When does selling become worth it to you?
Rental Property Investor · Austin, TX · Member since 2017 · 38 posts · 4 votes
When does selling become worth it to you?
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Real Estate Investor and Instructor · Gilbert, AZ · Member since 2010 · 303 posts · 332 votes
4yWhat information/data are you reading that suggests "we may be due for a correction here in the near future"? Where would you reallocate those dollars? The stock market? Crypto?
There are some excellent sources/housing experts to follow that paint a much different picture for the future of real estate. For example, check out Logan Mohtashami with HousingWire.com.
The key ingredient required for any type of correction is a massive increase in supply, and that is not happening. Check out this quote from his latest post:
"Rates have risen at the fastest pace ever, which makes houses more expensive, so in theory, some homebuyers can’t move. Home sellers with high equity aren’t as sensitive to higher rates because they bring a more significant down payment. Inventory skyrocketing back toward historical norms of 2 million to 2.5 million, which I would find to be the best thing ever for housing, is not happening this year."
32 Replies
- Real Estate Investor and Instructor · Gilbert, AZ · Member since 2010 · 303 posts · 332 votes4y
What information/data are you reading that suggests "we may be due for a correction here in the near future"? Where would you reallocate those dollars? The stock market? Crypto?
There are some excellent sources/housing experts to follow that paint a much different picture for the future of real estate. For example, check out Logan Mohtashami with HousingWire.com.
The key ingredient required for any type of correction is a massive increase in supply, and that is not happening. Check out this quote from his latest post:
"Rates have risen at the fastest pace ever, which makes houses more expensive, so in theory, some homebuyers can’t move. Home sellers with high equity aren’t as sensitive to higher rates because they bring a more significant down payment. Inventory skyrocketing back toward historical norms of 2 million to 2.5 million, which I would find to be the best thing ever for housing, is not happening this year."
- Rental Property Investor · Austin, TX · Member since 2017 · 38 posts · 4 votes4y
Moody Analytics just announced 344 US markets are overvalued by 10%, compared to only 261 in 2007. This time, it’s concentrated in secondary/tertiary markets that people flocked to during Covid, rather than in the major cities like the last time. Forbes says pending home sales fell to the lowest level in a decade in April and are getting worse. With the recent rate hikes, the average home price would have to drop more than 50% to get the same monthly mortgage payment as just a couple years ago.
I understand the effects of supply and demand on price, but at a certain point regular people won’t be able to pay ever increasing prices. No doubt inflation raises asset prices in the long run, but it seems like that’s just one piece of the puzzle here. Nobody knows the future, but I don’t think it is irresponsible to bet that some home prices take some type of step back in the coming months/years.Plus… you never answered my question!
- Real Estate Investor and Instructor · Gilbert, AZ · Member since 2010 · 303 posts · 332 votes4y
Quote from @Hunter Peterson:
Moody Analytics just announced 344 US markets are overvalued by 10%, compared to only 261 in 2007. This time, it’s concentrated in secondary/tertiary markets that people flocked to during Covid, rather than in the major cities like the last time. Forbes says pending home sales fell to the lowest level in a decade in April and are getting worse. With the recent rate hikes, the average home price would have to drop more than 50% to get the same monthly mortgage payment as just a couple years ago.
I understand the effects of supply and demand on price, but at a certain point regular people won’t be able to pay ever increasing prices. No doubt inflation raises asset prices in the long run, but it seems like that’s just one piece of the puzzle here. Nobody knows the future, but I don’t think it is irresponsible to bet that some home prices take some type of step back in the coming months/years.Plus… you never answered my question!
Sorry I didn't answer your question! I would need to know what your current cash flow needs are, and what alternative investment you plan to go with that will replace that cash flow.
Lots of variables to consider for sure when attempting to predict what will happen. And we could definitely see home prices dip in some areas. Are all of your rentals in Austin? - Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes4y
10-15 years net of all costs of selling. If I was a lot younger, I'd probably have a different answer. So if my cash flow on a house was $10k/year, I'd have to net at least $100k after the sale and any tax implications before I'd consider it. But 10 years puts me in my 60s so that's a different answer (and should be) than guys/gals on here that are in their 20's & 30s. If I was that age, I probably would answer with something that put me in my mid to late 50's minimum.
