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