250K of Equity - To Sell Or Not To Sell?

Question

Hello all!

Last Saturday marked the 1 year anniversary of the purchase of my first investment property. Definitely a lot of ups and downs but I'm glad I went through with it. With renovations and market appreciation, I'm now looking at $250K of equity in the property. I close on a HELOC next week and my plan was to use that money to invest in more rentals in the area. But I recently came across a listing that was sold at the end of 2019 and is now back on the market for nearly 3x the purchase price. It made me think if selling my property and using that money to invest elsewhere (in or out of state) would be a better idea? Or maybe  trading up with a 1031 exchange? Would it be beneficial to sell for any reason?

The way I look at it, keeping a cash flowing rental and still being able to use the equity with a HELOC seems like the ideal situation. But I'm curious if others have a different  perspective. And if you were in my shoes and my age (mid-20s) what would you do, knowing what you know now?

I'm sure there are a lot of different factors but any insight is appreciated. I'm still new to real estate and always looking to learn. Hoping this can strike up great dialogue.

Thanks!

Dave Foster · Answer

@Tristan Toliver, The key metric will be a comparison of the property as performing now vs it's performance after heloc is tapped.  If it's still worth keeping after increasing debt then hang on to it.  But if putting debt on it reduces it's performance too much it's a better deal to sell and 1031.

The only joker in that line of thought is that it may be worth hanging on to a low performing property if the potential appreciation is there.  Otherwise there's no real reason to hang on to an under performer just because it has debt capacity.

Alex Olson · Answer

We call this trapped equity. You can't do anything with it but you can sell it and invest in a cash flowing market in the midwest or the market I am partial to, KC. You can turn $1mm into $4mm pretty easily and it cash flows well to make a good income. Hope that helps

Noah Chappell · Answer

@Tristan Toliver congrats! Sounds like your Baltimore property is a money factor, based upon its rate of appreciation. If it were me, I'd cash out refi to where it was cash flowing enough to break even with reserve for repairs/ maintenance, then take that equity to a higher cash flow market, or sub market within the same city. I definitely think it'd be a mistake to get rid of this asset right now. As said above if you 1031 you're forced to identify your new purchase in 45d, and give how hot things are there's a slim change you'd find something worth the money, so you could buy a sub par asset, or be stuck holding the money and eat the capital gains - could be a mess.

Tristan Toliver · Answer

That's a great and simple way to look at it, Michael. I'm all for simplifying the way I make decisions and processes so thanks for that!

Ozzy Sirimsi · Answer

It seems like RE market is crazy everywhere. I read posts about 50K-70K over asking many other places.

Selling to buy another RE might not be the greatest idea right now.

I personally dont like selling houses that cash flow well unless I have a solid plan on what I am doing next. Not an idea, but action plan.Otherwise, It is better to use heloc, and wait for a nice cash deal and repeat.

Michael Plante · Answer

When a property appreciates I ask myself would I buy the place at that price for what I get in rent

if not I would sell it and use the money for something which performs better for my goals

Ivy Infore · Answer

As both a RE Broker and Investor I can give you some insight into both sides of the equation. You need to consider that this is the strongest seller's market in more than 10 years for a multitude of reasons primarily due to extremely low inventory and low-interest rates which are rapidly increasing. So while you could do very well by selling you will be hard-pressed to get any deals on the buy-side.

Since I don't know how you are calculating your "equity" I can only advise that you take a deep dive into the upgrades for comparables within no more than 1 mile (preferably .5 mile) of your property.  Look at the listings both the pix and write up to determine if you are competitive and if you are not, what will it cost to be competitive.

Today's buyer wants move-in ready with all the bells and whistles.  On the other side of the equation, the investor/sellers. especially in hot neighborhoods are listing properties that are inferior to the finished properties at prices that are simply unrealistic.  They sit on the market and eventually lower their price. Properties with even 1 price reduction sit on the market on average 3 times longer than one without a reduction with many withdrawing completely after 60 days.

I know this isn't a definitive answer but hopefully, it will help guide your decision.

As an FYI I always have a home inspection done prior to doing renovations and an appraisal before listing. You may want to consider an appraisal to help in your decision-making.

Tristan Toliver · Answer

Thanks, @Dave Foster. That's great insight! The HELOC does not do much for eating at the cash flow and the area is appreciating. So I think long-term it will be a good move to hold on to it. I agree with your line of thinking and appreciate the feedback!

Tristan Toliver · Answer

Thanks Steve! I appreciate that.

Sounds like we have similar viewpoints on this topic too. Based on your feedback, I think holding on to the property would be my best move unless I am able to roll that money into a better deal. Definitely want to make sure I can keep the momentum going so I'm trying to treat the next move as carefully as the first so I really appreciate the insight. Thanks again!

Steve Vaughan · Answer

Good problem to have so young. Congrats!

This answer will be asset and area-specific.  I have one I'm keeping but has enormous equity.  It is in a growing area and earning it's keep with an ROE of over 7%.  To replace it would cost too much and be too much effort.

I have another one in a rural town that caught the growth bug.  I was floored at its value and the equity is not earning it's keep. Rents cant keep up and probably never will.  I also don't see the area and market having much leg left.  I am exchanging it now to a similar asset type closer in.  A cash-out refi or LOC may be an option if those key factors were different.

When it's time to fold 'em, the decision is usually as obvious as it was for me.  If this asset is in the path of progress and in your backyard, earning at least a 7% ROE, I'd hold.  Too much cost and effort to make a move.

250K of Equity - To Sell Or Not To Sell?

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