PS: This assumes a house that's appreciating at or about the rate of inflation. Since everything I have is appreciating much faster than inflation, it would take more than that to get me to sell. And of course I'd have to want to sell, and I don't really have any place better to put my money.
Skyline Properties - Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes4y
You need to figure out how much appreciation you we losing out on as well. If my average property cashflows $20k/year but appreciates closer to $30k+ (7%). Thats $50k/year. I’m already not selling for $500k net since that means I’d have to earn in excess of 10% with the proceeds just to break even. (Not counting the compounding of rising rents and appreciation.)
On the other hand, if you’re stuck making $200/mo or $2400 cashflow plus maybe only $10k in appreciation because you have cheaper properties) that’s only $12,400. You should probably sell if you can get $250k in profit? 20 years? The problem is again, you’re pretty much locked out of real estate for the rest of your life if there’s not a 2nd in history housing crash.
That one house might have carried you through retirement in 30 years. But that $250k might be lost to inflation or to your lack of expertise in your “second best investment choice”.
Here’s an easy test. Is it easier to retire with $1 MILLION DOLLARS, or $10k/mo in income? Yes, most of us are smart enough to take the $10k. But way too many people think a million is infinity. As I reminded the other day. We were taught SQUARE DANCING in school, but nothing about borrowing money, paying taxes, or planning for retirement.
- Real Estate Broker · Austin, TX · Member since 2012 · 1k+ posts · 1k+ votes4y
Not sure what your question is since its not really phrased as a question.
I am assuming that you are asking if it would be worthwhile for you to sell your property now given that you think that the price of housing is high and due for a correction which might impact personal goals. Let's break it down.
1) What is the cash flow that you would be happy with? If you are not getting it from your current property when do you think that you will get it? If you don't think that you will ever get the cash flow to make you happy then you should probably sell it and put it into something that will make you happy. Its widely known that Austin isn't a cash flow market, initially but over time it most certainly is a cash flow market, historically speaking. Rents in Austin are the highest increasing in the US according to some reports.
2) Prices are high idea. Are you basing that upon data from the Austin metro? Or are you basing that upon information generated from Moody's or Forbes? The recent data (May report) from Austin board of realtors indicates that the market is slowing down but lets put it into perspective. The MSA median home prices increased by 19.6% year over year. The housing inventory increased from .7 months of inventory to 1.2 months of inventory. 19.6% appreciation is amazing! Is that indicative of a correction? I don't think so. Btw, if the months of inventory exceeds 6 months then its a buyers market and the sky is falling. The sky is not falling.
3) Your personal goals are the most important thing though. If you feel like your rental property isn't propelling you towards attaining your personal goals then you might want to sell. That is a personal choice.
If you do decide to sell then you might want to consider the tax implications and timing so that you can keep as much money out of Uncle Sam's pockets as possible.
- 4yJordan MoorheadBusiness MemberReal Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
@Hunter Peterson for myself I look at Return on Equity. If it gets close to meeting my cash on cash return goals I'll keep it or if it's rapidly appreciating. If not, I'll sell.
I'm mulling this over with an East Austin duplex right now myself so I'd love to talk with you about it too.
The Moorhead Team5140 Reviews - Rental Property Investor · Austin, TX · Member since 2017 · 38 posts · 4 votes4y
@Marty Boardman @JD Martin @Bill B. @Aaron Gordy @Jordan Moorhead
Thanks for those insights. In my case, the equity built in this property over the last several years now makes up a majority of my net worth. I'm a W2 employee with some savings, and my property is generating very healthy cash flows, but I'm still not close to having a second down payment saved for a primary residence where I want to live, grow my family, etc. unless I access the equity in this property. Cash out refi options were not attractive given the amount of fees I'd have to pay in order to access the amount of equity I'd be getting. Capital gains taxes would be low enough that I don't feel a 1031 is mandatory.
I know rents will go up (as will property tax) and in the long-term values will always grow, but I look at the situation and sort of think I'd be crazy to not take advantage of the 20-25+ year's worth of current annual cash flow I could liquidate now, use some of that to reach my family's personal living situation goals, and reallocate the rest over the next few years either back into real estate or take advantage of some of the big dips in stock price we've already seen for companies like Amazon.
I guess it's the same question as - If you win the lottery, do you take the lump sum or the monthly installments? All depends on what you do with it I suppose. Thanks for your opinions!
