When to sell - How many years of cash flow?

[Brie Schmidt]

I know REI decisions are personal, I preach it all the time. I purchased the bulk of my portfolio between 2011 - 2014 and since then the properties have appreciated. So while the properties are performing from a cash flow perspective my return on equity is not great.

I am looking at my profit (after fees and capital contribution) VS the average cash flow over the last 3 years. So my question is when do you sell? If I can sell and profit 5 years of cash flow is that enough? Less? More? WWYD?

Example - I bought a property for $100k with a NOI of 9k and annual cash flow of $5k and after closing costs my net will be $125k

I am going to tag some of my smarter REI friends for advice @Chris Clothier @Brian Burke @Brandon Turner @Ben Leybovich @Jay Hinrichs

[Brian Burke]

@Brie Schmidt I bought 120 or so rentals in the SF Bay Area in 2011-2013. I’m selling now. But my situation is different—I raised money from investors to buy these and the plan was a five year hold. So I need to do my part and execute the plan, which means selling and returning capital.

The thesis behind this trade back in 2011 was that housing prices would double in five years. Well, as it turns out I was wrong. They doubled-and-a-half. Time to take the chips off the table.

This never really was a cash flow play. Sure, the homes threw off cash, but this is CA so it was like 4-6% CoC. But get this—now that the houses have appreciated so much the return on equity is so low it's almost embarrassing.

So the smart move for me (ignoring that it’s also my obligation) is to sell.  Those proceeds could be reinvested in larger assets and reset the return on equity.  

Of course the smart move for you could be different. But here's a little fact that people don't often talk about—when investing in appreciating assets your CoC return climbs (assuming rents are also climbing), but your return on equity declines over time. By selling and RE-investing, you reset your RoE back to equaling your CoC (but at a much higher basis).