Are SFHs worth keeping more than a few years

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Are SFHs worth keeping more than a few years

Wade G.
Houston, TX 路 Member since 2010 路 150 posts 路 159 votes

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.

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Jeff Brower
Real Estate Agent 路 Willoughby, OH 路 Member since 2014 路 560 posts 路 690 votes
7y

I buy mine with the intention to hold forever. When you gain enough equity you can refi or get a heloc and that money is TAX FREE. Vs selling where you pay capital gains. 

Would you rather sell the goose and take a few golden eggs now or keep the goose that lays the golden eggs forever?

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  • Account Closed
    Wholesaler 路 Jacksonville, FL 路 Member since 2019 路 55 posts 路 47 votes
    7y

    Keep them as long as you can go without the money tied into them! And make sure they are producing KASHFLOOO! :)

    0Reply
  • Ola Dantis
    Multifamily Syndicator 路 Houston, TX 路 Member since 2016 路 1k+ posts 路 2k+ votes
    7y

    @Wade G. This is a fascinating question! Now, you mentioned no intention of paying off the house. With that in mind, I think one approach will be to hold onto the asset and ensure that you pull capital out in the future and deploy that capital into other investments.

    Think of your SFHs as piggy banks, and the tenants by paying down the mortgage while increasing your future REFi proceeds, which will be available to you to use as you wish. 

    Bear in mind, with Real Estate, there is always something to fix and/or replace even if you buy other types of Real Estate 馃

    1Reply
  • Josh Bakhshi
    Real Estate Agent 路 Atlanta, GA 路 Member since 2015 路 359 posts 路 158 votes
    7y
    Originally posted by @Wade G.:

    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.

    Wade,

    It depends on what your business plan is.  There are three main goals investors have... 1- Buy and hold for cash flow.  2- Buy and hold for appreciation. 3- Buy and Sell for a quick buck.  I have personally had experiences on all three and they all have positives and negatives.

    Of course I don't have all the information on your situation and don't know about you goals, but the example you gave implies that the properties you purchased were not good investments.  The big thing that is missing is the purchase price, how much you put down and where they are located.  

     If you bought the property for 40K cash and it is netting you 200/month, you are still netting 6% cash and 3% appreciation.  All things considered, that is pretty good.

    If you bought the property for 400K and everything else the same, then it is not a good deal.

    The other thing to consider is what are you plans for the money if you sell.  

    0Reply
  • Pearce G.
    Investor 路 Hendersonville, NC 路 Member since 2016 路 138 posts 路 71 votes
    7y

    @Wade G.

    Return on Investment vs. Return on Equity. Before I buy, I analyze based on the ROI the expected cash flow will produce. After I've owned it a while, and especially if it has appreciated significantly, I start looking at ROE. If that equity could be redeployed to another property for a better return, then it may be time to sell.

    For example, I own a rental SFR that I bought 2 years ago for 90K with 20% down. My ROI strictly from cash flow is around 15%. That's great, but now the house is worth around 130K, so I have >50K in equity. That puts my ROE around 5%. Time to sell? Probably so, if I don't expect continued appreciation at the same rate and if I can find another 10-15% ROI property.

    1Reply
  • Brant Richardson
    Investor 路 Santa Barbara, CA 路 Member since 2013 路 658 posts 路 315 votes
    7y

    @Joe Villeneuve I get your strategy but I don't see the necessity to sell if you are sticking with SFR's, just refinance and save the realtor fees. If by "just get bigger ones" you mean moving into larger and larger multifamily properties then I understand the need to sell. The realtor fees are no joke when you get into million dollar properties.

    If I could easily find deals that provided 20-30% equity immediately I'd be doing real estate full time, be it flipping or LTR.  For me to find and buy 2 more would be a major accomplishment.

    0Reply
  • Account Closed
    Rental Property Investor 路 Sacramento, CA 路 Member since 2015 路 1k+ posts 路 893 votes
    7y

    @Wade G. it really depends on your long term goal. No 1031 leads me to believe you don't want to use those funds to build a huge portfolio one day. What's the total amount of equity in the properties? What do you plan to do with it if you sell them?

    0Reply
  • Judy Parker
    Rental Property Investor 路 Closter, NJ 路 Member since 2015 路 884 posts 路 722 votes
    7y

    I buy and hold, forever....I enjoy the monthly rent checks, especially since I am heading towards retirement.

    2Reply
  • William C.
    Real Estate Agent 路 Souderton, PA 路 Member since 2016 路 591 posts 路 414 votes
    7y

    RE: 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.

