When do you sell? Cash flow vs. cashing out equity

Question

I'm generally a buy and hold investor, but a few of our properties have appreciated significantly over the years and have significant equity locked up. None of the 10+ banks I've contacted want to cash out refi unfortunately. Although the properties cash flow nicely, the gain from sales would likely represent 10-15 years of rental cash flow. I'd look to do 1031 exchanges, but prices are high right now across the board. What's the general consensus about selling vs. continuing to hold and taking consistent cash flow? I'll add that I have little to no deferred maintenance on them at this point.

Matt S. · Answer

Thanks for all of the responses! I'd love to pull equity out, but am having a hard time finding a bank that will allow me to refinance based on the FMV and not just the remaining balance owed. I should add that these are commercial loans to separate LLCs.

Michael Doherty · Answer

@Matt S. I would only sell if you have or plan to identify a better asset to go into. Could be for a number of reasons. If you want to scale up and get more units under 1 roof. If you like Mobil home parts/self storage more now... if you want something closer to home or want to change markets all together. As many others have said, it's a sellers market, albeit rates are very low.

I would not sell for the sake of selling. There are plenty of lenders who will do a cash out refinance. I am currently doing one now on my 5 unit building. Getting 75% LTV for 10 yr fixed 25 year amortization at 4.5%.

Benjamin Aaker · Answer

Hi @Matt S. The 1031 is great if you have found a great property to move into. On the other hand, you said you have a lot of equity. You could take out a line of credit on one or more properties and you'll be ready to purchase the next one when ready.

Heath Thomas Jr · Answer

@Matt S. why have the lenders said they will not do a cashout refi? From your post, it sounds like this is probably not the case, but are the property values under $70k? Or are the properties in LLCs?

Dave Foster · Answer

@Matt S., The best time to sell and start a 1031 is also the worst time to buy and finish a 1031 exchange - a sellers market.  It's just the poison pill of 1031 investing because the reverse is true as well. So the savvy 1031 investor doesn't just sell because their properties are worth a lot.  They sell to put themselves into a better position (which isn't just selling high and buying low).

Two of the biggest reasons to 1031 are

1. move from little to more cash flow

2. Escape from potential cap ex.

You've addressed both of these.  I like the comparison of years of net income vs sale.  That would indicate a 1031.  The low deferred maintenance would indicate a hold.

Some of the things indicated by @Henry Clark can also be important - like moving into a different sector or geography where growth is projected to be higher.

Tough call to make.  But isn't it nice to have this problem :)

Henry Clark · Answer

Go Steelers.

1.  1031 to Self Storage.

2.  Sell high, buy high         Sell low, buy low    This takes away your high market concerns.

3.  Check up 1031 and Reverse 1031.  Discuss with your tax accountant (you really need to).  Get all of your records in order.

4.  Cash flow to cash flow property, this address that concern.

5.  No more painting, soiled carpets, Saturday/Sunday/night calls.

6.  You can get rid of tenants in about 90 days, with no legal action.

7.  1031's are all about timing and documentation:

a.  Recommend you buy the self storage first.  This takes half of the worry and time control off the table.

b.  Now you can control the selling of the rental units.  Might take a little shave, but not much due to selling quickly.  Go for qualified buyers only with no selling restrictions.  You can't afford to back track on the deal and loose time.

c.  Since you know the $number on the Self Storage, you know the number of units you need to sell.  Versus selling and then buying to your 1031 numbers.

8.  Cash Out-  Get with a bank who does SBA loans.  Set up a construction loan, interest only.  SBA loans can take several months and this doesn't work with 1031 timeframes.  The local construction loan adds to your time frame.  Check with your accountant to make sure this meets 1031 requirements.  10% SBA collateral, take cash out when you trf from the local Construction loan to the SBA loan.

9.  Be prepared:  a.  Set up an LLC and find a 1031 company/executor., b.  Find a local/SBA banker.  Get all loan docs and agreements in place., c.  Call out to National Self Storage Realtors and tell them what your looking for.  State, $amount, managed, etc., d.  Prep properties for sale with Realtor and physically,

Now buy the Self storage.  Clock starts ticking.  Sell the units.

Only take offers from pre-qualified buyers and no restrictions on taking possession.  You don't have time for the buyer to go back and refi, or to be held at their mercy waiting on an inspection/etc.