Hold or sell single family property?

Question

Hey guys, I'm looking for some advice. I'm not quite a newbie to the game because I've been renting out a single family property for almost 7 years now, however I'd still call myself a novice since I've never really focused on buying anything else. I only own this 1 property and now I am interested in starting to build a bigger portfolio. I'm trying to weigh the pros and cons of selling this property that basically breaks even month to month. The catch is that it's in a highly appreciating market. The home has appreciated over 60% in the almost 10 years I've owned it. A recent cash out refi has given me enough to buy 2-3 more SF homes that generate a decent amount of cash flow and keep the original property.  Or I could also sell this other property and have enough to either start a pretty good 5-6 SF portfolio with good cash flow or possibly even a couple multi-family units. If we remove the downside of capital gains tax, which I'd get around with a 1031, what are the main considerations I should be looking at in this scenario? Any help for a newbie is greatly appreciated!

Lee Fuhr · Answer

It's all about ROI for me.  If I was putting my money in the stock market, on average, I'd be earning 6-10% over the long haul.  But if I control the money by putting it into cash flowing properties, I earn several times that over the course of 30 years.  Plus, being highly leveraged on properties is a good thing if you can borrow back at 3-5% and use that money to fund projects that would otherwise cost 10-12% interest with a private lender.  If the property you've owned for a long time is giving you equity that you can use to invest in other properties, and the area is appreciating, I say hang onto it, keep it highly leveraged, and use that money to invest in other projects.  Once the mortgage is paid down to a level at which I can draw a HELOC off the equity, I can continue to use the equity in the property to purchase more and more properties, refi them, wash, rinse, repeat.  Just keep using the same money to grow your portfolio.  As long as each property either cash flows and/or breaks even (but only if it the market around it is rising, giving you an equity bump), then it's cheaper to hold properties you already own than sell and move the money around.  Plus, you extend the life of your capital gains tax and all the closing costs of buying and selling.  But if you're running the numbers and that property isn't earning you either equity or cash flow, get out from under it and move on.

Aaron K. · Answer

Why is the property only breaking even if you've owned it for 7 years and you are in a high appreciation area?  It should be doing considerably better than that, especially if you have enough equity in it to fund down payments for 3-4 other properties.

Michael Castania · Answer

Aaron, the property breaks even because I purchased it originally to live in, not as an investment property. It certainly would not be a property someone would buy for the sole purpose of investing. The mortgage payment is too high compared to the typical rent values in the area. After a few years I had the option of refinancing to either lower the payment significantly or get some cash out to continue investing. I chose the latter, since my main goal is to get more properties.

Lee, that's great advice. The HELOC is a great option at this point in time and I will certainly consider it. Thanks!