Are SFHs worth keeping more than a few years

Wade G. · 2019-08-13T20:31:54-07:00

I have tried to figure this out but I get lost in the details. I have a couple of houses that I have had for over 10 years and a couple for only a few. I'm trying to figure out if its worth keeping them that long or if its better to sell them a after a couple of years of holding them as rentals and redeploying the capital. A few details for this scenario: - houses are bought with equity gains in the beginning - all repairs (new AC, roof, paint, flooring, etc.,) is replaced at acquisition so house is in great condition - no intent of ever paying off the house - appreciation being normal at 3% for this scenario - cashflow being $400 month, figuring $200 of the $400 for future repairs and vacancy - sell and pay capital gains tax rather than 1031 So in my scenario I figure most everything has a 10 year life span...AC, faucets, dishwasher, water heater, will need all fresh paint inside and out, etc. Basically in 10 years the house has to be rehabbed again and 10k -15k spent. Selling in a couple of years the house should still be in good condition, should get to keep more of the net cashflow since you only have one set of tenants and avoiding the future big expenses, and you get to redeploy the capital and capture more equity but pay more closing costs and probably some repair costs on new property. Waiting 10 years you get more appreciation, more mortgage paydown, but more cashflow has to be saved for rehab. Could probably refi the house and use that money for rehab to buy another property and capture some equity. I realize there are many variables to this and I hope it makes sense. I cant keep my thoughts straight when trying to figure it out. Maybe its a wash when everything is considered. In my thinking with normal appreciation, good tenants that dont destroy, it may be better to sell the properties after a couple of years and use that money to by another property but only if there is a huge equity gain. If not buying for huge equity gains maybe just holding the property 10 plus years is the way to go.

Dean Letfus

Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes

7y

Sure.
1. After the note payment I am getting $200 a month.

2. I paid 60K all in. Then mortgaged it for 60K on 90K appraisal so I am zero dollars down.

3. I have a ten year note. In year 10 I would reborrow the maximum I could and still maintain pos cashflow and note amortisation of 10 years again.

2 Reply

Joe VilleneuvePro Member

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

7y

Originally posted by @Brant Richardson:

I don't understand why "moving the money through the properties" by selling is any better or faster than refinancing and using the money from that for CAPEX and the down payment on a second property.

It's not the same money. When you move the money through, the money that's moving is your money. This moves through in the form of cash...which you don't have to pay for to use again. When you refinance, you are using the banks money...which costs interest, which the tenant pays...but subtracts from the cash flow

2 Reply

Joe VilleneuvePro Member

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

7y

Originally posted by @Dean Letfus:

Sure.
1. After the note payment I am getting $200 a month.

2. I paid 60K all in. Then mortgaged it for 60K on 90K appraisal so I am zero dollars down.

3. I have a ten year note. In year 10 I would reborrow the maximum I could and still maintain pos cashflow and note amortisation of 10 years again.

So you paid $60k in cash? If that's the case, then you can't say you don't have any money in it...you have $60k in it.

0 Reply

Joe VilleneuvePro Member

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

7y

Originally posted by @Dean Letfus:

Sure.
1. After the note payment I am getting $200 a month.

2. I paid 60K all in. Then mortgaged it for 60K on 90K appraisal so I am zero dollars down.

3. I have a ten year note. In year 10 I would reborrow the maximum I could and still maintain pos cashflow and note amortisation of 10 years again.

...or, you paid only the DP (say 20%), on the original $60k...so the property only cost you $12k. So at $200/m ($1200/yr), in 10 years you break even. Then you refi and start the process all over, but you are now making $1200/year in cash flow profit on that 1st first property.

What are you doing with the $60k you pulled out from the refi?

1 Reply

Dean Letfus

Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes

7y

@Joe Villeneuve, well I only had it in it until I got the bank loan. Then I got it all back. So zero after 3 weeks of ownership.

1 Reply

Dean Letfus

Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes

7y

60K I pulled out, which is all I put in, goes to buy the next property. I always make sure at purchase I can refi 100% of purchase price and costs. So I never have any money in them.

1 Reply

Joe VilleneuvePro Member

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

7y

Originally posted by @Dean Letfus:

60K I pulled out, which is all I put in, goes to buy the next property. I always make sure at purchase I can refi 100% of purchase price and costs. So I never have any money in them.