    @Brant Richardson the difference for me is pretty significant. When I purchase a property, renovate, and then rent it, I look to create a large amount of equity. My most recent example would be a BRRRR we bought for $165k plus $45k renovations. It just appraised for $310k. If we pull all out cash, plus an additional $40k or so, we'll have a Net cash flow of about $1200/month. MY GOAL is to hold forever. But I also have the ability to purchase the next deal without selling. So I can see why investors would be tempted to sell and redeploy in a new asset, if that is their only choice. Personally I would look for ways to pull the equity out to then deploy into a new asset, and build from there. It really depends on what YOUR GOALS are though. It is also deal specific as well. Personally I may look to redeploy with a monthly cash flow in the $200 range, and look for something with a bit more to offer, but $200/m might be the max you can produce in any given market.

    1Reply
  • Brant Richardson
    Investor 路 Santa Barbara, CA 路 Member since 2013 路 658 posts 路 315 votes
    7y

    @William C.  I completely agree with your strategy, refinance rather than sell to access the equity.  I was trying to make sense of Joe Villeneuve's strategy because I know he is a very experienced, successful investor but believes selling is the better option.

    0Reply
  • Jarrod Stotmeister
    Specialist 路 NW Indiana 路 Member since 2018 路 24 posts 路 9 votes
    7y

    Great conversation. So interesting how strategies and variables are so unique to different investors based upon what is important to them.  Coming from the holding rather than selling perspective, I see two issues.  Like a few have mentioned, if you have purchased with new mechanics, the rehab items should last longer than the estimated 10 years (mechanics aside from water heater, although the water heater could last beyond 10) making repair costs less than the 10-15k number within that span.  Also, as you mentioned, you did already account for some of the repairs with your vacancy/maintenance.  The other issue is the closing costs/realtor fees.  These would seem to offset the capex repairs by itself.  100k sale of house with 6% realtor fees and closing costs plus the acquisition closing costs add up quickly.  Also, even if you add 2 different properties with the funds from the sale, you now have two hits for closing costs on the acquisition unless you are buying with commercial financing (still with closing costs).  In the end, what is most important?  Moving a good, cash flowing property in order to find another could be counter-productive if that it ultimately your goal.  It would seem to be better to acquire another than to trade what you have.

    0Reply
  • Brian BoydPro Member
    USA 路 Member since 2019 路 305 posts 路 536 votes
    7y

    I have seen a lot of great reasons both ways on this post. Ultimately, it depends.... I know that is the typical lawyer answer but it really does depend; it depends on what your long term goals are, what your tax situation is, what your immediate need is, etc. So, let the numbers speak to you. Is there greater benefit over an 18 month time horizon than now than there is in a longer hold time horizon? 

    Maybe consider refinancing to reduce payments, increase your equity position in the short term?

    Maybe a cash out refi? Maybe a HELOC?

    What is your goal? Can the property cash flow even with a little money taken out? How do you deploy that money? 

    There are so many variables here that I think you come back to the genesis of your question, what is your goal? 

    Remember, Goals are different than Options.

    0Reply
  • Jenning Y.
    Investor 路 USA 路 Member since 2015 路 168 posts 路 243 votes
    7y

    I bought a property in 2012 for about $100k, cap rate is about 8 at that time.  Right now the market price is about $300k, market cap rate reduces to about 3.5%. I cashed out several times, mortgage interest rate is about 4.5%,  with no cash flow.  I plan to sell it and do a 1031 exchange.  Will be a fool trying to keep the property.  If the market is down, it may become cash flow negative, and may go underwater.   SO the point is, if you have good  MARKET cap rate ALL the time, you can keep it and continue cashout, but if the   MARKET cap rate becomes too low, it is much better to sell it and find a better use of your precious fund.

     

    0Reply
  • Luka Milicevic
    Real Estate Agent 路 Nashville, TN 路 Member since 2015 路 2k+ posts 路 2k+ votes
    7y

    The most successful RE investors I've come across have all said they never sell their properties and any property they have ever sold has been a regret on their part. 

    That's from folks with 20+ years and millions in RE 

    5Reply
  • Dean Letfus
    Specialist 路 Memphis, TN 路 Member since 2012 路 1k+ posts 路 1k+ votes
    7y

    @Luka Milicevic, what you quote is true but that is looking through only 1 lens. I feel the same way when I think about houses I bought for 200K that would be worth a million today. So that statement is a purely financial one. In my case if I had kept every property I ever purchased my second marriage would be over for a start through stress!

    So reality is people sell for lots of reasons. I personally think that, ALL THINGS BEING EQUAL, holding forever is the simplest, least stressful path to wealth in RE.

    But some people, like Joe for example, clearly thrive on the process of recycling, and I suspect the thrill of the hunt.  So that strategy is best for him.

    It's capital growth that makes people say they regret selling. But there can be many good reasons.

