Best Long Term Returns - Hold or Sell Investment Property?

Real Estate Deal Analysis & Advice
10yFollow

Best Long Term Returns - Hold or Sell Investment Property?

Jon O.
Investor · Hoboken, NJ · Member since 2016 · 5 posts · 5 votes

Hello,

I would like your help in analyzing the long term investment potential of either A. Holding the rental unit or B. selling it and diversifying my assets.

Background:

3 Years ago I decided to hold onto a condo I owned, in Hoboken NJ, and turn it into a rental when I moved to a new primary residence.Although a stretch at the time it was the best financial decision I have made in my life.I see this as a great investment from a cash on cash investment standpoint, by holding the condo as a rental property the last 3 years I have had significant property value appreciation (~25%) along with great cash flow from the rental income.It's a great location, walkable neighborhood (1 square mile city), and I have found both tenants in <5days.

With that said my new financial advisor has raised some concerns with how I am analyzing my investment return on the rental property.In addition he has concerns with my assets being heavily tied to real estate (between this rental property and my primary residence I have ~70% of my assets in RE). He suggests I sell my rental property, locking in significant equity I have, and reinvest the money in the stock market.He suggested if I want I can take some of that equity and reinvest in a new rental property (only problem with that is in the area buying a new rental does not make sense, CAP are )% or even negative as property values have skyrocketed).He believes by selling rental property I would accomplish goal of diversify my assets appropriately and also give me better returns in longer run.

Below are some key numbers and I'd appreciate your thoughts on how to analyze long term investment potential of either A. Holding the property or B. selling and diversifying my assets.

Option A: Hold as Rental Property

Purchase Price (Dec. 2010): 375,000

Current Value:$615,000

Outstanding Loan: $208,000, (3.875% 30 Year Fixed – 50 of 360 payments made)

Monthly Mortgage/Tax/Insurance/Maintenance:$1,851(Occupancy has been 100% for past 32 months since I started renting).

Month Rental Income: $2,850

Monthly Cash Flow: ~$1,000(I have had no minor or major repairs.Building was newly constructed in 2008).

Expected Future Rent Increase: 3% Annually, Expected Future Property Appreciate: 3.5% (This is very much on the low end, property values in my area have been >10% annually for past 4-5 years, I just do not want to analyze based on a number I am not sure the market can maintain… then again it certainly may!)

Option B: Sell and Reinvest in Stock Market

Sell Price (615k) – Closing/Fees (~5%) – Outstanding Mortgage ($208k) = ~$376,250

Expected Market Return: 7% (could debate this all day long, but this is the number I want to use).

I'm having difficulty making this decision because I have seen holding the rental property as a great current and future investment. Maybe I am too tied emotionally to the rental property and not analyzing this properly. Can someone please help me understand what the future expected investment returns would be between the two options and which would be better returns?I am looking for a 5yr/10yr/25yr return estimate on both options.  Any help would be greatly appreciated.

Kind Regards,

Jon

3Reply
35 views

Most Popular Reply

Hank A.
Investor · Plano, TX · Member since 2016 · 38 posts · 21 votes
10y

If I were you, I would definitely NOT sell this property, and I would probably fire the new financial adviser. Say you bought your rental with 25% down (the numbers are better if your down % was lower), your down payment plus closing was just under 100K. Let's say 100K roughly. Your current cash on cash return is 12K per year which works out to 12%, probably better than the average investor's stock market yield, and this will increase as rent increases every year. The building is new and in good condition so you are not expecting major cap expenses anytime soon. So why would you want to give this up for a lesser yield?

You have about 407K equity in the rental (current price minus outstanding loan), which is money sitting there doing nothing for you. I would look into doing a cash-out refinance to pull out most of that equity and use that towards acquiring more real estate, or if you have to diversify put that into the stock market, or even do both. Your mortgage will increase a little bit, but that will be more than offset by the returns you make on the investment from the cash-out money.

8Reply
See this reply in the discussion

25 Replies

Jump to latestLatest
  • Melroy D'Souza
    Investor · Hilliard, OH · Member since 2014 · 60 posts · 25 votes
    10y

    Jon,

    Many financial advisors/surveys do NOT include primary residence as part of your net worth. So don't count your primary residence in the equation. Then recalculate and are you comfortable with the new number? What are your financial goals? That answer will guide your decision. If you don't have any goals, do nothing for now. 

