Should i Sell rental property?

Question

I am considering selling my sfh rental. Currently I am getting a 17% cash on cash return on my $35k investment. $500/ month net rent after expenses. A great deal, but there is 100k equity wrapped up in the property that I could use to invest and increase my cash flow to 1k/ month. Should I sell the property and take the cash, I’ve only held it for 2 years. Any suggestions out there?

Steve K. · Answer

@Jake Langley

Jake, this is a problem not often spoken of in these forums. True, you are making 17% cash on cash on your initial $35k investement ($6k annual net/$35k).

However, you then say that over the past 2 years, the SFH has appreciated by an additional $65k (either due to your remodeling or general market appreciation or both).

If you hold on to this investment, you really are passing up the opportunity to extract $100k (omitting transaction costs and income tax due for simplicity). There's an economic concept called "opportunity cost". You should now think of this like you have made a $100k down payment to acquire this property. Now, what's your return?

$6k/year net rent / $100k equity = 6% return.

So, you used to make 17% cash on cash (because you had very little cash in the deal and had more leverage), now you have more equity in the deal and it's reducing your returns.

If you refinanced and could extract the $65k extra (assuming your original $35k down would be enough equity for proper LTV), could you get back to 17% IRR?

Would you keep this property if you burdened it with $65k more loan (and higher monthly payment?)

Then, take the extracted $65k cash and go buy another rental? Perhaps with BRRRRR strategy?

Steve K. · Answer

@Jake Langley,

I was actually advocating the cash-out refi, Jake. If you're keen to grow a real estate portfolio, don't be so quick to decide to sell, just to extract your precious capital.

I'm an engineer by background. I build spreadsheets. When I start out making 30% IRR on a new rental in Denver (yes, I assume a modest appreciation of market value, in addition to a little monthly cash flow and tenants paying down my mortgage principle), projecting into the future several years, the growing equity (on an opportunity cost basis) gradually lowers the future IRR. (at a 50% LTV, I have 50% of my precious capital earning about 4.5% APR of what a mortgage would be) and half making the 17% IRR like yours.....I get a blended average of about 11%. Later, it declines more until, when the loan is paid off further, I get down to arround 6%.

All of the REI's here on the forums are "adding" to their portfolios....they aren't selling one to acquire another. But they do cash-out refi to extract their equity to be able to buy more rentals. (BRRRR investors in particular, are seeking to use maximum leverage).

Jake Langley · Answer

@Chris Anderson

Thanks Chris, I’d love to hear your input when you get a chance.?

Chris Anderson · Answer

@Jake Langley

Hey Jake, I cannot write my response right now because I am busy for the moment, but I have an idea of which direction you should go. I would not refi and get into a bad front loaded interest bank product unless you have a exit strategy to pay it off. I live in Southern Highlands by the way.

Jake Langley · Answer

@Dominick Austria

Could you please explain the implications of a schedule k? As opposed to rental income from a sfh?

Thanks again for your input?

Dominick Austria · Answer

@Jake Langley I was thinking to myself, where in the world is he going to buy real estate for $50k in Vegas. If you enter into a part ownership on a multifamily, make sure you understand the tax implications. You may have entered into a partnership which means you will receive a Schedule K-1 from the fund. Good luck!

Jake Langley · Answer

@Dominick Austria

Good point, I defiantly want it for real estate. I still think I will sell the property and use the 100k for a part ownership on a multi family. The cash flow would be in the 1k/ month range. The 50k refi doesn’t go that far Las Vegas. I am considering all your opinions and I appreciate the input.

Dominick Austria · Answer

@Jake Langley If you do a cash out refinance, be sure to use it towards other real estate. If you use the cash to pay off other debt or take a vacation, the IRS requires you to allocate interest expense based on personal use and business use. On a $50k note the interest won't be much, but this could cause other issues.

Jake Langley · Answer

@Cole Raiford

Right I can pull out Maybe 50k .

Cole Raiford · Answer

@Jake Langley you say you are clearing $500/mo. If you refi and pull out the 100K equity that’s roughly a $500/mo note. You should certainly be able to pull out $50-$75K and still have positive cash flow.

Should i Sell rental property?

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