Short-Sighted or Prudent? Is it time to sell?

Question

Hi Friends,

Here's the sitch. I have a duplex in a prime location in San Diego. I run both units as an STR and make good cash flow (~$30k annually) but it is fairly labor intensive. I purchased the home for $720k w/ 20% down. I got the down payment from the proceeds from a successful live-in flip. The property has appreciated significantly due to sweat equity and standard growth in the neighborhood.

My master plan was to continue working my 9 to 5 and saving money for the next deal and continue to build my portfolio. I aimed to be financially free in 2 years and be able to focus solely on investment properties. Unfortunately, around 6 months ago I lost my good paying W2 job and have not yet replaced that income. My family and I have moved to a much more affordable area and we are just getting by for now. I've spent my severance and most of my savings at this point and I'm looking to right the ship. We are using the income from the rental to support our living expenses but some months we still need to put some expenses on credit cards which stresses me out. As the summer approaches, I know our income will increase and we'll pay off the cards and be fine but that doesn't get me closer to the goal of financial independence.

The good news is we have options.

1. We could sell. With approximately $400k equity, after closing costs and cap gains we'd probably walk with ~$300k. From there I would take $120k to start building my out-of-state BRRR empire. The remainder could be cash reserves and a new nest egg.

2. We could keep running it as STR. The returns are awesome, the appreciation has been great, and I anticipate that if I can hold on for at least a few more years I will be in a great position. I've learned a ton on this journey. The downside is it's been tough to find a lender that will recognize Airbnb earnings towards dti and now that I don't have W2 earnings it presents an additional challenge to pull money out. Also, as mentioned above, it is fairly labor-intensive.

3. We could rent it out long term. This would be much less labor once the tenants are placed but I cut my cash flow in half or more by going this route. The benefit is I've talked to many lenders that will recognize the rental income from a long term rental and they will give me 75% of that income towards DTI which would allow to pull out some cash. The other negative with a long term renter is I lose the flexibility that short term renting offers.

Currently, I'm in the process of obtaining my real estate license which I should have by this summer. My goal is to build $15k monthly passive income through real estate investments. I love real estate and to be honest, I'm a little attached to this property. If I sell it would be awesome to have that lump sum of cash, which I could really use right now and reinvest the proceeds. If I hold it I can easily see the property doubling (or more) in the long term.

Is it prudent to take my chips off the table and reinvest somewhere else? It's going to take so much hard work just to get back to $3k+ monthly income but I am down for the ride. Also, I love the idea of being able to use the same cash over and over again (BRRRR) to build the portfolio. Or am I being short-sighted by letting go of an income-generating asset in an awesome location?

What would you do if you were in my situation? Are there any other options besides the 3 above? Happy to provide any additional info you may need and I'm looking forward to your feedback.

Cheers,

DW

Donald E Appleberry · Answer

@David West

Also man, you might want to look at just cash out refinancing right now. Rates a STUPID low and that sounds like it might be a good compromise of both options. I have a guy if you’d like his info.

Tom Kastorff · Answer

I'm not a golfer, so likely not me. I will DM you, would still be interested in grabbing lunch late next week (out of town Mon-Wed for work) if you want to spitball ideas and contacts. I will DM you @Chris Mason's info or you can check his highly-detailed profile for his website and direct contact info. He is hyper efficient with running you through his calculator of numbers and scenarios.

Kenneth Donaghy · Answer

@David West

- I'm not a lender, CPA or a lawyer, but it is my understanding that if you don't use all the taxable equity in a 1031, you will have to pay taxes on all the taxable gains not in the exchange.

- Its also my understanding, when working with the right lender and appraiser they can include the income of the property for the refi appraisal. boosting what you may be able to pull out on a cash out refi

-  I am familiar with STR property management companies that will guarantee to increase your net while earning their split. helping reduce your personal labor.

-  Another option you haven't mention... I looked up your property, and it could be developer friendly. There are some good projects happening in the area. You could also partner with a developer, to increase your unit count, and increase equity and cash flow. Not all developers are willing to partner. I know some that will.

- Property will greatly increase as well with pre-approved plans for such a development.

- I use to live in that little pocket of OB and my close friend still does, so I have my eye on that neighborhood.

- Combining more than one of these options could also be a good possibility.

- if you need referrals for lenders, developers, buyers reach out. You have options.

David West · Answer

@Theresa Harris I was looking for a similar job, but I really think it's time to go all-in on real estate. The thought of going back to work just for the security of the paycheck sounds like torture to me! The idea of full time investing excites me! I am getting my real estate license now and I plan to amass cheaper rentals using the BRRRR strategy. Selling homes will supplement the rental income until I can live comfortably off of the investments.

Theresa Harris · Answer

Are you looking for a similar job to what you had?  Being unemployed for 6 months is tough.  If you are unlikely to get another job soon and you know you will still be short in the summer, I would think about selling.  You can't keep running a deficit-not for the rentals, but for your life.  STR do give a higher return but are a lot more work.  How likely are you to be able to use the equity to get you going on another rental?  You could also look to less expensive areas where the $300K would allow you to be multiple homes as long term rentals.

Matthew Irish-Jones · Answer

@David West if you sell you should 1031 Exchange for tax purposes.  I don't believe there is a crystal clear answer.  Usually the highest producing assets come with either the most risk, or the most work.  You will leave some money on the table when you invest out of state but, you get your time back.  There are some variables in the equation that are personal to you, especially if you are in a position where your return is labor intensive.

David West · Answer

@Mike Dymski there have definitely been some “scared crapless” moments! On the bright side we have some options and we’ve managed to live comfortably below our means. I’m confident that I can get back in the workforce with a decent job, but I’ve been building this real estate business in my mind for a long time. I’m seeing this as a temporary downturn and a strong sign that I can’t afford to not be prepared for hard times. Hopefully I’ll look back on this one day as the time I got shocked into action.

Mike Dymski · Answer

Thanks for sharing your story and your candor.  Nice work on the rental...it's a huge benefit in this situation.

Many of us would be scared crapless in this situation...out of work for 6 months, severance and savings gone, living on a variable $30k, and family to support.  Starting a real estate business would be the last thing on my mind.  I'd want security and a financial foundation first.

David West · Answer

@Kenneth Donaghy Solid advice brother. Thank you!

David West · Answer

@TJ Watson Sorry about that. Shoot me a message and we can connect next week. Thursday or Friday would work.

Short-Sighted or Prudent? Is it time to sell?

Most Popular Reply