    If you want to diversify into the stock market, do a dollar cost average method. I don't like plunking a large chunk into the market all at once. If you want more RE investing, there are a plethora of avenues to get into depending on your goals and temperament. Search BP, listen to podcasts, etc. Financial advisors tend to just do the typical asset allocation strategy like it is scripture or something. There may be a bunch of investors on BP who are 95% or more allocated in RE, but that's what they are comfortable with and it might be okay with them. Some one like Warren Buffet is 99.99% in stocks, works for him. I think you have to be comfortable with whatever you are doing.

    5Reply
  • Hank A.
    Investor · Plano, TX · Member since 2016 · 38 posts · 21 votes
    10y

    If I were you, I would definitely NOT sell this property, and I would probably fire the new financial adviser. Say you bought your rental with 25% down (the numbers are better if your down % was lower), your down payment plus closing was just under 100K. Let's say 100K roughly. Your current cash on cash return is 12K per year which works out to 12%, probably better than the average investor's stock market yield, and this will increase as rent increases every year. The building is new and in good condition so you are not expecting major cap expenses anytime soon. So why would you want to give this up for a lesser yield?

    You have about 407K equity in the rental (current price minus outstanding loan), which is money sitting there doing nothing for you. I would look into doing a cash-out refinance to pull out most of that equity and use that towards acquiring more real estate, or if you have to diversify put that into the stock market, or even do both. Your mortgage will increase a little bit, but that will be more than offset by the returns you make on the investment from the cash-out money.

    8Reply
  • Thomas P.
    Agent/Investor · Knoxville, TN · Member since 2015 · 59 posts · 29 votes
    10y

    I understand locking that gain, but consider the tax implications.  The tax on the gains would be substantial.  Where then would you invest?  There are great options in other states where you could turn that kind of cash into a nice portfolio, but are you willing?   Do you know where?  The cashflow on this property is substantial and you get the tax depreciation every year.  I've talked to investment professionals before and it always boils down to one thing: I know real estate and if I can make the returns I'm making, they tell me stick with real estate because they are fairly certain they cant do better.  That is based on my knowledge, experience and gains thus far.  Most people don't have that kind of knowledge and so a financial adviser is wise.  Of course, that's what BP is for so they can gain the knowledge because I believe everyone should own cash flowing rental property if only for the tax benefits.  As @Melroy D'Souza pointed out, what are your goals?  You have a nice situation with this property.  There are a lot of ways you could go!  Personally, I would keep it if you don't have a better plan than the stock market.   But if you can develop a plan to use the appreciation to reinvest in real estate and grow, then I might sell, but I still don't like the tax hit.  

    3Reply
  • Jon O.
    OP
    Investor · Hoboken, NJ · Member since 2016 · 5 posts · 5 votes
    10y

    Thank you all for the quick responses and advice! I see the property as a great long term investment and looks like many others do too...

    Simplifying my goals a little here but ideally I would like to grow my income (whether that be through RE Investment, Business or other investments), outside of my day-day job, to sustain 75% of my current spending/lifestyle. At that 'tipping' point I would at least have the option to continue working my day-day job, while having some great side income to support early retirement, or I could comfortable choose to work for myself.

    I am very comfortable with RE being a significant portion of my assets if that supports the above goal.

    I think the above quote hits the nail on the head with where my thought process is. I do have a lot of equity tied up doing nothing for me and that's why I raised this question. I think cash-out refinance is the best option to pursue and begin putting that money towards my goals.

    1Reply
  • Jon O.
    OP
    Investor · Hoboken, NJ · Member since 2016 · 5 posts · 5 votes
    10y
    Originally posted by @Thomas P.:

    There are great options in other states where you could turn that kind of cash into a nice portfolio, but are you willing?   Do you know where?  

    I am very willing but unfortunately do not have much insight into where optimal opportunities exist. 

    0Reply
  • John Hickey
    Rental Property Investor · Chappaqua, NY · Member since 2015 · 1k+ posts · 947 votes
    10y
    Jon O. I agree with a lot of what was said above and you hit the nail on the head with cash out refi, if you can tolerate the risk. You've already managed to hit a home run, I know what I'd be doing if I was you but that's up to you.
    2Reply
  • Byron Bohlsen
    Investor · Minneapolis, MN · Member since 2015 · 173 posts · 53 votes
    10y

    So your financial advisor wants you to kill the golden goose and sell the best financial decision of your life? Makes sense to me.... 