    Most of us have perfect hindsight and forget the path that got us there.

    1Reply
  • Jenning Y.
    Investor 路 USA 路 Member since 2015 路 168 posts 路 243 votes
    7y

    In my previous example, current market price is $300k, I still have about $160k mortgage left  with interest rate of 4.5%,  and the current market cap rate is 3.5.  If I continue holding it, will become negative leverage, also have about $140k dead equity left there doing nothing.  Also, the property is not in a great market. in this case, I think it is much better just to sell it.  So the main point is, how can we best make use of our capital, whether sell or not. 

    0Reply
  • Steve B.
    Engineer 路 Portland, OR 路 Member since 2014 路 1k+ posts 路 1k+ votes
    7y

    @Wade G. All new paint inside and out every 10 years?

    0Reply
  • Al Pat
    Rental Property Investor 路 Atlanta, GA 路 Member since 2016 路 325 posts 路 253 votes
    7y

    @Wade G. I buy house with intent to generate income and increase cash flow by doing value add, increased rent etc. My plan has been to use it as a retirement income source. When I have to repair the property, I see it as part of the business. If you can afford it then hold it. Short term gain vs. long term gain and benefits is what I look for.

    0Reply
  • Jenning Y.
    Investor 路 USA 路 Member since 2015 路 168 posts 路 243 votes
    7y

    I consider myself being a long-term buy-and-hold investor. When I started my investing, I told myself I would hold long and never, ever sell any my rental property. But after I invested about $100k my own money, bought about 4m properties and increase my equity more than ten folds, just using cashout and conventional financing, without any partner, and without using any private money, I found myself in an awkward position: I have a 4m portfolio, over 1m equity, but I just do not have any cash flow. How can that happen? Then I checked my 2018 tax return, I know the reason: the first several properties that I bought were all in hard-hit area, some prices are doubles, some are even triple, but their MARKET cap rate decrease from the time that I bought them, which was more than 8, to just 3.5 right now. That means I hold a portfolio whose cap rate is just 3.5%, and the properties are not in great cities and great area, and also I use huge leverage. How can I withstand downturn if I hold some stuffs with cap rate just 3.5? The answer is no, I can not withstand that and I hold wrong properties. I need to get rid of them and buy more higher cap rate properties, thus can increase both my holding value and cash flow. The conclusion for me is that I had some great buys but they are not worth holding long.

    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI 路 Member since 2013 路 13k+ posts 路 19k+ votes
    7y
    Originally posted by @Luka Milicevic:

    The most successful RE investors I've come across have all said they never sell their properties and any property they have ever sold has been a regret on their part. 

    That's from folks with 20+ years and millions in RE 

    What about the "other" REI's with 20+ years of experience flipping their hold properties...that also made millions in RE?

    1Reply
  • Scott Walters
    Member since 2019 路 7 posts 路 2 votes
    7y

    @Jeff Brower this is what a friend and me were thinking. Refi later in life, so you get the gain with the equity out at no tax, the. will properties to the kids and no capital gains.

    0Reply
  • Rhonda McDaniel
    Realtor 路 Tulsa, OK 路 Member since 2019 路 76 posts 路 42 votes
    7y

    @Joe Villeneuve what鈥檚 DP?

    0Reply
  • Rhonda McDaniel
    Realtor 路 Tulsa, OK 路 Member since 2019 路 76 posts 路 42 votes
    7y

    @Joe Villeneuve hank you for breaking this down to where it makes sense.

    0Reply
  • Brant Richardson
    Investor 路 Santa Barbara, CA 路 Member since 2013 路 658 posts 路 315 votes
    7y

    DP - down payment.

    @Jenning Y. I can understand that. If a property appreciates faster than the rents increase and you keep pulling money out with refinances until the ROI that is left is abysmal, then it is time to sell. That sounds like a pretty long process though, not selling off every 5 years to avoid CAPEX.

    0Reply
  • Jenning Y.
    Investor 路 USA 路 Member since 2015 路 168 posts 路 243 votes
    7y

    @Brant Richardson  Yes, I bought in good times. I plan to sell 3 properties which were held for 7, 7 and 5 years separately.  And if do rehab which can bring huge equity increase in short time,  sell to scale up is also not a bad idea.

    0Reply
  • Jordan MoorheadBusiness Member
    Real Estate Agent 路 Austin, TX 路 Member since 2015 路 5k+ posts 路 3k+ votes
    7y

    @Wade G. My first broker holds indefinitely and they鈥檙e paid off. He lives in a condo on the beach now. There isn鈥檛 a wrong way to do it. Has a lot to do with your goals and risk tolerance.

    [email protected]512-888-9122
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