To sell rental or not to sell

General Landlording & Rental Properties
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To sell rental or not to sell

Jack B.
Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes

Making about 6.8% cash on cash from rents after expenses. It's a 145K house and although the market is going up, it's small gains compared to my leveraged 500-700K leveraged houses. 

I've kept it to date as a fall back position since it's paid off. If I lose my job, I can move back into it and live cheaply, even with no car (if it's that bad), since everything is within walking distance. It's on a somewhat active road that I didn't care for, but not a big problem when you factor in how cheap I could live there and how convenient it is otherwise. Plus the busy road seems to keep other problems at bay.

It is about an hour away from where I live now though, and dealing with flakes (sometimes all the appointments flake, try to have a few at a time so as not to make it a wasted trip) is time consuming. 

I've considered selling it and either 10-31 exchanging into another paid off property with some money on top (for a nice place, not on an active road). I could also just sell it and pocket the cash waiting to reinvest elsewhere. Or I could buy a nice house in Tampa Florida paid in full with the money. I plan on relocating there though have not made a recent recon visit yet. Can do though...

The house needed a new roof within 5 years per inspector when I bought it. I just celebrated 6 years the other day. The quality of tenants leaves a bit to be desired. Lot's of losers despite being in a gentrifying/not that bad of an area (lot's of new houses and condos going up).

What say ye? Looking for different perspectives here.

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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
9y

To fully understand income properties you must understand that every property has two separate sources of cash flow generation.

The property itself based on debt repayment costs, expenses etc resulting in a positive or negative cash flow and any equity in that property. Initial calculations are based on any given property being assessed with 100% financing.

Every time you pay down a mortgage or the property appreciates a dollar that dollar  generates a separate income on the property which must first be deducted from the income before all other expenses. Every dollar sitting dead in a property is a opportunity lost to invest and generate it's own income stream in another vehicle.

Investors do not allow money to sit idle especially when interest rates are as low as they are today. Equity being worth a minimum 10% with mortgage rates at the 3% range every dollar paid down on a mortgage or dead equity is losing a minimum 7% return per month.

If you are saying you are earning 6.8% return (positive cash flow) on $145,000 then you are losing 3.2% per month on the opportunity value of the equity and for all intent and purpose the property itself is earning nothing since all the profits are being generated by the equity. That is not how income properties are assessed.

Equity and brick and mortar (rental property) are two separate value generating entities that are considered separately.

The reality is that 6.8% on a combination rental property and $145,000 cash is a terrible return on total investment.

Cash on cash is only one way to look at investing but if you are happy with $820/month positive cash flow then that is great. I however believe you can do much better.

Suppose you mortgage it for $110,000 (20% down on the $145,000 = $30,000)

At 3% you would be paying $462/month P&I. Your cash flow would be reduced to $358/month. That would be a 14.2% cash on cash return using your system of calculation. 

The other $110,000 would be invested in possibly 4 other similar properties generating a similar return. The overall result would be $1800/month positive cash flow.

All hypothetical of course.

Equity is killing your TRUE cash flow.

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  • Brandon L.
    Real Estate Agent · Falls Church · Member since 2012 · 2k+ posts · 1k+ votes
    9y

    @Jack B. I do not think we are at the top of the market, so my vote is to keep it for 3-5 more years :)

    0Reply
  • Al Williamson
    Rental Property Investor · Sacramento, CA · Member since 2011 · 2k+ posts · 1k+ votes
    9y

    Hmm, there's an old saying that may apply here... "Buy - don't sell"

    You can always get to the collateral.

    0Reply
  • Jody Sims
    logistics · Lexington, KY · Member since 2015 · 33 posts · 30 votes
    9y

    Some will say I am crazy. @Brandon L. thinks we're not at the top of the market, yet, but I suppose that depends on the market area you're in. That said... I think we ALL need to be very watchful of what congress allows Trump to do. If they give him all he has proposed in terms of corporate taxes, there could be a nationwide top coming far sooner than many expect. The question we need to contemplate is whether congressmen are dim bulbs (many are) or visionaries (damned few are). The dim bulbs will give him all he's asking for.