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes4y
Quote from @Hunter Peterson:
Answer this… If I could walk away with XX years of my current annual cash flow, it would be worth it for me to sell my property now.
Since we may be due for a correction here in the near future, I figure I’m not the only person reconsidering my buy and hold forever mindset and looking at cashing out now and reallocating those dollars more effectively in the years to come. For me, there are also some personal goals pushing me towards selling and reallocating the funds in a way that better suits my lifestyle.
When it accelerates me towards my goals.
If you're just selling because the market is hot and you see dollar signs, you're making a mistake. You should only sell to invest in something that accelerates your growth, puts you in a more secure space, moves you to a different market, or something specific that aligns with your goals.
The DIY Landlord Book4.7247 Reviews - Real Estate Broker · Hyde Park Tampa, FL · Member since 2019 · 2k+ posts · 3k+ votes4y
It sounds like you've made up your mind. Here's my thinking...you live off of your W2 income - and you build, grow, and preserve wealth from your investments - especially real estate. If you want to sell, sell - but you need to replace the ROI from that investment with your cash out. To sell and put the money in a savings account or even in the stock market right now is not a wealth building and preserving act.
Again, if you want to sell, sell; don't ask anyone for their validation or opinion. You've earned the right to run your business as you see fit based on your criteria. Congratulations on buying right and earning your way to a tough decision.
Best.
- Property Manager · Raleigh, NC · Member since 2014 · 729 posts · 596 votes4y
@Hunter Peterson
I had similar thoughts and sold a portion of my holdings. I did it as to have cash on hand if things go south. If you do sell, know what you are going to do with the funds before you sell. Also realize capital gains will take a large chunk from your gains.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes4y
I started selling headache smalls a few years ago. It was mostly based on hassle and indigestion and giving first time home buyers a hand up with equity by owner.
My asking prices were fair and net of commissions, a la carte. If they had or wanted an agent they could have one, but raise the offer to pay for it. You know, like it is in the real world.
Tax efficiency selling off 1 to 2 per year was also a factor so I started early. Didn't want to 'get out' one year and get killed in taxes.
With larger legacy type apt properties, I've been selling those by owner as well with seller financing, interest only for 3-10 years. The interest only payments exceed the cash flow I was earning even as a self-manager. I have staggering balloons 5 to 10 years in. I am done for now and didn't want to exchange.
The stock market/ mutual funds/ ETFs are more attractive now than they have been in a long time as well. They won't call me or turnover or be subject to repairs or the weather. The attractiveness of other asset classes also factor in to a selling decision.
Reasons for selling are very personal. I did my 20 and want time freedom so I set up annuities with staggered cash injections to pivot into future opportunities, whatever they may be.
- Rental Property Investor · Austin, TX · Member since 2017 · 38 posts · 4 votes4y
@Patricia Steiner I hear you on that, but if living off the W2 and investment cash flow alone makes you a renter, whereas selling the investment and using some of the proceeds to get you into a home you own, would you consider that a worthwhile trade off? I'd invest the remaining proceeds back into real estate or stocks, but at least this way I'm not wasting five figures a year on rent!
@Curtis Mears My owner occupant status would help with some of the cap gains, but not all. I see a lot of sense in your strategy. Even if I don't know exactly what I'd do with the proceeds, I feel that having some capital available if things go south is a much better option that seeing my inflated equity in a property slowly decrease (admittedly a big "if" there)
@Nathan Gesner That is absolutely my thought process. Transition the equity into a set up that works better for my lifestyle, rather than let it all sit in one property and risk losing a portion of it should we see a prolonged recession.
@Steve Vaughan Thanks for that insight. I see this as an opportunity to fast forward my investing rather than sitting on this great asset and not really taking advantage of it until retirement age.
- Member since 2019 · 7k+ posts · 4k+ votes4y
Quote from @Hunter Peterson:
Answer this… If I could walk away with XX years of my current annual cash flow, it would be worth it for me to sell my property now.
Since we may be due for a correction here in the near future, I figure I’m not the only person reconsidering my buy and hold forever mindset and looking at cashing out now and reallocating those dollars more effectively in the years to come. For me, there are also some personal goals pushing me towards selling and reallocating the funds in a way that better suits my lifestyle.
