Good evening folks, I've been wondering around this lately and decided to come to where the expert live. I have a rental property that used to be my primary home until a year ago(Miami, FL). We bought it in 2010 and priced has doubled since. Last year we bought a new house and decided to keep the previous one as a rental, I had a 15Y loan and refinanced it to 30Y to maximize cash flow. At present time, spread is aprox $1,500/mo (just rent-PITI to simplify things). It will shrink some as I already know insurance will increase quite a bit at renewal. Prices in the area have gone up and talking to a couple of agents I learned that houses are closing about 10% above appraisal, which makes me wonder where is the "line" where selling outright makes more sense than holding on to it? I understand that a solid plan for the profits of the sale plays a factor in the decision but I want to keep the question single-threaded for now. Any pointers? Thanks in advance!

NOW!!!! Here's why. Think of your equity as as cash that's locked up in the property, and that equity is the asset, not the property. The property is just the temporary resting place for it. I say this because the equity value would be the same dollar amount...no matter what property, or properties, it is in. When your equity builds up, it looks good on paper, but only on paper. It's greatest value is when you release it into the real world. Here's an example.Property A:PV = $100kEquity = $20kCash flow = $1000 Property appreciates to $25k. New number$ for...Property A: REI keeps propertyPV = $125kEquity = $45k (plus whatever paydown happened...thanks to the tenant, and their rent payment)Cash flow = $1000 (assuming rent increase covers taxes/insurance increase) Property increases in value, but CF remains the same...the landlord gets no real value from the appreciated PV...yet. Property B*: REI sells propertyDP = $40kPV = $200kEquity = $40k (still the same as when it was in the original property - closing costs)Cash flow = $2000 * This could be more than 1 property, but the total equity would still be the same...just split up, and it would still be a 20% DP on the Properties...so the Total PV would also be the same. What changes is the cash flow, and the total PV...and, since the PV goes up, so would the appreciation compared to the original Property A since the Original Property A's PV would be only $125k but the new PV would be $200k. That means if the same appreciation rate (say 10%) was applied to both, the original property A's new PV would be $137.5K, while the new PV would be $220k.

At a minimum, sell and buy an identical house. That allows you to keep the tax benefit of the section 121 capital gain exclusion on the sale of a primary residence (and end up with a higher tax basis in the replacement property). The replacement property will have the same investment returns as the original property...they are identical. Factor in transaction costs in the analysis. @Dave Kansagor and @Allende Hernandez holding your existing property is the same as buying your existing property at today's price. Putting aside the capital gain exclusion, the existing property has little to do with a keep vs. sell decision. We have $X amount of equity in a property and we can either "buy" our existing home with it (i.e. keep it) or buy another property. The past irrelevant...what matters is the projected future returns as if you purchased the property today (vs another property). Congrats on the appreciation!

My preference of timing is when I can double what I have. Usually that means when the paid for equity and the free equity are equal. However, that doesn't mean I can't double what I have sooner than that. The timing is specific to the circumstances at any given moment. Sometimes you are paying under market value, and are getting the benefit of some free equity at the time of purchase. Sometimes the strategy you used to buy the original property established a ready made exit that will occur over a much shorter period of time than just waiting for appreciation to deliver. Sometimes the terms of the original agreement to purchase establishes its own timeline to that magic number. It all comes down to an understanding of how money works, and how to apply that knowledge to REI by the strategies you use...and invent.

Look at the money you'd get from the sale and then what returns you'd get if you bought another place or invested your money elsewhere. there is no magic number, but if you can make more by selling, then I'd do it.

@Allende Hernandez, And that's where the 1031 exchange will work best for you. A diversification exchange selling one and buying multiple replacements. You can also allocate your proceeds in any way you want - as multiple down payments. Or you can purchase one property for cash and use the maximum leverage on the second property. When you do this you actually increase your freedom as the free and clear property is available if you want to refi that one later.

@Dave Kansagor, Looming Cap Ex can kill your IRR for years and leave you landlording for free for a long time! You won't get one penny more in rent whether your roof is 20 years old or your wallet is $20K lighter for a new roof. So if that's a concern I'd be running to get out. Another hidden benefit in a sale vs refi is that purchase rates are generally a little lower, and you're financing more loan. Which, in a low interest environment means that the amortization of your loan (paid by the rentors) is more principle more quickly than in a higher interest loan. Again, a reason to put as much as you can into the next loan.

There's only one instance where I will offer higher than the AP...and that's when I'm getting seller financing. I don't bid against myself, and if that means I have to bid what it takes to get the property, and in the process bidding over what is needed to make it a deal, I'm not bidding at all. I'm not interested in owning real estate...I'm interested in getting control over locations (properties) where I can immediately start to make a profit on cash flow, and quickly recover all the cash (my only cost) I put into it.

