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?

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?

G. Brian Davis · Answer

I think it’s worth revisiting the numbers every few years. A property that was a great investment when you bought it may not be the best use of that equity today. I’d look at what I’m actually earning on the equity I have in it now, what I’d net if I sold, and what I could do with that money elsewhere. If the property is still producing a good return and I don’t see a better use for the equity, I’m happy to keep it.

Ashish Acharya · Answer

Alicia, I think the return on the equity you have tied up is the key question here. A property can still cash flow nicely while becoming a relatively low-return use of the equity sitting in it.

I'd run three numbers before deciding: what the property produces after realistic expenses, what you'd actually net after taxes and selling costs, and what that equity could realistically earn if redeployed.

The 1031 option can be especially interesting if you still want to stay invested in real estate, but I'd compare the after-tax outcome of a 1031, refinance, and simply holding rather than assuming one is automatically better.

Depreciation is another piece I'd include in that model, because the tax consequences of selling can be very different from simply looking at the property's appreciation.

Happy to connect!

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.

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.

Sheldon David · Answer

Alicia, I’d want the alternative to earn its place in the comparison. “I could put that equity to better use” is easy to say—but what specific investment would replace this rental, and does it still look better after transaction costs, financing, reserves, and management time?

I’d compare holding, refinancing, and selling over the same time horizon, using conservative assumptions for each. Refinancing deserves particular attention: pulling cash out creates another payment, so the comparison needs to include both the existing rental’s reduced cash flow and what the redeployed money could realistically produce.

I’m involved with PropertyIQ, and this is the kind of decision we’re working to help investors evaluate: making the assumptions and tradeoffs clearer instead of stopping at a headline cash-flow number.

A reliable tenant, manageable upkeep, and favorable existing financing all have value. My litmus test would be whether a specific alternative offers enough improvement to justify the costs, uncertainty, and additional work.

Do you find owners usually revisit this because the property’s performance changes, or because another opportunity catches their attention?

Alicia Sierra · Answer

To answer your question on seasoning - it is mixed. It often depends on the credit/asset/experience profile of the borrower - in other words the option for 90 day seasoning is there for qualified borrowers with many of the lenders.

Randy Schell · Answer

Looking at it with fresh eyes is a healthy habit, even when a rental has treated you well for years. After 20+ years of inspections I'd also weigh how tired the roof, plumbing and electrical are getting, since those costs tend to sneak up on an older paid off house.

Randy, Bunklow

David Krulac · Answer

@Alicia Sierra I've bought and sold over 1,000 properties for my own inventory. Not all were rentals, but a significant number were. In you example of a $80,000 property and now worth $180,000; if you owned it 10 years, you might have a $100,000 capital gain plus a depreciation recapture of over $23,000. Your Federal income tax could be as high as $25,000 with straight line depreciation and more if you took bonus depreciation or cost segregation. For me the selling and paying the taxes would be my last alternative, though I have done that. My second choice would be to refinance, trying for 80% LTV, which oddly enough would yield more in pocket money than outright selling. But my first choice would be to do a 1031 and pay no taxes, defer to death do us part and invoke the stepped up basis and wipe out the tax altogether. I've done IRC Section 1031s before and number one they are complicated to do, and more importantly the short fuses causes people to exchange a great deal for a so-so deal in order to comply with the 45/180 day rules associated with a 1031. we discussed this topic on Bigger Pockets Podcast 82, where I said that "capital gains taxes should be indexed for inflation." And I still believe that to be true.

Aaron Zimmerman · Answer

I’d be looking at ROE and seeing if that meets my required returns, upcoming capex, and what I would do with the money. For me, I’m riding my properties out for now

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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