Should I cash-out or continue to hold?

Question

I am an amateur when it comes to real estate investing. However, in 2012 I made a homerun deal that if managed properly it can get me to my new realized dream of becoming an actual investor. Here's the deal:

I bought a single family 1900 sqft, 3 bdrm, ranch-style house with an attached mother-in-law suite. I converted the property into a 2-family 5 bdrm (2 & 3) which I house hacked for 3 years. The purchase price was $77,500; I put 3.5% down; did a 203k loan which got me $30,000 from the bank for the rehab and put $10,000 out-of-pocket for the balance. All together i was $12,700 out-of-pocket and had a mortgage of about $108,000.

In 2015 the house appraised at $185,000 and I eventually refinanced for $130,000; I got my original investment out of the deal and use the remainder along with a VA loan to buy my primary residence. This property now cash-flows close to $1,000/mo. which is helping me pay down both my mortgages.

The property value is now $285,000 and I owe about $118,000 on my mortgage. Would it be smarter to sell the property, cash-out big and use the capital to invest in other properties? Or does it make more sense to refinance again and have less capital to invest?

My concern is that a refi would drop my cash-flow/equity and I'm not sure if the current market is the best time to invest.

Dennis Soto · Answer

@Jaron Walling I appreciate your response and insight. The problem I am having is that I'm not sure how to "determine the point of equity or upside when SELLING makes more sense". Is there a formula for that? Do you know where I may be able to find information that will help me make that determination?

Dennis Soto · Answer

@JD Martin Thank you for your response. My plan is to invest the money in other properties. Although I don't have one lined-up yet, the idea is to have the money at my disposal when the opportunity presents itself.

Jaron Walling · Answer

@Dennis Soto Well done sir, well done. As an amateur investor you utilized some high level tactics . The ReFi would drop your cash-flow and equity no doubt but who cares? Money trapped in a property is just dead equity. When the velocity of money slows down, so does the return you make. You need to determine the point of equity or upside when SELLING makes more sense. Just because it cash-flows $1K per month doesn't mean you SHOULD hold.

All of the high level buy and hold investors I've met run the numbers, look at the overall market conditions, and sell when the upside is big. Why wait years to collect rent, fix damage to rentals, and deal with unpredictable tenants when you can have all the cookies today. Reinvest the money into the next DEAL, repeat until you die, and give the properties to the children tax free because America is amazing. Cheers!

JD Martin · Answer

Well,

1. Money is really cheap right now. You are unlikely to see mortgage rates this low in your lifetime again. My first mortgage was over 8% and that was considered a low rate.

2. If you don't have any real plans whatsoever for the money, then you can consider that it's making a more-or-less nominal 3% or so (the cost of borrowing money today), which is better from a return standpoint than sitting in the bank doing nothing but also locks up a lot of liquidity, which is also an important part of any asset.

Should I cash-out or continue to hold?

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