    Here's my thinking on the subject. Trump says he'll give corporations a 15% tax rate. He's counting on that tax rate to bring home more than $16 TRILLION in overseas profits (taxable @ 15% versus... who knows how little... .5 to 5%?) corporations are hoarding. He also says he'll close all the tax loopholes. THAT is the fly in the soup. If he does do that, corporations will be paying more in taxes than they are now because most corporations, with loopholes, don't pay as much as 15% in taxes. Rather than bringing home all that cash (read: tax money) and creating tons of new jobs here, my strong suspicion is perhaps only 10% of that money will be repatriated (some CEOs taking the gamble that they won't have another opportunity to bring it home at a lower rate in the future) and it will end up costing us jobs due to higher tax payments, not creating tons more as he thinks. As soon as he made that statement on the campaign trail, you can be sure smart CEOs across the country had their CPAs crunching the numbers to see what the cost/benefit analysis would look like if Trump did all he said he would.

    I'm not complaining. I think his strategy is going to create a very nice buyer's market. But, it will be a bad time to be in the housing construction business. Since that's not my field... again, I'm not going to complain.

    0Reply
  • Andy D.
    Investor · Zürich, Zürich · Member since 2016 · 292 posts · 115 votes
    9y

    @Jack B. Sell it if it causes you headache badder than what you feel like it's worth having compared to the income. Otherwise keep it.

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    With $145,000 in equity, opportunity value of 10% minimum, your equity is eating $1200/month off of your rental income before even calculating any other expenses. Since you do not give the rental income numbers it is only a guess but I suspect this property has major negative cash flow after compensation for the equity lying dead in the property.

    I would either refinance and invest the money in a descent income property or sell and reinvest. The up side in selling is you get rid of a low class property and increase your returns.  

    3Reply
  • Jack B.
    OP
    Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
    9y
    Originally posted by @Thomas S.:

    With $145,000 in equity, opportunity value of 10% minimum, your equity is eating $1200/month off of your rental income before even calculating any other expenses. Since you do not give the rental income numbers it is only a guess but I suspect this property has major negative cash flow after compensation for the equity lying dead in the property.

    I would either refinance and invest the money in a descent income property or sell and reinvest. The up side in selling is you get rid of a low class property and increase your returns.  

     Not sure your post makes any sense...How does the equity eat $1,200 a month off my rental income before any expenses? I don't think you understand how capitalization or cash on cash returns are calculated.

    I posted the numbers. I'm not cash flow negative. I'm positive. To the tune of 6.8% after all expenses, relative to equity. Read the first sentence in my original post....

    Here is what I said again:

    "Making about 6.8% cash on cash from rents after expenses. It's a 145K house and although the market is going up, it's small gains compared to my leveraged 500-700K leveraged houses."

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    To fully understand income properties you must understand that every property has two separate sources of cash flow generation.

    The property itself based on debt repayment costs, expenses etc resulting in a positive or negative cash flow and any equity in that property. Initial calculations are based on any given property being assessed with 100% financing.

    Every time you pay down a mortgage or the property appreciates a dollar that dollar  generates a separate income on the property which must first be deducted from the income before all other expenses. Every dollar sitting dead in a property is a opportunity lost to invest and generate it's own income stream in another vehicle.

    Investors do not allow money to sit idle especially when interest rates are as low as they are today. Equity being worth a minimum 10% with mortgage rates at the 3% range every dollar paid down on a mortgage or dead equity is losing a minimum 7% return per month.

    If you are saying you are earning 6.8% return (positive cash flow) on $145,000 then you are losing 3.2% per month on the opportunity value of the equity and for all intent and purpose the property itself is earning nothing since all the profits are being generated by the equity. That is not how income properties are assessed.

    Equity and brick and mortar (rental property) are two separate value generating entities that are considered separately.

    The reality is that 6.8% on a combination rental property and $145,000 cash is a terrible return on total investment.

    Cash on cash is only one way to look at investing but if you are happy with $820/month positive cash flow then that is great. I however believe you can do much better.

    Suppose you mortgage it for $110,000 (20% down on the $145,000 = $30,000)

    At 3% you would be paying $462/month P&I. Your cash flow would be reduced to $358/month. That would be a 14.2% cash on cash return using your system of calculation. 

    The other $110,000 would be invested in possibly 4 other similar properties generating a similar return. The overall result would be $1800/month positive cash flow.

    All hypothetical of course.

    Equity is killing your TRUE cash flow.

