Do I Sell or Rent A Property I own That Has Appreciated In Value?

[Joseph Castaneda]

Ok her is the situation. I purchased this single family home in North Miami Beach, FL five years ago for $120K (Cash no Mortgage) and immediately rented it to the previous owner for $1,500 per month (Aproximatley 10% return per year in cashflow). The tenant recently moved out and I have just invested another $30K in renovations to the home. So my total investment into it is $150K. The two options I'm debating between is: 1. Do I sell it for $280K and take the capital gains? 2. Put a tenant in there for $1,800 per month and do a 70% LTV cash out refinance which will give me money to buy another property and do it over and over again? I am more geared towards a buy and hold investment strategy with a few fix and flips thrown into the mix. I'm not looking for a ton of cash flow right now but I am more concerned with building long term wealth by buying more properties. Right now I have the property listed for rent. These are the questions that go through my head. I want to manage my real estate investment portfolio in all the right ways. Your input is greatly appreciated!

[Evan Bell]

Seems like you answered your own question. I like the idea of putting a new tenant in and doing the cash out refi. Sounds suspiciously like the world famous BRRRR strategy from one of those real estate podcasts......

[Brian Sherman]

What's you depreciation schedule?

[Brendan J.]

@Joseph Castaneda . I'd look at a buy/hold for this one. @Evan Bell hinted at BRRRR (Buy, Repair, Rent, Refinance, & Repeat) and he's right.

I wouldn't max out on the 70%LTV though, your P&I would be too high to make sure this thing was cashflowing (w/ a little extra cushion). Here's how I would look at it if I was in your shoes....

Rent for $1800, Plan on expenses making up $900 (Management, maintenance, capital ex, vacancy, taxes, insurance, minor utilities, etc...

Refi 149k (only 1k left of your money) for 30 years @ 5%. Principle and interest would be $800/month. This would leave $100/month cashflow, but we aren't close to the fun part.

$1200 annual cashflow (120% returns on your $1k invested)

$2300 annual principle paydown by tenant (230% returns)

$5000 in appreciation at a modest 1.8% appreciation rate over the 1st year... (500% returns)

Total of $8500 in wealth creation (850% returns)....With $130k in equity still in the house. You also have $149k to go buy another property in cash to BRRRR that one as well.

Just my $0.02 Joseph!

[Joseph Castaneda]

@Brian Sherman I would do a 30 year fix loan. @Evan Bell & @Brendan J. This is what get's me excited about real estate. The returns you can get on money you personally have in the deal is astronomical! However I think I can take $210K out in refinance at 4.5% on a 30 year fixed and cash flow about $200 per month after P&I, Taxes and insurance. House should need very little maintenance considering I just put $30K into it. I'm leaning towards leaving as little equity in it and letting the equity build up again over time through principle pay-down (with renter's money!) and appreciation. Because in your example, if a calculate returns while counting the $130K in equity left in the property as my money the returns aren't as great. In my market it is difficult to find something worth buying under $200K (Right now, but we may have a correction). Thanks for the input guys! It helps to know other people out there with similar mindsets! 

[Russ Draper]

I always do a 15yr when I can, the difference in interest saved is usually enormous!  Try drcalculator.com/mortgage to compare rough numbers.  Also keep in mind that right now the 15yr is lower than the 30yr rate!

Of course, if you can trust yourself to pay extra each month you can effectively have a 15yr mortgage with the ability to pay less if your financial situation changes.  Some banks don't make that easy to do though.

[Joseph Castaneda]

@Russ Draper thanks yes the 15 years are super attractive right now. The increase in payment is minimal compared to the 30 yr due to lower rates on the 15 yr. That's a great option.