Should I sell my house, or rent it out?

Question

Hi BP community,

I bought this house in Southwest Colorado for 365k in 2017. Put about 200k in renovations over the years. Refinanced at 3.25% in 2020 and now owe 405k. I could sell for about 825-850k right now. Not sure if it makes more sense to rent it out and be happy with the $1,000/mo in cashflow, or sell and buy better cashflow rentals with the 375k net proceeds? When I use the BP calculators is comes out with about 6-7% Cap Rate and about the same for Cash on Cash return. From what I understand, those numbers are not that great... Would love some help from more experienced investors to help me decide what to do! I will be moving to a different area and buying another property there. My 5-year goal is to invest in cashflowing properties and replace my 120k income.

Thank you!

Lauren Robins · Answer

You're at a critical decision point with your property in Southwest Colorado, and the choice between renting it out or selling largely depends on your long-term investment goals. Since you purchased the home for $365,000 in 2017, invested around $200,000 in renovations, and now owe $405,000 after refinancing at a low 3.25% rate, you have significant equity. With the current market value estimated between $825,000 and $850,000, selling could provide approximately $375,000 in net proceeds. However, renting the property would generate about $1,000 per month in cash flow. The key question is whether holding onto the property is the best use of your capital, given your five-year goal of building a cash-flowing portfolio to replace your $120,000 annual income.

If you decide to keep the property, you’ll benefit from a relatively low mortgage rate, continued appreciation potential, and tax advantages such as depreciation. The $1,000 monthly cash flow is solid, but with a cap rate and cash-on-cash return in the 6-7% range, it may not be the best vehicle for achieving your income replacement goal quickly. Managing the rental remotely could also introduce challenges, including the need for a property manager and potential maintenance costs that may eat into your profits. While this option allows you to maintain a growing asset, it may not provide the scalability needed to reach your financial independence target in the next five years.

On the other hand, selling the property and reinvesting in higher-yield rentals could accelerate your path to financial freedom. With $375,000 in proceeds, you could potentially acquire multiple properties in stronger cash-flowing markets, each generating $750 to $1,000 per month in income. This approach could get you closer to $3,000 to $4,000 per month in cash flow, making significant progress toward replacing your $120,000 salary. Additionally, utilizing a 1031 exchange would allow you to defer capital gains taxes and preserve more of your equity for reinvestment. The downside is that you’d be giving up a property with strong appreciation potential and would need to carefully identify new investments that provide both stability and returns.

Given your goal of achieving financial independence through cash flow, selling and reinvesting in stronger rental markets seems like the more strategic move. While keeping the property may offer long-term value, it doesn’t provide the level of income you need to scale quickly. If you're open to exploring high-cash-flow markets and a 1031 exchange strategy, this could be an excellent opportunity to transition your equity into a portfolio that better aligns with your long-term financial goals.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

Eric Fernwood · Answer

Hello @Aurelie Slegers,

Whether you should sell, rent, or do a 1031 exchange depends on how the property is likely to perform in the future. Assuming your investing goal is financial independence, you need a rental income that will sustain your current lifestyle for the rest of your life. Since we live in a world with constant inflation, you need rental income that meets the following requirements:

• The rental income must increase faster than inflation. Every time you go to the store, you pay more for the same basket of goods. If you can buy a basket of goods for $100 today, and inflation averages 5%/yr, how much will you have to pay for the same basket of goods in 10 years? $100 × (1 + 5%)^10 ≈ $163. If your rents increase faster than inflation, you will have the needed $163. If not, you will be forced to get a job to make up the difference. The first question, is whether your rent is likely to increase faster than inflation in the future. If not, you should dispose of the property. The same consideration should be given to any future rental properties you buy.
• How long are tenants likely to stay in your (current) property? For example, we target single-family homes priced between $350,000 and $475,000 in Las Vegas, and our average tenant stay is over five years. Single-family homes priced over $550,000 in Las Vegas have an average tenant stay of between one and two years. With short tenant stays, your vacancy costs may be very high. Consider how long tenants who rent your property are likely to stay. Factor in the estimated time to rent and between-tenant make-ready costs to calculate your potential vacancy costs. Let me share a personal example: The first property I owned was a C-class 4-plex in Houston. Before I purchased the property, I estimated $2,000/month cash flow. Due to vacancy costs and property damage, I LOST about $1,000/month.
• While cash flow pays the bills, appreciation is how you grow your portfolio. The challenge in locations with unlimited urban sprawl is that existing home prices tend to increase slowly. Las Vegas, however, is different—there is very little undeveloped land available for expansion. As a result, undeveloped land in desirable areas costs over $1M per acre. Due to land scarcity and a rapidly increasing population, the average annual appreciation rate for the property segment we target exceeds 10%. Based on what has happened over the last 10 years, what do you expect the average appreciation for an existing home in your price range to be for the next 10 years?