How many refis can you have at the same time? How fast can you do them?

0 Reply

Dean Letfus

Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes

7y

Well that's variable. I can do more than I am doing so they aren't a bottleneck. My bank is very user friendly now I have a track record with them. Providing I have 25 to 30% equity at acquisition they keep handing over 100% lending. But I'm not trying to do a hundred a year anything!!

0 Reply

Joe VilleneuvePro Member

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

7y

Originally posted by @Dean Letfus:

Well that's variable. I can do more than I am doing so they aren't a bottleneck. My bank is very user friendly now I have a track record with them. Providing I have 25 to 30% equity at acquisition they keep handing over 100% lending. But I'm not trying to do a hundred a year anything!!

I wouldn't do 100/year either, but the returns would allow you to. So instead of doing 100/year, you just do bigger ones. I would start with 3 properties at 20% down ($20k DP for $100k properties). I just calculated this out, and between the appreciation, the DP, and the equity the tenant is paying for, (based on your % numbers above) if I sold all three in 5 years, I would have over $200k in cash to invest with. That would allow me to buy 10 new properties the same way. 5 years later, after selling those 10, I would have over $400k in cash to work with...no debt associated with it...and just keep repeating the process.

Also, during that first 5 5 year period, my cash flow on 3 properties would be around $15k ($5k/yr per property...30 year loans). So if I decided to reinvest the CF, I would have $30k accumulated at the end of year 2...and buy a forth property...and have $10k left over.

Now I have $20k in CF/yr, so at the end of the third year, I have $30k available...and buy my fifth property...and have $10k left.

Now I have $25k/yr, so at the end of the 4th year, I have $35k available...and buy my 6th property...and have $15k left.

Now I have $30k/yr, so at the end of the 5th year, I have $45k available...and buy my 7th & 8th property...and have $5k left. Wait. I just sold the first 3 (5 years are up), so I only 5 properties = $25k/yr in CF...but, I also have $200k in cash from the sales available (see above) = $225k available...and I can buy 11 more properties (or the equivalent of in larger properties). That's 16 properties = $80k in cf/yr.

Now, I'm selling off all the 5 year old properties, and combining the cash from the sales with the CF, I'm rapidly increasing the CF and the value of my RE.

Like I said above, I'm not interested in owning 100 properties, but the value of those potential 100 can be applied to larger ones instead. Go another 5 years with the same system, and the growth is much faster...and exponential, as long as you reinvest the profits...but you don't need to. Just keep the CF, and move the proceeds from the sales forward.

6 Reply

Daren H.

Real Estate Investor · Desoto, TX · Member since 2013 · 560 posts · 528 votes

7y

@Erik B. had a good point. What capex issues do you run into in such a short period of time like 5 - 7 years? I have a house I bought in 2008 and still has the same roof, water heater, HVAC, plumbing fixtures, toilets, etc. Keep in mind the house was owned by someone prior to me. Hell, it even has the same carpet as when I lived in the place (tenants are required to clean carpets annually). I touched up paint, but never a full paint job. Sure, we have repairs, but my tenants pay for the repairs through the rent. The place is in crazy great shape. Rent has grown damn near $500 a month cumulative over this time.

If I buy a house with a 20 - 25 year old roof, 15 year old water heater, 15 year old HVAC, etc., I am factoring that in my offer price and planning to get those things done. Furthermore, the rent has to show it can support capex reserves, repairs, operating expenses, vacancy loss, operating expenses, debt service, etc and my profit. As a result, my seller is going to cover my capex, and my tenants are going to cover my repairs.

1 Reply

Brant Richardson

Investor · Santa Barbara, CA · Member since 2013 · 658 posts · 315 votes

7y

@Joe Villeneuve Maybe I could understand this if you walked us through your typical deal from purchase through selling and moving the money into two or more new properties. You hint at not having money in it and that paying the bank interest subtracts from cash flow. What is your strategy?

0 Reply

Joe VilleneuvePro Member

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

7y

Originally posted by @Brant Richardson:

@Joe Villeneuve Maybe I could understand this if you walked us through your typical deal from purchase through selling and moving the money into two or more new properties. You hint at not having money in it and that paying the bank interest subtracts from cash flow. What is your strategy?

