Should we sell? What would you do?

Question

I have a property that I am thinking about selling. It's a great no-hassle single-family property.  We purchased it for $10k down, a few years ago (owner occupied) at a great price as a foreclosure - no significant renovations - and it cash flows over $450 per month. I recently applied to drop PMI and found that it was valued at $265k and we owe about $165k - so $100k in equity. Not bad for a first deal :-)

The plan would be to take that money and reinvest for more cashflow.

I heard that when you buy a property, you look at ROI but when you hold a property, you look at ROE. The ROI was great but a Return on $100k equity is not great.

I have heard that it's difficult to get home equity loans on investment properties but have found a few options. I could take out up to $44k for 5-6%, or $35k for 8-9%.  These seem a little pricey and I can't access much of the $100k.

If I sell, I imagine I'll be able to get around $80k-$90k after fees and closing costs. I'll lose the $450 in monthly cashflow - but I can take $80k and buy a $400k property with it. If I can expect a 12% ROI on the $80k, the cashflow would be $800 a month. (Is this reasonable?)

I heard on a recent BP podcast that the economy is showing signs that it could make a down turn within a couple years and that investors should be hoarding money to buy up as much as possible when property values are low.

What would you do?

Dave Foster · Answer

@Anthony Torres, excellent appreciation.  Congratulations.  Your Cash on cash return is excellent.  Overall ROI not so much.  If you're looking at what you can make off of the cash you can invest then you may want to hang to this one and use outside dollars to get your second.

If your war chest is tied up in the equity to this property then a sale and redeploy of the equity can probably benefit you.  If you sell then a 1031 exchange would be the tool you'd lose so you don't have to pay the $20K or so in tax. Deferring that tax by itself can add significant return to you.

Ed Emmons · Answer

Have you figured tax implications ? A 1031 exchange may make sense  if you are going to reinvest.  If you feel the house is at the top of the market then obviously it would be a good time to sell.

Dave Foster · Answer

@Anthony Torres, my only thought in keeping it is that for a $10K investment you are making $450/month return.  That's fantastic.  The return will drop dramatically with a refi or LOC.  But what I tried to say was that if you have access to other funds (the war chest) that could be used to get your next property rather than dilute this one that would be a phenomenal alternative.  Yes it leaves untapped equity.  And I am a 1031 fan.  But a 10k investment bringing in that kind of annual return is a great one to keep love and protect.

Otherwise, 1031 away!

Anthony Torres · Answer

Grant - My goal is maximizing cashflow. This is our only investment property, currently. I'm thinking that I could sell this property to purchase a better cashflowing property without having to put in any additional cash. I think a multifamily would be the next step. I'm not sure if I'm over extending myself or if this is a "grass is greener" situation.

Anthony Torres · Answer

Joe - We didn't live there long enough to do a section 121. We would do a 1031 if we were to sell. We would want to reinvest anyway.

Grant Rothenburger · Answer

@Anthony Torres

I agree with others on doing the 1031. But there is something to be said about a cash flowing property with equity. What are your own goals? Do you want to own a lot of SFR? If so, why sell this one? If you want to get into MF or commercial or something other than SFR's then this would be a good move.

Joe Trainor · Answer

You bought it as an owner occupied so I am assuming you lived in it for awhile and then rented it out?  How many years did you live in it before renting it out?  May be able to avoid capital gains taxes all together if you have the right timeline...

Basit Siddiqi · Answer

@Anthony TorresIt looks like you are eligible to take a good portion of the equity via HELOC/LOC.If you did a cash-out refinance - the max most likely you would be able to take out is $47,000 additional which is calculated as 80% of $265,000 minus $165,000 = $47,000Being able to take out $44,000 through a HELOC seems good.

Anthony Torres · Answer

LOL, Tim. Thanks! It isn't the house we currently live in. I'm thinking that the numbers work in the favor of selling it so that we can tie up a bigger investment. I'm wondering if there are any things I'm missing on my pros & cons list.

Tim Johnson · Answer

I don't look at my private house as an investment, I love where and I live and I would never leave.

If this was a buy and hold rental I would sell that thing in a second.  A mentor I had a couple years ago as said "never love anything that doesn't love you back."  I look at my deals in those eyes.

Best of luck

Should we sell? What would you do?

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