20x rule, Anyone heard of it?

Question

There are several rule of thumbs out there. Everyone wants to know when a good time to sell is. I can't remember where I heard this one, but is the 20x rule a "real thing"?

If your property value appreciates to over 20x your gross annual rental income it's probably a good time to sell.

Steve Vaughan · Answer

Congratulations, Ken! Those are great appreciation numbers you've achieved.Why not refi to buy more? Other than it being a ton of work to source a new property, the refi process itself sucks. I just did a cash-out refi this fall. I'd forgotten why I hadn't borrowed from a bank in over 5 years. But at least the cost of capital was 10%. $3200 for a lousy $32k. I ended up buying amazon stock with it. Overall I'm getting bored with B&H. Just improved a townhouse nicely this weekend but cant't seem to get excited about it anymore. Just a personal decision for me. There are major players on here are turning 200 rocks to find one deal. Just don't got time for that anymore. I lazer-focused on some plexes and got to know the owners (all are over 70 and have been self-managing for decades), but other than that, it's been a good run. Happy to pay off the ones that aren't yet (19 of 30 are), sell when my targets are hit and hang up the cleats.

Ken D. · Answer

@Jay Helms Finding another market is precisely what I am looking to do. Looks like the 20x rule might be a thing!

Ken D. · Answer

@Steve Vaughan looks like I hit the unlikely situation of hitting 20x annuals rent. But rents are still going up and I know the property will appreciate further in the area my property is located (San Diego). Property values have also exceeded cost to build pretty much everywhere, and flips have been happening non-stop for the past 5 years. Basically the neighborhood went from a B- neighborhood to A- neighborhood and I don’t expect that to move the other way in the near future. But property values only matter when you buy, sell, or refinance. If rent could cover your mortgage and expenses is there any reason you wouldn’t just cash out refinance and use that money to purchase more buy and holds?

Steve Vaughan · Answer

Ken, I was referring to listings for sale in my area @.5% per month which makes me gag, but I would consider selling some of my apts at that. I bought 2/3 producing 2% per month, then improved & stabilized them up to 3 &4%.Now I have to do math to convert to annual. I'm with Brandon and would sell at 20x annual for sure. Waiting for that may put you in hog-ville, as in getting slaughtered. Won't happen.A metric I've had from day one has been replacement cost as provided by my insurance. One I bought for $345 in '05, insured for $740. Another bought for $260 in 03, insured for 800. When market value equals cost to build, I'm out!

Brandon Hicks · Answer

I would sell EVERYTHING I own at 20x gross annual rents. No hesitation whatsoever. Never heard of that rule though.

Ken D. · Answer

Thanks for the correction. 1/20 makes 0.5% sound right but it's not... looks like either criteria is a good enough point to sell. If 20x rule is not a thing it'll be my first pass personal criteria!

Ken D. · Answer

@Steve Vaughan I haven't gone through the refinance process yet but assumed it was very similar to getting a loan when you purchase a house. In any case you reason for not liking to refi makes sense. Everyone have there targets and goals. Looks like 20x will likely become one of my rule of thumbs!

Brent Coombs · Answer

Just so you know, 20x annual rent is the "0.4166% Rule". ie. Almost 20% worse return per month than the "0.5% Rule" (that lots of folk have said they'd already be selling at)!You do realize, if rents go up ahead of property value, that it'll change the rent ratio to less than 20x annual rent, right? (Conversely, if property prices keep going up ahead of rent increases, then the ratio will be even more than 20x annual rent! Then, who, wisely, did not sell before?)My question is: Who can cash flow positively at 70+% LTV, if gross rent is less than 0.5%/m?...

Jay Helms · Answer

Negative. At 20x or .05 rule, I’m selling. At those numbers I expect that property is at the top of the cycle. Refi at those #s puts you in a position to be stuck with that property. Sell it and wait for the cycle to start over or find a market with more upside.

Ken D. · Answer

@Jay Helms good to know there is another name for the rule and it sounds like it’s something people use. Very good point on the second exit point being when the property no longer has tax benfits through depreciation. That’ll definitely be one I keep for the books if I get to holding property that long. Same question I asked Steve, any reason you wouldn’t cash out refi instead of sell?