Should I Sell or Should I Hold?

[Matt J.]

Hey BP. Have a house we're just about finished rehabbing up Duluth way. I'm all in for around $195,000. ARV back in March when I bought it was around $245,000 but the market's appreciated a ton since then and there's some comps nearby that support as high as $275,000. Keep in mind the appraisal was done on the house prior to it being fixed up and based on the scope of work my contractor had put together.

So, if I were able to sell it for $275,000, after paying realtor fees, capital gains, and the mortgage I have on it (construction loan of $192,000), I'd clear around $50,000. '

Keeping it as a long-term rental, I would be cash flowing around $425/month. At that rate, it would take me a little under 10 years to end up earning $50,000 in profits from cashflow. 

Now, I realize the other benefits of buy and hold including debt pay down, equity buildup, tax depreciation, all that jazz. I prefer to go buy-and-hold and have never done a flip. 

But that do you all think? How do you decide whether it makes sense to keep it long term or sell it for a quick-ish profit? 

[Michael Schraepfer]

Matt I love this question!!!  

It's always good to be objective - and I think this is one of the differences between good and great at this game.  There are some good answers here, but many are anecdotal. I struggled with this question for a long time - searching for a better than anecdotal answer.  I.E. what you set out to do when you bought it x amount of months ago is irrelevant to what "is" today - and being aware and objective is smart.

An investor can do well either way, sure - but there is a right answer here. This is money and time which equates to math, so there must be a right answer...

Here is what I landed on: The issue is that all investors should have an IRR standard that they earn on their equity. For example, I started out wanting at least 20% annually, that was my IRR standard. As I achieved it and more I pushed my standard up. Whatever your IRR goal is, the point is with this clarity the decision is easy, but with out the benchmark no answer feels right. So, the question really is - what has your past annual IRR performance been? What is the IRR as a buy and hold in this deal? Does it meet your standard? If the IRR is not good enough, flip it or refinance and lever it up.
Actually - this analysis should be done on all properties and investor holds every year. This guides me to when the time is right and I should refi and re-lever up the swelling equity in properties I hold. I've learned over time, between appreciation and pay down most of my holds are below 50% LTV at 6-7 years and my IRR drops below my standard.

So - long story short. I'd create an IRR goal, and then calculate the IRR factoring in your cashflow, principal pay down, and nominal appreciation and make a decision based on that info.

Final note - I've learned at a handful of lenders up here if you hold the property over 1 year, they have no problem doing a cash out refi and levering a project gone well up to the new 80% LTV. So, you might be able to tap half that equity and get your IRR back up above your mark as a buy and hold.

Haha - I feel like this was a complicated answer!  I hope it makes sense - maybe I talked myself in circles!

Cheers!