What would you do? Hold or Sell?

[Justin S.]

I believe I may already know the popular vote, but here is my situation: 

I purchased a brownstone in Brooklyn in 2014 as a shell and the house underwent a gut renovation. 

It is a 3 unit building that my wife and I occupy. We just had a little girl last month and I am kicking around selling. We are in a gentrifying neighborhood and the property values have went nuts but the market is starting to soften, the economy is showing signs of doubt (Dow down 800pts) and I am thinking now may be a good time. We have about 1.1M in equity in the house. 

I saw an article a couple of weeks ago in the NY post about how Billy Joel purchased a townhouse for his first wife in the 80s for 4M and its now back on the market for 20M. I don't want to be that guy! :) https://nypost.com/2018/08/22/townhouse-billy-joel...

Everyone knows NYC is an appreciation play and I don't want to cut myself short. I signed up for Biggerpockets this year and @John Hickey caught my eye. Here was a guy who had the same story as I did and ended up selling it to buy a ton of properties in Newburgh. I jumped on the bandwagon and now own a few properties there myself. It blows my mind how my 100k investments cash flow more than a 2.6M brownstone in Brooklyn, and it got me second guessing myself. I know @InvestorLew is big on pointing out the fact other people are still paying down your mortgage (which is at 3%) and maybe the house is breaking even now (it would it I rented the entire thing) but if the rents increase down the road, the property that I sold because it was breaking even, then would cash flow 3-4k per month. 

Ideally I would like more space but everything in my house is brand new. My wife and I are not 100% sure if we want to raise our kids here in NYC either. I LOVE Brooklyn, so its certainly a possibly. So I guess what I am asking the community is: 

1. Cash out 1M by selling. I can walk away with 500k without any capital gains because it has been my primary for the last 4 years. I can also 1031 the other 500k since that portion is the investment side. Buy a house in the burbs or a bigger brownstone.

2. Keep it and rent it out. The property doesn't cash flow 

3. Put an extension on the house and stay here. Would cost me at least 100k 

My purchase price was 860k and I put in 600k worth of work (nuts I know!) I learned a TON on this project and I am applying those learning experience in Newburgh. What would you do if you were me? 

[Llewelyn A.]

@Thomas S.

Hi Thomas. Not sure these personal replies are a good thing for a forum or is just better off as an exchange of emails.

Either case, the basis of any of my calculations is that the components of those calculations change all the time.

For instance, you mention equity. So if I were to calculate ROE, over time, ROE will change. What I hope will happen is that ROE will get smaller, which means that the Equity is Growing. You may call that a bad thing because the ROE diminishes over time, but the overall cause of it is a higher Equity.

Every single cash flow calculation should be thought of as a moving target, RoE, Cash on Cash Return, GRM, Cap Rate, etc.

HOWEVER, there are a few calculations that will take into account all of these moving targets. The one that I use all the time is Internal Rate of Return (IRR).

What I do is project out the next 10 years of the Investment and determine an IRR based on certain assumptions. I will use conservative assumptions, such as 4% Appreciation Rate, 2.5% Rent Appreciation, 5% Expense Appreciation, etc. to come up with the cash flows throughout the 10 year holding period.

If the IRR meets my target number, usually over 10% IRR, I then look to see if there is any way to add value either now or in the future.

Although this is an extremely complicated spreadsheet to build, every one of the Investment Properties I have bought in the last 21 years have done PHENOMINAL.

I would say it's all about the numbers. But the reality is that I was WRONG. The Conservative models were WAY TOO Conservative and we had made a HUGE killing in the Brooklyn Market. But then again, the models were designed that way. It lowered the risk on the downside and there was NO risk on the upside.

As far as Economic and Market risks are concerned, I have been investing since 1997. You already know the Crisises that occurred during these period, and especially in NYC (think of 9/11).

I often ask people to tell me the difference between a good Investor and a Lucky Investor, because it's very difficult to tell them apart.

Both will make MONEY.

HOWEVER, the time when BOTH make money is when the economic tide is rising... meaning when everything is doing GREAT!

When the tide falls back, that's when you can tell the difference.

The Lucky Investor is much like a Gambler. He tends to continue his bet as he keeps winning, mostly doubling down as he goes. But inevitably, this Lucky Investor will lose, and may infact lose it all.

The Good Investor will make money in the good times. When the Bad times come, a Good Investor will NOT Lose money or very little.

A GREAT Investor will not only make money in the good times, but will also make money in the Bad times too.

My Investing History tells me who I am. I have been through enough crisis to know.

Either case, if you are really good at one thing, it follows you can apply that same motivation and discipline to other things as well.

Real Estate is just one of the areas I use to grow my wealth. I think we all have multiple things we are all doing. Some they have their careers, other businesses, etc. and RE is just another vehicle of investment.

The Great thing about using IRR, is that it doesn't matter what the Investment is that you are using. All that matters is the Cash Flows of that Investment.

My real skills is in the understanding of the Cash Flows of multiple Investment vehicles and coming up with a comprehensive IRR Based Business plan.

I know this has been a very boring post! But if you read this far, I congratulate you!