I wrote a detailed step by step (kind of) above. Probably at the same time you were writing this. LOL. Check it out, and let me know if it makes ~~cents~~, I mean "dollars" to you.

0 Reply

Jeffrey Bower

Member since 2019 · 94 posts · 50 votes

7y

This is all amazing advice. I'm seeing the benefit of holding onto a rental just long enough. I didn't even consider CAPEX, so now adding that into a decision process is helpful to me down the road.

1 Reply

Bill B.

Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes

7y

I know many of you don’t have the same product inventory we have in Vegas but it has to be taken in to consideration.

I have 12 properties here, average age 15-20 years old, average time owned 10-15 years. With tile roofs, stucco siding, no storms, freezing, or “real” earthquakes, I average about $250-$300/mo in repairs and cap-ex combined. (About 1.5% of rent) (Usually a water heater every year and an ac unit every 2, everything else is under $200 plumber, landscaper, or handyman call.)

If you’re painting houses or fences, replacing asphalt roofs, trimming/removing trees, in a market of 50-80 year old houses with cast iron pipes, water wells/septic, or other things like that your numbers will vary.

But it almost sounds like your argument should be for renting out brand new houses in markets that don’t have severe weather or asphalt roofs. I can’t see justifying selling $3-$4 million in real estate to avoid $3,000/year in cap-ex/repairs. Forget the vacancies, acquisition costs, mortgage costs, etc...just the $200k to the realtors is 60 years worth of expenses. I plan on being dead by then.

Next year could be a tragedy and I get hit with $12k instead of $3k, it’s still less than the commissions on selling just one. I understand sometimes RE investing is boring and selling and taking profits is exciting, but boring isn’t all bad.

6 Reply

Dean Letfus

Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes

7y

OK got you Joe. Just looks like too much work to me! I'd rather keep finding great properties at 70 cents on the dollar and hold them forever. Buying and selling is all work and I'm too busy to work these days :-). But I get your headspace now.

1 Reply

Jasmine Hu

Rental Property Investor · Tysons, VA · Member since 2015 · 73 posts · 45 votes

7y

Today I just made a spreadsheet to compare loans, either 20 or 25% down, pay 0 to 2 point for loans. I can tell you this is a math question. was a software engineer and good at math.

The key is to calculate your return on cash generated from rent mortgage difference, principal paid within those monthly mortgage payment combined; then divided by house CURRENT equity, not the original down payment.

Then assuming you can sell this property, paid tax then get the cash out (your new equity). Then use this new equity and see what kind of property you can get, then calculate new property's return using same formula.

Then pick the higher one.

In general, equity built up is faster then rent increase. In this case, unless there is fast rent increase, or fast price increase, it is always better to sell before 10 years. (10 years over 30 year amortization creates too much equity).

Just my 2 cents.

3 Reply

Shawn Coverdell

Investor · Clatskanie, OR · Member since 2014 · 212 posts · 233 votes

7y

I agree with Brandon. I have many properties that would sell for more than double what I paid for them. But if you consider that most are BRRRRR investments with zero left in them, how do you run those numbers? Do you replace them with bigger properties with money left behind. Are your friends impressed or do they secretly plot your death. Do you want to win the game? Do you want to talk like Grant on Pod casts?, do you have a wife?

It don't take long before you can buy any car in production, but you might find you lost interest.

Many of you know what I am talking about. Many more will never know.

one thing is for sure, I can guarantee you are going to die. your kids will cry, then sell all your boxes off.

Shawn Coverdell

Homes in the Hood

3 Reply

Bill B.

Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes

7y

The sell and buy something else also assumes...

1) you’re finding great deals in this market

2) you have no other money to buy these great deals with

3) Equity minus sales costs, closing costs, acquisition costs, vacancies, capital gains and depreciation recapture taxes, and new property make ready is more than you can get with a simple refi. If you can get 75-80% with a refi it’s hard to believe netting 90% on a sale MAX minus the other costs would result in more cash than a tax free, almost cost free refi. Just the commissions and taxes should result in less cash than the refi.

1 Reply

Gary L Wallman

Rental Property Investor · Beavercreek OH · Member since 2018 · 422 posts · 970 votes

7y

Admittedly I only have paid for SFR's. Why would I ever sell them? Well maybe if a passive investment like a bank account started paying 12 percent interest. In the unlikely event we see that soon I'll keep my cash cows.

