental Property Investor · Member since 2018 · 826 posts · 810 votes
4y
@Ben Mosh depends how much you want to scale. If you want to have lots of units with higher margin (and more headache) then sell. Condos are not efficient investment vehicles, and HOA fees will continue to eat into profits over time.
If scaling slowly is your speed, then doing a cash out refi and redeploying that capital is another approach. You'll need to run the numbers on how much your interest rate reduces and how much principal you can pull out while maintaining cash flow positive. Since CA properties are different than those in the Midwest, you'll need to set up an IRR calc to really understand the whole picture. But once you assess the IRR of your options, then it will be more clear whether you sell or refi.
1 Reply
Michael King
Rental Property Investor · Navarre, FL · Member since 2019 · 913 posts · 640 votes
4y
I just sold a 4 plex in St Louis thinking I could use move $200K equity into a better position in Florida, where I recently moved to. I am struggling to find a suitable place that has even half of the ROI I had. Prices are through the roof, buyers are like savages with over asking price cash offers, and much higher interest rates now. Same with St Louis. Sometimes it's the devil you know.
1 Reply
Khoa Ha
Real Estate Broker · Garden Grove, CA · Member since 2017 · 159 posts · 55 votes
4y
@Joe Villeneuve
He can cash out refi to tap into the equity too. The market is still hot right now. And since his property is in Orange County it will probably not losing any value anytime soon. With the shortage in inventory and the vast amount of money in the market for real estate we will not see any major correction in the near future. I know a few people that sold their property a few years ago thinking it was the peak at the time only to see property price sky rocketed 2021. The advantage of cash out refi is that you do not need to pay tax. Selling will require you to pay capital gains.
Disclosure, I'm a real estate broker in Garden Grove
Khoa
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Khoa Ha
Real Estate Broker · Garden Grove, CA · Member since 2017 · 159 posts · 55 votes
4y
@Michael King
Yeah, most of the time it better to own more property than less. You could have cash out refi and get some equity out then to sell the property straight out. Did you have to pay any capital gain tax from the sale? If so cash out refi would have some you on paying the tax as well. I recently cashed out refi and are looking for some investment property. But the inventory is very low and not too many good deal out where I look.
Khoa
0 Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Originally posted by @Khoa Ha:
@Joe Villeneuve
He can cash out refi to tap into the equity too. The market is still hot right now. And since his property is in Orange County it will probably not losing any value anytime soon. With the shortage in inventory and the vast amount of money in the market for real estate we will not see any major correction in the near future. I know a few people that sold their property a few years ago thinking it was the peak at the time only to see property price sky rocketed 2021. The advantage of cash out refi is that you do not need to pay tax. Selling will require you to pay capital gains.
Disclosure, I'm a real estate broker in Garden Grove
Khoa

COR isn't tapping into the equity, It's using the equity as collateral...the bank is selling you money in the same way as if they did when you buy the property. It's not your money you're getting out of the property. If it was, you wouldn't be paying interest on it.
When you sell, you're getting your money out for free. When you refi, you're paying for it. It's not the same.
1 Reply
Eric D.
Maplewood, NJ · Member since 2016 · 38 posts · 8 votes
4y
You should sell the property. Look, the value of the property is $520k and you owe $100k, so you could clear $420k (minus real estate transaction fees). For our purposes, let's say that is $380k. If you were to invest in stocks with 5% dividend rates, you would clear almost $20k per year. Right now, your monthly income is $1150 per month or $13,800 per year. And stocks go up faster than real estate, historically.
Quite simply, too, condos are not good investments. You would be better off buying a multi-family. Also, you are in California and you just cannot make the same return there on real estate rentals as you can in, say, the Heartland.
Personally, I would sell the condo and use the money you get as an investment. I would not want to do a cash out refi on the condo simply because I do not think it is a worthwhile underlying investment. Maybe it is just me, but I would not want to do a cash-out refi on an existing property unless, in theory, that property could support the re-fi. Which yours cannot. Otherwise, to me, it is not a good investment and I am not making a sound financial move. But maybe that is just me.
2 Reply
Michael King
Rental Property Investor · Navarre, FL · Member since 2019 · 913 posts · 640 votes
4y
Originally posted by @Khoa Ha:
@Michael King
Yeah, most of the time it better to own more property than less. You could have cash out refi and get some equity out then to sell the property straight out. Did you have to pay any capital gain tax from the sale? If so cash out refi would have some you on paying the tax as well. I recently cashed out refi and are looking for some investment property. But the inventory is very low and not too many good deal out where I look.
Khoa