I will sell when :
- the primary appreciates more than 500k
- the rental appreciates more than 500k
- when case shiller appreciation index goes below 2%
- when I do *not* have access to low-interest rate
(eg: if you have your rental w/ 30YRFRM below 3%, you are safe until 2050)
- when I am 56 years old. Retirement. - 4yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
At the end of the day this is a personal question based on many factors. If people are planning on selling in the next year or two, now may be a good time to sell. For me it is a matter of when I retire, slowly selling places off starting with the one making the least amount first.
- 4ySam YinPro MemberLos Angeles, CA · Member since 2021 · 584 posts · 738 votes
@Hunter Peterson short answer, anytime the sale will net at least 5 years of current cash flow an/or the net equity allows fo scale up with more doors or better class/location.
New product should start off as close to current cash flow or better and have more rental upside/growth.
This may not be for everyone. But is a current strategy I use, but I'm still very new at this. This current strategy has allowed me to grow my portfolio fast, increase net worth, increase cash flow, and increase reserves.
There are many levels of investors on this forum and every strategy has its merits. My goal was to contol about 50M within 10 years, be no more than 65% levered, and cash flow 100K/mo minimum. Im about 2 years in. The market, up or down, has no bearing. It all about the underwriting on the upleg and down leg. I will likely call it quits around 50 yrs old because kids will be out of high school and wife/I will have more free time together. If things change... well... I'll change my tactics. All depends on your personal goal.
- Real Estate Broker · Hyde Park Tampa, FL · Member since 2019 · 2k+ posts · 3k+ votes4y
Hunter, I'm a former senior wealth banker/manager and, as such, I don't do anything that is not about creating, building, and preserving wealth. Paying rent is not wealth building so I cringe at the very thought. Sharing what you have with us, I would first decide if selling is necessary. You could always pull the equity out by refinancing or obtaining an equity line to have a strong down payment on a primary residence while keeping your investment property work for you. I definitely recommend purchasing a primary residence and taking all tax advantages are available to you as a homeowner. In my state, the property tax savings for homeowners is substantial while we allow our investment owners to ride out higher and higher taxes each year.
Hope this helps...and again, you have options - and only because you invested so well in the first place. Congrats!
- Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes4y
Buy and hold forever mindset is the only mindset I know.
Selling now in anticipation of a possible market correction/crash is an attempt at timing the market. Timing the market is a fools game. Imagine you sold in March 2020 when Covid was predicted to destroy the economy.....you would have lost out on a ridiculous amount of wealth.
These so called "experts" are consistently wrong. Even if that wasn't the case, I still wouldn't try to time the market.
The only time I consider selling is if there is a particular reason and I had an exact plan for the money. If I need to tap equity, I'll just refinance.
Anytime I buy, it's with the intention of holding forever.
- 4yWale LawalBusiness MemberReal Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
Hello @Hunter Peterson
You should have your investment goals clear and once you achieve your goals, you can sell and move ahead.
All the best!
NETWORTH BUILDERS5236 Reviews - Rental Property Investor · Austin, TX · Member since 2017 · 38 posts · 4 votes4y
@Luka Milicevic I appreciate your perspective. When I looked at tapping equity through cash out refi, I would have been able to access about a third of my equity, it would have cost me almost a sixth of my equity to do so, and my rate would have gone up 2 whole points.
I guess I should clarify that this isn't my full time gig. I don't have 300 properties and I'm selling a small portion of them to reallocate. If you wanted to access the capital in that scenario, what would you do?
- Contractor · Nashville, TN · Member since 2014 · 1k+ posts · 1k+ votes4y
The answer does depend on a person's goals. But nonetheless there's got to be a rule of thumb we can come up with, like the 1% rule for rentals.
if there's equity to tap, default to refi.
however, perhaps this is an asset that you wish to trade up an whatnot. The metric here is return on equity or ROE.
I recently sold a quadplex that had averaged 3% ROE and it was constantly needing repairs with long vacancies partially due to how hard it was to draw good tenants in a war zone. 3% means 33 years of cash flow at sale.
I could see 4% roe being a good threshold as well.
Another potential theory is if you have somewhere that can get a better return then to go ahead and sell, but from what I've seen it's hard to find better returns that can wait for you to sell a property.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes4y
Quote from @Hunter Peterson:
Moody Analytics just announced 344 US markets are overvalued by 10%, compared to only 261 in 2007. This time, it’s concentrated in secondary/tertiary markets that people flocked to during Covid, rather than in the major cities like the last time. Forbes says pending home sales fell to the lowest level in a decade in April and are getting worse. With the recent rate hikes, the average home price would have to drop more than 50% to get the same monthly mortgage payment as just a couple years ago.