@Allende Hernandez Great discussion! I’m not sure if someone pointed this out already, but if you plan on selling it, keep this in mind. If this was your primary residence for at least 2 year in the last 5, you might be eligible for a large capital gain exclusion when you sell. A tax break is always a great incentive!

When does it make sense to sell your rental?

Allende Hernandez

OP

Miami, FL · Member since 2011 · 296 posts · 72 votes

5y

@Samara Huntley I quite did not understand your statement.

0 Reply

Alex Martino

Member since 2020 · 2 posts · 3 votes

5y

@Allende Hernandez I’m a CPA and have masters in financial planning, so I hope my advice counts for something. There are a lot of personal details that need to be considered when making this decision, like what you will do with the proceeds and where you are in life financially. But without knowing that detail, I would take the amount of cash that you would expect from the sale, put it into an investment calculator at 8% (my assumed rate of return in the stock market) for over 15 years. I would then compare the value of that amount vs the amount you would make if you kept it for another 15 years (this would include cash flow, debt pay down, appreciation, and tax benefits). Pick whichever will be worth more.

3 Reply

Ola Dantis

Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes

5y

@Allende Hernandez I totally agree with @Joe Villeneuve.

The best way to unlock equity is to release it in order to deploy it to purchase another asset.

What I have struggled with is the balancing act of getting the known CF with the potential of getting a new unknown CF from the new deal "I may be buying".

It is definitely a balancing act, and if you know for sure you can find another property that would produce more CF than you getting now, then NOW is really the time.

4 Reply

Josiah Patrick Zebarth

Rental Property Investor · Denver, CO · Member since 2019 · 76 posts · 70 votes

5y

@Allende Hernandez

Hey Allende,

My two cents would be sell the property when your why no longer involves owning it. For example let’s say you used to own property to get Cashflow to escape the rat race, but now you’re just looking to grow your flipping side or get into commercial real estate, then you would move on.

Best of luck,

Josiah

1 Reply

Bryan Lyde

Wylie, TX · Member since 2018 · 75 posts · 55 votes

5y

@Allende Hernandez I recommend running a 5-10 year analysis of cashflows. you will likely find around year 5 that the property will generate reportable income, and be half way through the life of rehab or improvements if one was done prior to renting it.

As others have pointed out, take advantage of the tax savings but sell it in the 5th year since living in it. said another way, you can rent a primary residence for only 3 years and keep all the gains.

1 Reply

James Ma

Burnaby, BC · Member since 2017 · 282 posts · 268 votes

5y

The main points that cause me to think about selling:

- When location economics are not looking good (ie. less population growth, less jobs, negative regulatory issues etc.)

- When financials for the property go south and lower profitability or cause the property to negative cash flow

- Opportunity cost, finding a higher ROI investment to put your money into

- Risk diversification, maybe your portfolio is unbalanced because of a single property (ie. 80% of your networth in a single investment property) and you'd like to diversify your exposure into different investments

3 Reply

Nelson Sandidge

Rental Property Investor · Cartersville, GA · Member since 2019 · 11 posts · 7 votes

5y

@Joe Villeneuve

Thank you for your answer. Every time I feel lost or in need of answers, somebody in here has the same question or a similar one and I learn from it: 1) what was the answer and 2) that I'm not alone in this. Thank you

2 Reply

Jaquetta T Ragland

Real Estate Agent · Winston Salem, NC · Member since 2014 · 486 posts · 303 votes

5y

@Allende Hernandez one reason I think to sell is when you plan to scale up and buy something better or bigger.

1 Reply

Daniel Umstead

Realtor · Philadelphia, PA · Member since 2009 · 107 posts · 69 votes

5y

@Theresa Harris 100% agree, it's like analyzing one's 401k, if your money is sitting there and not doing anything or even growing. Move it elsewhere.

0 Reply

Pete Widell

Johnston, SC · Member since 2017 · 25 posts · 14 votes

5y

As the Steve Miller Band lyrics go

“Take the money and run”

Now is the time to sell and be prepared to reinvest when the opportunity presents itself.

1 Reply

Bob S.

Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes

5y

I sell when I can get two years or so of rent ,,,,,then move on to another

0 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

5y

Originally posted by @Dave Foster:

Oh my goodness great catch @Mike Dymski!!! @Allende Hernandez, if you sell that property now you will get the first $250K of profit tax free ($500K if your married). No need to 1031. Just sell and pocket the cash. I missed that in the original post. And that changes the game in my mind. Always take the chance to sell if it can be tax free.

I was going to chime in on the 121 but you guys beat me to it.. that is by far the best tax treatment.. taking a home that you have tax free money in ( appreciation) and then turning it into a rental were your now kind of stuck having to buy replacement properties or pay cap gains.. when you could just cash out.. and do whatever you want with the money.. IE diversify with the tax free windfall.