I hope the questions pose some questions that will help you evaluate what is the best option for you.

I created a simplified flow chart that I hope will help you make this decision.

Aurelie, I hope this helps.

Mike Klarman · Answer

Yes, if a HELOC is attainable that is best.  But before that, start to develop the channels for the new way you will buy.  It will take time to create and find your own deals and you'll need to meet the right agent who is an agent/investor probably in the market.  But yes, if you can buy first and do financing second that will dramatically lower your project costs which increases profit.

Chris Barrett · Answer

The two metrics I look at in your situation, which I am also in, is Cash on Cash return both $ and %, and Return on Equity. Additionally look at tax implications. I typically look for a minimum return of 10%.  Your ROE is definitely less than 10%, your CoC % is probably also below 10%. $1k a month cash flow however is a great start to passive income.

Another thing to consider is your risk profile. I think the market is going to be unstable moving forward, so for me maintaining options is the most important factor in the near term. We'll be holding onto our current single family house, and after moving out and fixing up some small items, putting it up for rent and cash flowing about 1k a month. We'll have 3 years before we have to decide to sell in order to avoid capital gains.

If for whatever reason the rental market dries up (unlikely in our location) then we could sell. If the housing market drops significantly we won't be forced to sell. It's the best situation to be in.

Then as you rent it out, you can pull either a HELOC or a 2nd mortgage on the equity.

Wale Lawal · Answer

@Aurelie Slegers

You have a great opportunity with significant equity in your Colorado property. While a 6-7% cap rate isn’t bad, it may not be the best return compared to higher-yielding markets. If your goal is cash flow and replacing your $120K income, selling and reinvesting the $375K net proceeds into multiple higher-cash-flow properties could accelerate your path. However, keeping the property provides long-term appreciation and passive income. Consider 1031 exchanging into better cash-flowing assets to differ taxes.

Good luck!

Bradley Buxton · Answer

$1,000/month in cash flow is solid—assuming that's net. There are a few key things to consider:

• You can unlock equity through a HELOC, cash-out refi, or by selling.
• You’ve got two more years of renting before needing to worry about a 1031 exchange.
• It might make sense to buy your next stabilized property in the area you're moving to. Get to know the market, then look into a duplex or small multifamily there.
• Once that next property is stabilized—maybe even as your primary—you can reassess whether selling makes sense.
• Don’t forget to factor in property management vs. self-managing, as it can impact your cash flow.
• If you think the current market has peaked in appreciation, selling could be smart—but make sure you have a plan for reinvesting. Parking the proceeds in stocks might not be your best move.

You can unlock equity through a HELOC, cash-out refi, or by selling.

You’ve got two more years of renting before needing to worry about a 1031 exchange.

It might make sense to buy your next stabilized property in the area you're moving to. Get to know the market, then look into a duplex or small multifamily there.

Once that next property is stabilized—maybe even as your primary—you can reassess whether selling makes sense.

Don’t forget to factor in property management vs. self-managing, as it can impact your cash flow.

If you think the current market has peaked in appreciation, selling could be smart—but make sure you have a plan for reinvesting. Parking the proceeds in stocks might not be your best move.

Mike Klarman · Answer

First, congrats on your great situation you find yourself in.

I'd say if you have no real plan for the equity, then leave it in the house for now.  That's a large chunk of money to take out of a property.  Were you looking to sink that into one project?  Multiple?  Looking to park it for 12%?

You are at a great rate on your mortgage and you'll make 1k per month while you come up with a solid plan.  That equity in the house is a great safety net for you and it provides you access to cash.  I'd guard that with my life.  If it was me, I'd be looking to set up channels that are bringing me cash deals that are clearly 20% - 30% off market price.  I'd set myself up to shop for cash buys where the big wholesalers, private dealers, Professional BRRRR investors shop.   where investors are buying for 200k, you are buying for 150k.

If it needs rehab you can go to a lender right away and they will put you in a bridge loan program which will cash you out of the house at 80%/85% and provide rehab funds.  If it does not need work, hold for 6 months and DSCR out into a 30yr.  Either way, you ensure you are buying under market and you are maximizing your spread.  Anyone with the liquidity to invest this way, should be doing so.

Aurelie Slegers · Answer

Wow this helps a lot, thank you! Saving your flow chart for the future :)

Chris Barrett · Answer

Sorry, I'm in the midwest so I don't know anything about the North East :) However, hitting your return metrics is always about finding deals. You make your money on the purchase.

Should I sell my house, or rent it out?

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