    1Reply
  • Ryan Inman
    Financial Planner · Las Vegas, NV · Member since 2015 · 66 posts · 19 votes
    10y
    I'm curious to know how your advisor is being compensated and if he is truly acting as a fiduciary. The advice that has been given doesn't seem to be in your best interest and seems to be an asset grab than a true diversification conversation. While I wont give any direct advice on the property, I congratulate you on the great investment decisions so far. Good luck!
    1Reply
  • Byron Bohlsen
    Investor · Minneapolis, MN · Member since 2015 · 173 posts · 53 votes
    10y

    have you asked him to calculate the overall return on that house and suggest a stock that can match?

    So what if a majority of your net worth is tied into real estate. Its what gave you that net worth to begin with. Real estate has made more people rich then any other sector if I am not mistaken? 

    2Reply
  • Cashmere Robinson
    Wholesaler · Bronx, NY · Member since 2015 · 46 posts · 11 votes
    10y

    Long term investing in RE always gives a positive return. It depends on how and when you are investing and what is your expectations. As external factors plays a role in REI you should not overlook small things which may ruin your investment goals.

    1Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    Good advice so far. Fact is your return on the rental is very poor based on the equity you have tied up in it. $2850 rental income on a $600,000 is dismal regardless of your expenses.

    Rental properties have in effect two income sources, first being the property itself and second being the equity in the property. Equity tied up in a property that is not generating sufficient return is dead money.

    Money must earn it's keep otherwise what is the point in having it.

    By your own numbers you expect a return on your money of 7% and yet it is earning virtually nothing in the rental. 

    1Reply
  • Henry J.
    Monterey Park, CA · Member since 2014 · 157 posts · 80 votes
    10y
    Hi Jon, Congrats on your condo rental success. Whether it's luck or not you had great appreciation and have good cash flow there. I'm more of a stock junkie than RE investor but I wouldn't sell the condo to invest into the stock market right now. Not knowing your other financial info (and I'm not a financial advisor), unless you have a good grasp of the stock market, why would you invest $300k at once into the market? There are value stocks out there but I don't know if there is enough value for you to drop majority of your net worth in there right now, at once. Besides, once you sell, unless you have other business or properties, you just lose out on your tax write off. If you want to diversify, start buying vanguard s&p funds on a monthly basis with your rental cash flow. Also invest through your 401k if your work has a decent plan, or IRA if not. If you want your asset to work harder for you, refi or find ways to get cash out of your condo. If you want more rental properties then sell to buy SFR or multi or 1031 to other properties. Good luck! Henry
    1Reply
  • Jon O.
    OP
    Investor · Hoboken, NJ · Member since 2016 · 5 posts · 5 votes
    10y

    Thanks all for the continued guidance.  @Ryan Inman I do believe it is an attempted asset grab from my advisor. With that said I am willing to admit to this point when I calculated my investment return on my rental property I never factored in the significant equity that has built up in the property, so he did force me to start to think about it differently.  At this point at least I can see the value of putting that money I have tied up in the property back to work for me.  

    0Reply
  • Jon O.
    OP
    Investor · Hoboken, NJ · Member since 2016 · 5 posts · 5 votes
    10y

    @Thomas S.

    At the end of the day I put $140k down in late 2010, I would walk away with $380K + ~$36k rental income. Pretty good ROI at ~200%. Now I want to ensure I maximize this first very lucky / good investment. The next step is the most important step, which is why I came here looking for advise.

    1Reply
  • Christine Mwai
    Investor · Alabaster, AL · Member since 2016 · 280 posts · 88 votes
    10y

    Great post... Depends on your goals and market as others said above... Where I am, it's still a buyer's market a $45-70k property rents for $700-850... So, an investment of 200k can cash flow $2000 easily... Appreciation... Not as good, so that would be if you plan to hold..

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    10y

    @Jon O., there's some pieces that your advisor and all who say this is a very poorly performing instrument are missing.  First you will not net out 380.  If you sell for 615 you will probably have 10% closing costs netting you more like 346 - 350.  Next you have to take into account taxes on the roughly 200K gain.  That could be 60K so now your net cash back to you is 250 - 290.  You'll have another 10 - 15K in depreciation recapture.  