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Pete Harper

Rental Property Investor · Streetman, TX · Member since 2018 · 527 posts · 495 votes

5y

@Joe Villeneuve

Wouldn’t it make more sense to do a cash out refinance rather than sell the property? You could pull 75-80% of you equity out at a very low cost. Plus you retain the cash flow from the original property.

If you sell like you suggest you will pay 5-6% commission to agent, 15% capital gains tax, then 2-3% closing costs on new properties. Then you need to factor in lost revenue while you look for, buy, renovate and rent new properties. You will easily loose 20% of your equity in the turn over.

0 Reply

David Clay

Real Estate Investor · Chattahoochee, FL · Member since 2014 · 133 posts · 107 votes

5y

Originally posted by @Pete Harper:

@Joe Villeneuve

Wouldn’t it make more sense to do a cash out refinance rather than sell the property? You could pull 75-80% of you equity out at a very low cost. Plus you retain the cash flow from the original property.

If you sell like you suggest you will pay 5-6% commission to agent, 15% capital gains tax, then 2-3% closing costs on new properties. Then you need to factor in lost revenue while you look for, buy, renovate and rent new properties. You will easily loose 20% of your equity in the turn over.

See Joe's earlier response on this question on page 1 of the comments. He addresses this nicely with a simple 100k unit. Obviously, your numbers would be whatever they happen to be, but the example he uses shows that you won't be able to pull out all of your equity. The banks will set a cap on loan to value (70% or whatever) and then you have the cost of the loan which will eat into your equity. Effectively, you'll only receive a small portion of your equity to use for something else. There are times when a refi works or people wouldn't do it. I suppose it is also related to your specific goals and what numbers you're working with. Go back and look at his explanation, he explains it better than I just did.

1 Reply

Allende Hernandez

OP

Miami, FL · Member since 2011 · 296 posts · 72 votes

5y

Originally posted by @Jay Hinrichs:

Originally posted by @Dave Foster:

Oh my goodness great catch @Mike Dymski!!! @Allende Hernandez, if you sell that property now you will get the first $250K of profit tax free ($500K if your married). No need to 1031. Just sell and pocket the cash. I missed that in the original post. And that changes the game in my mind. Always take the chance to sell if it can be tax free.

I was going to chime in on the 121 but you guys beat me to it.. that is by far the best tax treatment.. taking a home that you have tax free money in ( appreciation) and then turning it into a rental were your now kind of stuck having to buy replacement properties or pay cap gains.. when you could just cash out.. and do whatever you want with the money.. IE diversify with the tax free windfall.

-----------------Editing as it seems I messed up quoting -----

@Jay, so you're suggesting to take the money out and just spend it to avoid getting trapped into a replacement property forever loop? I understand that is a desirable situation for many investors, same as investing from an IRA or using a 1031 correct? Pile it all up to when we are at a lower tax bracket in the future. (of course, without forgetting to live the present as well)

If I am no mistaken unless you just spend the money, no matter where you invest it into you'll always be in the "push forward" scenario or pay cap gain tax.

0 Reply

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

5y

Lots of appreciation is a good problem to have. I haven't seen hassle factor mentioned.

I've been selling 1-2 headaches a year since 2017. These had pain points it doesn't sound like yours has.

Transaction costs and selling hassle, taxes, re-deployment of capital are all factors.

I sold my rentals solo to help reduce closing costs and give my first time buyers some equity going in, but that is part of my why.

When you close your eyes and think of this property, what comes to mind? Do you smile? Mine made me flinch so I sold. Others don't so I kept them.

In a good sellers market it is harder to redeploy capital effectively, so keep that in mind.

I just sold an old 7-family yesterday with SF. Bad roof design keeps it a leaking plus other chronic issues inherent with a 107 year old soft brick building.

One house had low water pressure at the hosbib so the sprinklers wouldn't pop up fully. Yard work anyone? Commute time, functional obsolescence (funky interior design) or facing updating and cap ex in general are all intangible reasons to sell that won't necessarily show up on a spreadsheet.

4 Reply

Marcus Auerbach

Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes

5y

Seldom sell. Cash out refi unlocks your equity without creating a taxable event. Pete mentioned it just above.

Joe did a nice job explaining the primary thought process around equity. The following question is now what should you do with it. Refi and buy more property or pay uncle Sam. Remember - a 1031 does not wipe out the tax liability, you are just kicking the can down the road! Selling will cost you about 6%.

Another big consideration is what do you expect for the future of the neighborhood? So there is a lot going on, I like to play with szenarios in xls and compare.

