Wondering if it's time to sell

[Leigh S.]

I have a sweet little BRRR with a cash flow of $300/mo. The neighborhood it's in has come up in value tremendously. I've got $42k in it with a mortgage of $38k. Current comps suggest that I could get about 85k if I sold it. Is now the time to sell?

[Jason Turgeon]

Well, if you sold it you'd end up with about $38k in your pocket after closing costs, commissions and 1031 exchange fees. Then you'd have 45 days to go find an exchange property.

If you put that $38k to work at 75% LTV, you could get yourself into a property worth ~$150k. If you can find something a little cheaper that needs rehab and you can either self fund the renovation or line up rehab funding, you could maybe force some appreciation.

Let's say you find a place that will offer you 15% cash on cash and you can force $20k of appreciation through some relatively modest upgrades. You will eventually have a property that brings you in ~$500 of cash flow and you'll have $20k more in equity. 

But to get that extra $200 a month and $20k in equity you will have to:

• ready the property for sale by fixing any little details and making it pretty inside and out, 
• potentially get rid of your tenants and lose out on some cashflow while it's for sale (depending on your target buyer), 
• get professional photographers in, 
• list it or otherwise market it and hope you actually get your $85k, 
• then go through the not-insignificant headaches of finding an exchange property that actually gets you the 15% cash on cash and $20k in forced appreciation, 
• close on that property and pay those costs, 
• either do renovation yourself or hire someone to do it, 
• get it listed for rent, and get new tenants in. 

It could easily be 6+ months before you get that first $500 in cash flow and find out if you actually succeeded in your quest to force the appreciation from the appraiser.

Is it worth it to you to do all that to get $200 more a month and maybe get $20k in appreciation?  Only you can answer that. 

Can you find a property that does better than $500 a month in cashflow and/or gets you more than $20k in appreciation? Possibly, but it's very hard to guarantee, especially in the tight timeframe of a 45-day exchange window.

If it were me, I'd wait for a while, but I might refinance to unlock some of that equity and help get another rental in the same price range (the 3rd and 4th Rs in BRRRR). Things that would trigger a sale on this property might be the loss of a stable long-term tenant, a major repair coming up that I didn't want to deal with, or a much bigger rise in appreciation that made it worth the headaches of doing an exchange. But if you are anxious to grow, you have enough equity to do a little bit better with some hard work.