Thank you Khoa, good points. I didn't want to continue owning the property; it was a little more high maintenance than I wanted after the move to Florida. I don't mind so much the maintenance, but the distance is the problem now. Or was. I am going to go back to my old job in St Louis and since I'll be up there, I'll be able to be more of a helicopter landlord again. As far as the tax implications of the sale, I closed 2 weeks ago and in 2022, and inside the 1031 exchange period. As long as I can buy another within the allotted timeframe, I won't have taxes to the tune of approx. $40-$50K.
0 Reply
Khoa Ha
Real Estate Broker · Garden Grove, CA · Member since 2017 · 159 posts · 55 votes
4y
@Joe Villeneuve
Yes COR is using your equity as collateral but it is not much different than selling and taking the money out. For COR one does not need o pay any capital gain tax whereas selling will be hit with capital gain tax unless it is replace by another property with a 1031 exchange. With the record low interest rate we still experiencing, in my opinion I think it better to COR. However, the OP said he don't want to take care of it anymore because of high maintenance then selling for him is probably a better choice.
Khoa
1 Reply
Bud Gaffney
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
4y
keep it ! Rent it out ! Cash flow.
0 Reply
Khoa Ha
Real Estate Broker · Garden Grove, CA · Member since 2017 · 159 posts · 55 votes
4y
@Eric D.
There is a capital gain tax he will need to worry about also. So saying that he will walk away with $380,000 after all the fees might surprise him when he have to file his tax and hit with the capital gain.
Khoa
0 Reply
Khoa Ha
Real Estate Broker · Garden Grove, CA · Member since 2017 · 159 posts · 55 votes
4y
@Michael King
That's great that you can do a 1031 exchange. If the number works for you then that's all the it to it. Good luck.
Khoa
0 Reply
Joe HomsBusiness Member
Flipper · Mission Viejo, CA · Member since 2014 · 2k+ posts · 1k+ votes
4y
@Ben Mosh there is way more information that I would need to advise you than provided. The biggest question, not to assume, but did you purchase the condo for $100K? I know that's the loan, but not necessarly the purchase price. You would calculate your profit by subtracting the Purchase price from the Sales price, minus alot of other fees.
Not to be rude, but how old are you? If you are younger that 35 then I will say keep it forever. If you are over 65 then consider selling it. However, what do you intent to buy and how do you intend to buy it. Are you going to do a 1031 tax differed exchange? If you are just going to sell it make sure you account for taxes from your business partner "Uncle Sam" of at least 20%.
Honestly if you are positive cash flow this much, I would keep it for the rest of your life.
Good Investing...
[email protected]949-625-4533
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Mrinal Parashar
Member since 2019 · 34 posts · 16 votes
4y
@Ben Mosh can you do a 1031 exchange?
0 Reply
Ariel K.
TX · Member since 2018 · 154 posts · 92 votes
4y
@Khoa Ha I agree with this. I understand the idea that COR isn’t your money, it’s the bank and that having a lot of equity doing nothing isn’t great. However, the strategy to sell a property every time there’s some equity is insane - in this market, you’d never keep a property more than a year or so, generating fees for your agent and losing that wealth. Plus there the capital gains idea (unless you do a 1031 exchange, but that can be a huge pain).
I would only COR if you can still cash flow. Think of it as buying the property again. If not, I would sell and buy something bigger. It’s also all about your goals.
1 Reply
Leslie Pappas
Professional · San Francisco, CA · Member since 2014 · 876 posts · 301 votes
4y
Originally posted by @Ben Mosh:
Hello everyone -

I'm hoping to get some general input on what I should do with one of my rental properties (eg, do you think the amount of equity I have would perform better in a different investment). Also, what calculator(s) do you all recommend for analyzing current investment performance (rather then analyzing new investments). Some details on the property:

Location - Condo in Orange County, California

Current Value (based on zillow) - $520K

Current principal on loan - $100K

Monthly Rent - $2,800

Current Monthly Income (before factoring in maintenance and vacancy) - $1150

Might be worth looking into a 1031 Exchange
https://www.biggerpockets.com/...

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