Is it a good time to sell a Rental for Cash or Hold?

Question

About two years ago I decided I wanted to start investing in Real Estate with the hopes of acquiring several rental properties. I bought a house, lived in it for two years, moved out and started renting it. As you know, starting out in real estate my biggest barrier to acquiring more properties is capital. With the market being still being hot, even with the COVID situation, I am considering selling this house to pull out the $20k in equity I have added in order to have enough capital to purchase more properties down the road.

I am basically wondering if it is worth trying to take advantage of selling while the market is hot, and assuming the market will be more buyer friendly in the coming months with the impact of COVID taking a further toll. Even though selling a rental property seems to go against my long term goal of aquiring more rental properties. Any advise is appreciated as I am new to this and just getting started!

Thanks

Dave Foster · Answer

@Clayton Pearce, Selling high and buying low isn't a common primary 1031 strategy.  It's a great strategy - don't get me wrong.  But it usually doesn't work with the 1031 as a primary strategy.  There are other strategies that work better (but still use the sell high buy low as a component). The reason is that the best time to sell and start a 1031 is in an up market.  The worst time to finish a 1031 is...in an up market.  The converse is also true The worst time to sell is the best time to buy.

This principle changes is you're using the 1031 to find "holes" in the market or areas of inefficiency where you can sell in a highly appreciated market and buy in a more depressed market.  Then you are actually able to sell high and buy low - but the mechanism is to find the market that works.

The same principle is used with 1031s to change classes of asset.  Selling single family when it's hot and buying depressed multi family (remember the old days).  Or selling commercial or multi family at it's peak and going back into SF to anticipate a ramp up.

Your other strategy of selling one door and using the equity to purchase multiple properties is a great way to extend your capital since you can spread the proceeds as down payments on multiple properties.

So all of these work and that's why buy and hold investors still sell.  It's a mindset and philosophy rather than a set it and forget never sell kind of thing - more strategic.

But.... here's what's really interesting to ponder (and you have kind of hit on it already.  You just need to flesh it out more).  Selling right now (or for our clients who have already sold and are in the middle of an exchange) could indeed present the opportunity to sell at the top and buy lower.  No one knows for sure what recovery will look like - is it v shaped or U shaped z shaped.  Are we in Zombieland or is this more like I am legend?  But if the IRS does give some healthy extensions to the 1031 timelines then those people just now entering into exchanges will have a unique opportunity to get an extended look at the market evolution while keeping their tax deferral intact.

interesting times indeed.

Tyler Jahnke · Answer

Hey @Clayton Pearce - with you saying your hope is to "acquire several rental properties" I'm going to assume your strategy is to buy and hold for cash flow.

With that being said, let's not worry about timing the market yet. First, you need to figure out if selling your current rental and buy 1-2 additional properties will provide you with more cash flow and the same (or better ROI). Not sure where you are in deciding to sell or not, but my point is to start with the analysis first.

If you CAN'T find more cash flow and better ROI out there right now, then there's no reason for selling right now (unless you need some cash). And your decision is made.

As someone mentioned earlier, I'd recommend looking into a HELOC as well. Using that with some cash (if needed) can get you that 2nd and 3rd property as well without selling your 1st.

-Tyler

Michael King · Answer

It sounds like trying to time the stock market, or any market for that matter. If the property you have is not flowing cash, then it's obvious to let it go. And you already know the up and downsides of the one you have. All of my properties have reasons that would justify me selling them; but then they all cash flow and that means I am keeping them. Plus, I'm tired of closing costs at the sale of real estate. Only you can know if it's worth keeping.

A bird in the hand is worth 2 in the bush. Unless the one in your hand is trying to peck your eye out.

Clayton Pearce · Answer

@Alyssa Dyer The properties I'm looking at are $150-200k, 2-3 bedroom, in the Kansas City south suburbs. So 5% down being $7.5 to $10k. On my first purchase I was able to get $4k in lender credit/seller concessions, so I was able to pay about $5k out of pocket for down payment and closing costs combined. A 5% down payment will take most of my current cash reserves... so I'll need to get creative on the financing. I'm in the middle of reading The book on Rental Property Investing and hoping to use some of the creative ideas in it.

Brian Holshouser · Answer

@Clayton Pearce I’m in line with what Johnathon said. My wife and I wanted to get our portfolio started sometime this spring but the current economic situation has urged us to pump the breaks at this point and review our goals. It also makes us want to have a heavy cash reserve for times like these.

With that said real estate is not for everyone. It’s not exactly call walk every time and some people are not going to stomach the stressful parts well. You may be one of those of people. Or it may just be you’ve seen your risk tolerance stretched in the wrong direction and you need to make sure you’re making different deals in the future.

Either way, wish you the best of luck!

Alyssa Dyer · Answer

@Jeff Fox's advice is perfect. Great contribution.

Nick Giulioni · Answer

You absolutely nailed it here. Great analysis!

Jeff Fox · Answer

Clayton,

I don't know all of your details but a few things to consider that I haven't seen mentioned (lessons that I learned the hard way)

- You will most likely pay realtor fees of ~6% on your sale ($175,000 * .06 = $10,500)

- You will most likely have some "sale ready" repairs, cleaning, maintenance, etc..

-Trying to sell with a tenant in place can be difficult so if you remove the tenant to sell you will also have mortgage payments, utilities, etc. during the sale process

- If the buyer comes back to you with negotiations after the inspection or appraisal, you may need some wiggle room.

Basically, what I am getting at here is that it sounds like you have about $25k equity in the property (if I followed your details correctly) and that is a pretty thin amount to work with when attempting to sell.  Not trying to discourage you at all, just reminding you to consider those expenses.  If you only end up with a few thousand in your pocket, it may not be enough to work with to get into more properties.  I learned quickly how much of my "paper equity" is lost each time I sell a property.  At least you may be able to avoid taxes since you recently had this as your primary residence (double check this with your tax professional).

Good luck with which ever decision you go with.

Mike D'Arrigo · Answer

@Clayton Pearce I don't know what market you're in but there might not be any reason to think it will be more a buyers market in the coming months due to COVID 19. In Indianapolis and Kansas City where we are active, it is still a sellers market. I'm predicting that there is not going to be any major reduction prices in most markets, There is a huge shortage of inventory in many markets. Prices drop when there is an over supply of inventory. I don't see an over supply in many markets. I think what will happen if anything is that the real estate market might pause. It's not as though there will be a lot of homes on the market with few buyers. If anything, I think buying activity will remain strong and fewer properties will go on the market. Sellers don't want to put their homes on the market and have people coming through them right now.

Is it a good time to sell a Rental for Cash or Hold?

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