When to sell a buy and hold portfolio ?

[Luke Grogan]

When is the best time to sell as a buy and hold investor? As I write that, it doesn’t sound like I am a buy and hold investor, but I’m definitely not a flipper and I’m in this for the cash flow.

I buy SFR, usually with cash, fix them a little, and hold them for cash flow. I started in 2013, so I'm only 6-ish years into this. The interesting element is that appreciation has been brisk and that raises some questions, like do I shift my portfolio to a lower price area and get more properties, do nothing and keep collecting cash, or sell a couple and redeploy into higher yield properties and/or lower tax/insurance areas.

A little about my portfolio:

* One home is out of state and was my primary residence. It has a 1st & 2nd loan - VA loan with an adjustable rate currently at 3.5% and a second at 5%. I have had this home 15 years and have roughly $110-120k in equity. Cash flow is $350/ after PITI.

* Five homes were purchased for $70k or less, 3 yrs later put a blanket mortgage on them for 40% of the value, which helped me recoup roughly 70% of the cumulative purchase price. Average rent for these homes is $1150. Average value is $142k as is. Maybe in the $165k range with a $10k facelift.

* Two homes bought for $110k each. One rents for $1200 the other for $1400. I've got an adjustable HELOC on each that allows me to get up to $200k out, so that usually works to my benefit. Value is probably $360-375k together.

* Two other homes in older areas bought for $70k and $80k and rent for $840 and $1000. Could bring up the rent on the $840 but was renting to a multi year tenant for $750 and raised to $840. I’d rather keep it rented since they are low maintenance and raise it 3-4% per year going forward.

So the question is what would you do? Sell everything and buy more of what my last two look like? Cheaper homes with good cash flow but will not appreciate as quickly because they’ve already bounced from the $40k ish range from a few years ago. If I sold everything (except the last two listed) and paid the mortgages, I’d net around $900k-950k depending on some factors. I’d assume $1.07M if I sold all of them. With this, I could move inland away from the coast where both taxes and insurance are climbing higher than other areas (but appreciation should also be better on the coast). But, assuming 3% appreciation, this adds roughly $41-50k in yr one and averages $58k/yr in appreciation over 10 years (assuming a consistent 3% appreciation, which they have appreciated much faster than that).

One interesting thing about appreciation as a buy and hold investor is that it doesn’t do much for me. It might be good for my kids and it will help when it comes time to refi, but I found commercial mortgages on single family homes are difficult and most banks would not do 8-10 individual loans. This leads me to think multifamily might be one of the better options, but I have no experience there and do not want to self-manage a sub-40 unit complex (I currently self manage). I also don’t expect 3% appreciation going forward if I were to buy at these prices, unless I take a much longer term view.

I generally take between $5-5500/month as disbursements and collect just under $11,500 in rent. Based on the total value of the portfolio, I'm taking around 3.5% as a return on the unleveraged total value and 16.5% after expenses on the leveraged value. $60k per year is about 9.5% return on original capital invested. So I am taking 43% of the monthly rent for myself and the remainder covers PITI, short term expenses and long term capex.

In honesty, I’ve semi retired off the $5k per month and my savings and I’m not dying to go hustle again, but I can. So this means if I did sell everything, I’d start eating into the cash until I pick up my income, which would take 2-3 months. Assuming that I did jump back in and get back to work within a few months, I could stop drawing on the cash, but I’d expect to take at least $45k and seek to reinvest the rest.

So, what do you think you would do in this market? Sell because most investors are not selling and wait until I can buy when most investors are not, or cannot buy? Sell off and use good financing to find something that produces an unleveraged return in the 5-6% range, of which I could bump to 10-11% by putting 50% +/- leverage in place, hopefully at sub 5.5% rates.

Or I can just sit tight and continue to collect rent and raise rents 3-4% per year. I have two that need to be raised around 20%, but I hesitate because it puts people out of the houses, costs money to get them rent ready, and then takes 2 months to get renters. But that is some low hanging fruit that I’ll need to address to get highest and best usage out of them.

A final thought would be to lease to own with an option deposit and sell them at full market or a touch higher and seek to help the tenants buy the houses in three years. The properties have three years left until I either refinance or sell, so that could line up with my financing.

Given the numbers and your take on the market, would you sell and immediately reinvest into lower tax/insurance areas, sell and go into MF, sell and wait until the next pullback, or just continue down the original buy and hold, raise rents every year, keep using moderate (sub 60%) leverage?

[Dave Foster]

@Luke Grogan, Portfolio wide it looks like you're making a real 7% ROE.  Add in depreciation benefit, principle pay down by the tenants and if appreciation is giving you anything at all, and you're doing quite well as @Brant Richardson says.  

So if you're semi retired then I'd suggest a semi passive more surgical approach from the following menu (believe me if I could mix any more metaphors here I would) . or mix n match.  But I don't think wholesale change is needed until you're ready to turn the "semi" into "fully".

1. Consolidate using a 1031 into fewer properties that have better cash flow and offer less maintenance headache.

2. Comb the portfolio for the properties with the highest equity and lowest profit/depreciation recap.  Sell those and pay a little tax using the proceeds to pay off your better performing properties.

3. Sell only your lowest performers and 1031 into better properties.