I understand the effects of supply and demand on price, but at a certain point regular people won’t be able to pay ever increasing prices. No doubt inflation raises asset prices in the long run, but it seems like that’s just one piece of the puzzle here. Nobody knows the future, but I don’t think it is irresponsible to bet that some home prices take some type of step back in the coming months/years.Plus… you never answered my question!
Please remind where we can find the article by Moody or Forbes about how home prices were going to surge upward, back in 2019. You know, the one that doesn't exist.
How about in mid 2020 when Moody or Forbes said we would all survive and home values would go up another 20%. Oh, that's right, they were predicting the end of everything weren't they.
Moody and Forbes have got the greatest record for getting important market moves WRONG. Matter of fact, if you went opposite direction of what they say for the last 20 years, you'd be counting yachts.
So this whole thing of "Moody and Forbes says the sky is about to fall" tells me nothing except what's selling traffic, surprise surprise, doom & gloom again.
Marty was spot on, and if the whole premise of the question is built on a false-hood, then it's not worthy of demanding an answer. I also didn't see an answer to the facts and data Mart quoted, just a "yeah, well, so and so said" which is play-ground argument.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes4y
I sell when the IRR for alternatives is materially better...or when I can exit for full price but lots of cap ex is due...or properties that are problems for one reason or another. For me, it's often a math exercise...compare the future IRR of the current property with the IRR of alternatives.
- Member since 2021 · 109 posts · 130 votes4y
@Hunter Peterson Depends on what you are using the money towards. If you are driving by that property in 25 years and tripled in price are you going to say 1) I wish I had never sold that place wasted the money on a luxury car and a pool 2) are you going to say I am so glad I sold that place so I could use the equity to buy this other place 3) I am so glad I kept this place 4) I am glad I took my profits and reinvested a few years later when the market settled down. #1 would be a terrible idea,#2 and #3 would be OK, #4 would be risky - who knows what is going to happen in the future (certainly not some writer at Moody's making 40K/year). If your goal is to buy a bigger house for your family just cause it would be nicer than resist the urge, if the goal would be to buy a house in a nicer area for your family then save and sacrifice to make it happen and keep the investment.
People that bought in 2007, were kicking themselves until about 2016. Those that bought in 2007 that sold at the first time they broke even have been kickung themselves for 15 years.
- Investor · Lancaster, PA · Member since 2016 · 94 posts · 356 votes4y
Quote from @Hunter Peterson:
@Marty Boardman @JD Martin @Bill B. @Aaron Gordy @Jordan Moorhead
Thanks for those insights. In my case, the equity built in this property over the last several years now makes up a majority of my net worth. I'm a W2 employee with some savings, and my property is generating very healthy cash flows, but I'm still not close to having a second down payment saved for a primary residence where I want to live, grow my family, etc.
This type of question blows my mind. Why on earth would you want to sell the one thing that has created the majority of your net worth to place the equity into a personal residence. In my non educated opinion, if you don't have the down payment for a personal residence you should not buy it! You my friend are at a cross road. Continue with investing and growing your net worth which will ultimately will provide a way better life for your family in the long term, or increase your life style further trapping you in the rat race.
I would personally only sell this to buy more rentals. I challenge you to envision where you would be today if you had 10 or 20 of these homes that appreciated the way this one did. Are we at a perceived peak in real estate? Boy it sure does feel like it, but I promise you in 10 years you will be kicking yourself if you sell out and don't redeploy that equity into income producing real estate.
I know it seems like it will take for ever for the income from the rentals to replace your income, and it will. But it will be SOOOOOO worth it. In 15 years My wife and I amassed a portfolio that grosses in a month what we earned in a W-2 year which was over 6 figures. The cash flow is just the icing on the cake, the real prize is the equity that it creates. As you mentioned above, One house has created enough equity that it now houses the majority of your net worth. That is the beauty of real estate my friend. Our portfolio generates over 1 million in equity annually. Imagine what that would do for your kids? What would that allow you to do for your Wife? What would your personal residence look like with those numbers? could you change the direction of your family tree forever?
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