How do you figure out if your cash flow rental still the best use of your money?

Question

I think a lot of landlords don't give enough thought to this question - when you've owned a rental for years, it cash flows, the tenants are decent, and you've got no particular reason to sell it. So you don't.

But what if you bought that house for $80K and today it's worth $180K? You're sitting on a pretty nice chunk of equity, but are you really getting a good return on that money anymore?

Looking at the numbers again is important - Meanwhile, the the property is aging, the depreciation window is closing -

I'm not suggesting selling just for the sake of selling. There are plenty of good reasons to hang on to a property, especially if it's paid off and doesn't give you much trouble. And of course, selling comes with its own costs and tax consequences - what's your litmus test for the best move: 1. hold the line 2. sell/1031. 3. refinance

Curious how often you revisit the numbers - thoughts?

Leo Stein · Answer

Alicia, I run this check once a year on every door, and it changes how I look at the old paid-off houses. I pull three numbers: net operating income after real maintenance, turns and vacancy, current market value, and what it would cost to sell and redeploy, including the tax hit. Divide net income by the equity you could actually walk away with, not by the original purchase price. When that yield falls under what I could earn on safer money, the house is asking to be reviewed.

But I also look at the operations side. An aging house with deferred roof, HVAC or plumbing work can look great on paper until one repair eats a year of cash flow. If the tenant is solid and rent is near market, I often keep it and raise rent gradually. If the rent is far below market, the tenant keeps turning over, or the house is a headache to manage, it goes on the sell list first.

I would not sell the best-run house just because equity grew. Happy to compare notes by message.

Matthew Morrow · Answer

@Alicia Sierra most of my portfolio came from this exact decision. I didn't sell. I used equity from what I owned to fund the next one, so refinancing is usually the first thing I look at, as long as the property still cash flows with the new payment. Selling and 1031s get complicated fast with taxes and deadlines, so I'd bring a CPA in early. I take a fresh look whenever something changes, like a big capex item coming up.

John Racine · Answer

Alicia, almost every investor I've talked to regrets every property they sold. So before selling or a 1031, I'd look hard at whether the property can do more for you while you still own it.

Jimmy, Leo and Muyees covered the return-on-equity math well, so I'll add two options that aren't on your list yet.

First, an equity loan or line of credit. Muyees mentioned a cash-out refi, but if the current mortgage has a good rate, a loan or line against the equity lets you keep that rate and still put the money to work as a down payment, or as purchase and rehab money, on the next property. A line is especially useful because you only pay on what you draw. Just make sure the rental's cash flow still covers the new payment, and keep reserves so one bad repair doesn't put both properties under pressure.

Second, changing how the property is used. Across the units I run now, furnished mid-term consistently brings in more than long-term would, even after covering utilities and the other owner expenses. It doesn't fit every house or neighborhood, so check real mid-term demand nearby and your local rules first. But it's worth running the numbers before deciding hold or sell are the only choices.

Alicia, how often do you see clients with older paid-off rentals actually tap the equity instead of selling?

Muyees Ayilara · Answer

Great framing Alicia — this is where I see a lot of buy-and-hold investors in Boynton / Palm Beach get stuck — property cash flows, so they don't run the ROE math.

My litmus test I use with clients on a $80k to $180k case like yours:

1. Return on Equity, not cash flow — If you net $6k/yr on $180k equity, that's 3.3% — vs refi at 70% LTV and redeploy $126k into another $80k-$100k basis deal. Cash flow stays, ROE jumps.

2. Depreciation clock — you flagged it — if you're past year 15-20 and major CapEx (roof/HVAC) coming, factor that into hold. Paid off + low trouble is nice, but equity trapped + aging is real cost.

3. My 2-year rule — I revisit every 2 years: (a) What would this sell net after tax/cost? (b) What would refi net monthly after higher payment + reserves? (c) Can 1031 into 2 smaller or 1 bigger improve total cash flow + tax benefit?

In your example, I'd likely refi vs sell — keep tenant, pull equity tax-free, keep depreciation base on new debt, unless you're ready to scale via 1031. Selling just to sell rarely wins if tenants are decent.

Curious — for your St Louis rentals, are you seeing DSCR lenders still give you credit for appraised value at 90-day seasoning or pushing to 6 months for cash-out? In Monarch Lakes (FL) we’re seeing mixed.

Jimmy Samaha · Answer

Alicia, good question. The check I like is to figure out what the property would put in your pocket if you sold it today, after agent and closing costs, any loan payoff, and taxes on the gain. Then compare that to what the house nets you in a year after taxes, insurance, repairs, vacancy, and management.

On your example, if a house bought for $80K is now worth $180K, the rent that looked great on $80K is a much smaller return on the $180K you could have in hand. It can still be a fine hold, but I'd measure it against what the equity is worth today, not what you paid.

Talk to a CPA before deciding either way, since the tax on a sale can change that number a lot. Then put the after tax figure next to what that money could realistically earn somewhere else. I'd revisit it about once a year, or any time something big comes up like a roof or a rent change.

How do you figure out if your cash flow rental still the best use of your money?

How do you figure out if your cash flow rental still the best use of your money?

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