    4Reply
  • Travis K.
    Investor · Golden, CO · Member since 2016 · 4 posts · 2 votes
    9y
    Greg S. great way of looking at it. Jack B. I would also add that if you have $145K that includes headaches, another option could be to sell the property and do a 1031 exchange (or deferred sales trust) and put your money to work as an equity partner in larger deals. A 10% cash-on-cash seems reasonable plus you would be able to take advantage of appreciation and amortization when the property is refinanced or sold. The down side would obviously be some loss of control and access to your capital...but the headaches would be gone and you would have a potential for improved cashflow.
    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Jack B., Depends on what you want of course.  With an equity position like that there's a middle ground position that may prove attractive.  You could look  at a very nice vacation rental here in the Tampa Bay area.  Management headaches don't have to be onerous.  You may even just choose to do a season rental for a while each year.  This would leave it open during the rest of the year should you want to use it yourself.  After a couple of years when you are ready to retire.  Your house is waiting.  You move in and never pay a penny of the tax and depreciation recapture that went forward in the 1031.

    The 1031 Investor5137 Reviews
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    1Reply
  • Jack B.
    OP
    Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
    9y
    Originally posted by @Thomas S.:

    To fully understand income properties you must understand that every property has two separate sources of cash flow generation.

    The property itself based on debt repayment costs, expenses etc resulting in a positive or negative cash flow and any equity in that property. Initial calculations are based on any given property being assessed with 100% financing.

    Every time you pay down a mortgage or the property appreciates a dollar that dollar  generates a separate income on the property which must first be deducted from the income before all other expenses. Every dollar sitting dead in a property is a opportunity lost to invest and generate it's own income stream in another vehicle.

    Investors do not allow money to sit idle especially when interest rates are as low as they are today. Equity being worth a minimum 10% with mortgage rates at the 3% range every dollar paid down on a mortgage or dead equity is losing a minimum 7% return per month.

    If you are saying you are earning 6.8% return (positive cash flow) on $145,000 then you are losing 3.2% per month on the opportunity value of the equity and for all intent and purpose the property itself is earning nothing since all the profits are being generated by the equity. That is not how income properties are assessed.

    Equity and brick and mortar (rental property) are two separate value generating entities that are considered separately.

    The reality is that 6.8% on a combination rental property and $145,000 cash is a terrible return on total investment.

    Cash on cash is only one way to look at investing but if you are happy with $820/month positive cash flow then that is great. I however believe you can do much better.

    Suppose you mortgage it for $110,000 (20% down on the $145,000 = $30,000)

    At 3% you would be paying $462/month P&I. Your cash flow would be reduced to $358/month. That would be a 14.2% cash on cash return using your system of calculation. 

    The other $110,000 would be invested in possibly 4 other similar properties generating a similar return. The overall result would be $1800/month positive cash flow.

    All hypothetical of course.

    Equity is killing your TRUE cash flow.

    Properties actually have several sources of income. One is principal pay down. Another is cash flow. Another is appreciation. Another is depreciation. The fact that you claim that there are only two rather than the commonly known four I just mentioned, combined with your out of this world explanations convince me you don't have a clue what you are talking about. I clearly stated in my OP that I make 6.8% return on cash flow after all expenses on my 145K paid off property. Here is the text from the very first sentence in my OP:

    "Making about 6.8% cash on cash from rents after expenses. It's a 145K house and although the market is going up, it's small gains compared to my leveraged 500-700K leveraged houses."

    Then you claim:

    "With $145,000 in equity, opportunity value of 10% minimum, your equity is eating $1200/month off of your rental income before even calculating any other expenses."

    I ask you how. Yet you don't answer the question, instead posting more random numbers rather than answering how I'm losing $1,200 a month before expenses despite my saying that I make 6.8% after all expenses on a 145K property.

    Now your numbers and story have changed again. How exactly am I losing $1,200 in rental income before calculating expenses? You make absolutely no sense, and your story and numbers change from post to post each time you are called out, and you don't actually answer the question.

    1Reply
  • Daniel Shi
    Milpitas, CA · Member since 2016 · 1 post · 1 vote
    9y

    Greg did a great job by responding to your OP twice and laying out his prospective, which I found very logical and informative (to me).  My takeaway is : unless your "expenses" includes the opportunity cost/benefit of $1200/month from $145k equity,  you are NOT making the best of your capital. 

    1Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    Maybe if you post more number on the property someone else can explain it differently. Only having your 6.8% number is making it difficult to explain and although I have tried obviously I am unable to communicate any clearer.

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    @Jack B.

    @Jack B.

    "Properties actually have several sources of income".

    Principal pay down and Cash flow are attributed to the property generated income source.

    Appreciation/Depreciation are your equity generated income source.  

    0Reply
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