    So all things being said the true comparison for opportunity cost and return on cash is the 12K net rental vs 240 K or roughly 5%.  Better than the 3% everyone is saying but still not stellar and definitely below the stock market average of something like 8%.

    But, If you make one more forecast that your property will match the average 3.6% multiple decade appreciation average all of a sudden your real estate asset is returning  over 25K in cash and appreciation on an investment or opportunity cost of $240K  This still does not include the fact that the appreciation is compounded free of tax while not tapped.  It also ignores the write offs and additional 22 years of depreciation left. 

    The question you need to ask your financial advisor is how confident he is that he can match a return greater than 10% (after his commissions) that includes additional tax write offs.

    There's other real estate that will provide a better return.  But if you're comparing to the equities market make sure the investment opportunity and opportunity cost are apples to apples.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    2Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    Appreciation is nice but you get the identical appreciation regardless of whether it is 100% financed or 100% owned.

    The smart investment would be to pull the money and purchase X more cash flow property with 20% down on each.

    Having said that I can appreciate your position. I have one property worth about $550,000 that I only owe $185,000 on that I am not able to pull the equity out of as I can not get it refinanced at this time. However my monthly income is $6800 with positive cash flow at about $3500/month. Not nearly as bad but I would prefer to have that equity spread around making more cash flow and more appreciation.

    0Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    10y

    Don't know your new financial advisors training, background, or bias but most "financial advisors" are either (a) stockbrokers disguised as financial advisors (b) insurance salesman disguised as financial advisors or (c) financial planners with heavy education and knowledge of stock market, bond market, annuities, tax planning, estate planning and wealth transfer with very little or no knowledge of real estate investing.  To every hammer the answer is always a nail.

    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Jon O.  @Thomas P.   Thomas might this person be just on the cusp of being able to get their tax free sale gain of a primary residence.. I think its 2 of the last 5 years ... I could be wrong on that it could be 3 of the last 5.. but maybe its 2 of the last 5 and he can sell now quickly for NO tax.

    then free to invest where ever.. I echo @Don Konipol sentiments on financial advisors.. either insurance folks or tied to their brokerages and cannot sell away... If they do what they like to call non traditional they usually have affiliate marketing relationships with companies that pay them HUGE commisisons to sell varying different types of investments.  Many that are suspect for safety and quality.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    1Reply
  • Victor N.
    Investor · Meriden, CT · Member since 2013 · 201 posts · 145 votes
    10y

    @Jon O. The stock market has been significantly down the past few months so you're lucky you didnt follow your advisor's advice so far. 

    2Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    10y

    @Jay Hinrichs, Good catch.   I did quick math earlier and was sure he was past it but there is a tiny tiny potential window and he would be on the cusp but conceivably @Jon O. if you can calendar back that you have lived in that property for 24 out of the last 60 months prior to sale you could sell it and take the first 250K (500K if married) in gain tax free as Jay suggests.  That doesn't validate or invalidate the advisor option but it does eliminate the potential tax as a motivator to hang on and leaves you free to do whatever you want with the money.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Dave Foster  and of course with that kind of equity he could 1031 and not pay gain if he wants to stay in RE... I suppose if he is considering it a call to you to go over all the different options that are potentially avalaible to move into on a 1031 exchange would be a good thing for him.. probably does not know there is more to 1031 then selling one rental for another.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    0Reply
  • Ryan Inman
    Financial Planner · Las Vegas, NV · Member since 2015 · 66 posts · 19 votes
    10y
    Jay Hinrichs Don Konipol Not all advisors are bad. Fee only Independent RIAs such as myself, do not sell products or insurance, and are true fiduciaries to our clients. Granted we represent 2% of all advisors, but good ones still exist. Good catch on the 2 of 5 year exemption. I didn't catch that on my first pass of the post.
    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Ryan Inman  yes should have put an asterisk by fee advisors.. sorry bout that.

    I was in a room of advisors about 4 years ago all independent guys.. all about mid 30s and we were having a big dinner and drinks and they were mainly selling annuities to older folks.. and man did they let loose.. I came away from that meeting with a very sour taste in my mouth. these guys were all about commissions and as high as they could get...

    I know personally a few fee advisors that only take clients on with say 5 or 10 million dollar plus accounts and for sure that is another level.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    0Reply
  • Mark Holencik
    Investor · Coplay, PA · Member since 2015 · 404 posts · 315 votes
    10y

    I know nothing about investing in stocks. So I invest nothing in stocks.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free