0 Reply

Allende Hernandez

OP

Miami, FL · Member since 2011 · 296 posts · 72 votes

5y

Originally posted by @Steve Vaughan:

Lots of appreciation is a good problem to have. I haven't seen hassle factor mentioned.

I've been selling 1-2 headaches a year since 2017. These had pain points it doesn't sound like yours has.

Transaction costs and selling hassle, taxes, re-deployment of capital are all factors.

I sold mine solo to help reduce closing costs and give my first time buyers some equity going in, but that was part of my why.

When you close your eyes and think of this property, what comes to mind? Mine made me flinch so I sold. Others don't so I kept them.

In a good sellers market it is harder to redeploy capital effectively, so keep that in mind.

Just sold an old 7-family yesterday. Bad roof design keeps it a leaking. One house had low water pressure at the hosbib so the sprinklers wouldn't pop up fully for chronic yard work. Functional obsolescence (funky interior design) or facing updating and cap ex in general are all intangible reasons to sell that won't necessarily show up on a spreadsheet.

Thanks, all great points. In my case, I do not have critical hassles. Tenant is always late in payments but they pay, which today is a blessing.

My situation is that currently I do not have extra capital to invest and I see this as an opportunity to grow it. I need to unlock it to redeploy and increase cash flow which seems very possible ( I am also doing some homework in that front as well prior to making any decision). I am looking for a balance of when having capital locked in may deaccelerate growth.

0 Reply

Marlen Weber

Specialist · Plano, TX · Member since 2020 · 2k+ posts · 861 votes

5y

Excellent advice and great way to explain it, @Joe Villeneuve.

1 Reply

Jay C.

Seattle, WA · Member since 2014 · 307 posts · 170 votes

5y

The biggest thing that tipped me off in your post was 2010. You bought at a great price. I used to laugh at all the flipper who bought at recession lows and flipped for peanuts how much cash they missed out on. You didn't. You collected rent and price appreciation. Lets fast forward. The rules for landlord`s are changings. CoV is speeding those along. The biggest part of the equation I would ask is what are you going to do with the money? Do you have a place to park it? For myself anyways I have so many better places to park my cash. My properties have become 5 baggers and spooled of incredible rent. Now I can and have been selling and have doubled my monthly intake on other investment's. I have no hassles now from tenant's or regulators and do not have these funds trapped.

1 Reply

Joe VilleneuvePro Member

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

5y

Originally posted by @Pete Harper:

@Joe Villeneuve

Wouldn’t it make more sense to do a cash out refinance rather than sell the property? You could pull 75-80% of you equity out at a very low cost. Plus you retain the cash flow from the original property.

If you sell like you suggest you will pay 5-6% commission to agent, 15% capital gains tax, then 2-3% closing costs on new properties. Then you need to factor in lost revenue while you look for, buy, renovate and rent new properties. You will easily loose 20% of your equity in the turn over.

Your not refinancing 70-80% of your equity...your refinancing 70% if your PV. That means 30% of your PV is still in the property, and in order to cash out you have to have more than 30% equity in the property.

Let me add this to the mix. It may sound as though I'm not a big fan of refinancing, but that's not true. There's a time and place for most things in life, and the time and place for the refi is the last property...when you take out equity in the form of a loan. That's your accumulated profit. You don't pay taxes on loans, and the tenant is paying the loan off for you.

1 Reply

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

5y

Originally posted by @Allende Hernandez:

So sell the golden goose with no headaches just to capitalize? Here you got us all getting analytical and theoretical.

Back to basics. You don't have a hold or sell problem, you have a budget and or income problem.

I'd review my budget and prioritize saving the goose over lifestyle comforts. Capitalize organically to not have to give up a good asset.

3 Reply

Kenny Lewis

Member since 2019 · 4 posts · 0 votes

5y

It depends on the market that your in. Most owners will sell at the height of the market. When you sell take into consideration the taxes that you have to pay on your profit. Take course to consult a tax attorney to limit your payments.

0 Reply

Adam Azam

Investor · New York, NY · Member since 2020 · 119 posts · 84 votes

5y

When you are ready to retire, when you have negative cash flow or it becomes more stress than it is worth. If it has a large amount of equity created by appreciation and principal pay down that can not be removed and still produce positive cash flow it's time to sell. When a property is not positive with maximum leverage it means your own cash is the only thing generating income. You want the property not your cash generating income.

2 Reply

Waleep Alvi

Investor · Oakland, CA · Member since 2020 · 108 posts · 89 votes

5y

It depends on what your goals are. If you are happy with your cash flow and it's working for you then keep it. If your goal is more cash flow or a larger building that can support a property manager and make it more hands-off for you, then do that. You have to decide what your long-term goals are and do what is going to get you there. Good luck :)

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When does it make sense to sell your rental?

When does it make sense to sell your rental?

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