I bought them, renovated them and keep them in good repair. Why would I want to pay tax, recapture depreciation or hassle myself with a 1031 exchange? I just use the massive cash flow to buy new ones and add to my portfolio and cash flow.

88 SFR's and counting. When I die I can pass them on to my kids on a stepped up tax basis.

8 Reply

Patrick Menefee

Real Estate Coach · Charlotte, NC · Member since 2016 · 399 posts · 341 votes

7y

@Wade G. Great post, and great conversation.

I have to say though, I’m surprised at the amount of support for selling compared to a refi. Assuming your market supports the timeframe for a 1031 exchange in every case and you avoid losing 15% off the top, you’re still looking at a significant amount of cash spent for the sale of one and acquisition of another. That also doesn’t take into account the opportunity cost of rents that you don’t collect between sale and purchase.

Fascinating discussion though, have learned a lot just from seeing various opinions. Thanks!

1 Reply

Joe VilleneuvePro Member

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

7y

Originally posted by @Dean Letfus:

OK got you Joe. Just looks like too much work to me! I'd rather keep finding great properties at 70 cents on the dollar and hold them forever. Buying and selling is all work and I'm too busy to work these days :-). But I get your headspace now.

I'm not into that much work either. Remember, I said I wasn't interested in owning that many properties...or dealing with that many at the same time either. The number of properties I use in the example is just to show what the repetition does. It's not meant as a counter of properties...just dollars.

What would actually happen, is instead of adding more and more properties based on a $20k DP, you would only add one property at a time...based on the total dollars available at that time.

So, if at some point of sale, you sold a total value of$???? and made a total profit of $????? you would use that total profit as a 20% DP on just one property...which would be bigger than the previous one(s).

1 Reply

Mark Fries

Contractor · Jacksonville, FL · Member since 2017 · 1k+ posts · 2k+ votes

7y

@Joe Villeneuve

Reading this thread makes me thankful that I am debt free and that I did not ever sell any of my properties...lol

I really enjoy not having to think about ratios and leverage and debt and helocs and refinances and move this money and change that money, dump that house, equity pull on that one...

But there are many valid points in all of the postings!!

6 Reply

Bob Prisco

Specialist · Cleveland, OH · Member since 2018 · 1k+ posts · 666 votes

7y

@Wade G. of course if they are paying for themselves and are paid off. You build wealth when you hold , not just flip. Flipping is a job, a good one at that but still a job. Rentals provides freedom and long term wealth

Good Luck

2 Reply

JD MartinBusiness Member

Moderator

Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes

7y

@Wade G. It depends what your goals and end game is. If you "harvest" the equity on a regular basis, you have a setup similar to @Joe Villeneuve without any of your own cash in the property. Of course, then you have to do something with that cash. That "something" is work, so don't discount the time & energy component of finding & closing deals, deploying capital, managing or overseeing rehabs on a constant basis in order to keep the money moving.

There's no free rides and there are opportunity costs in everything. Just because you can alternate out of one vehicle into another doesn't mean you should. Do you want to keep playing Monopoly forever? If you really enjoy Monopoly, then you may have your answer. There's no right or wrong answer. If you enjoy constantly being on the hunt for deals and rotating funds, then you may (or may not!) be better off selling every 5-7 years. Someone like @Russell Brazil does this and trades up, but guess what? It's also just a side note to his regular "job" which is real estate in the first place. In other words, trading up and hunting better deals isn't incrementally that far from what he's already doing, so it may make sense for him. If you already have a day job that you like, and you do real estate "on the side", this strategy might be an enormous amount of extra work.

In any case, don't let anyone tell you there's a right or wrong answer. There's only what makes sense based on your own situation. If you have a family, hobbies, a day job, and a really busy life outside of real estate, you might find the incidental gains from swapping out not worthwhile compared to the time & energy investment. That is why there's plenty of people that do the @Mark Fries model, get a bunch of homes paid off and put it on cruise control while you do other things.

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Account Closed

Wholesaler · Jacksonville, FL · Member since 2019 · 55 posts · 47 votes

7y

SFHs are a goldmine if you buy them right and they produce for you.

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Are SFHs worth keeping more than a few years

Are SFHs worth keeping more than a few years

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