My formula to decide when to sell to buy something else - is in this right?

[Ron K.]

Hi BP,

I have property with built-up equity, and I was planning to sell and trade up (refinance doesn't work for me).

The problem is, that I believe that the costs associated with trading a property are too high.

Please see what you think of this calculation:

• Property value (i.e. sell at): $200,000.
• Loan: $100,000
• Equity after sale (assume 8% cost of sale):  $84,000
• Cost to buy a new property: $6,000
• So, my equity in the new property is: $78,000
• Assuming I need to put 30% down (investor, >4 mortgages, buying 2-4 unit), this allows me to buy: $260,000

To keep things simple, let's say I cash flow $200 more a month in the new property, and let's say I pay down the same amount of principle, and the expected appreciation in the same in both properties.

Additional gain: 

• Cash flow: $200 * 12 = $2,400
• Appreciation: At 3% appreciation, the new property makes $1,800 more

So I make $4,200 more per year, but I lost $22,000 in equity !! (take 5 years to make that up).  Does this make sense?

It seems that once you own a property, you've paid the buying cost, and committed to paying the selling cost, so the longer you hold the property the more real gain. i.e. every extra trade is quite expensive.  Obviously, at 6% appreciation, the trade looks better, but you can count on that, and I can't predict if I'll have better appreciation at the new property.

What do you think?

Thanks,

Ron

[Josh Caldwell]

Ron

I see where you are going, and I understand the strategy, I just dont like it. 

The true path to wealth is in creating piles of cash flow based passive income. What you are doing is you are expensing your buying and selling costs with your cash flow. 

I will suggest a different strategy, keep this property and save up you cash flow, then use that cash flow to buy the next property.  That way your cash flow keeps expanding geometerically after the 2nd property.  That is the key to building wealth. 

To your success

Josh