Knowing when to sell and when to hold?

Question

I have both sides of a twin that I have owned for about 3 years now. They are rough to say the least. In a rough area, in rough condition, low income tenants that don't take good care of the property.

All in all it's been a pretty good run with them. They cash flow nicely (when the tenants pay on time). I got a great deal on them. My mortgage is low, the maintenance has been much more manageable than I expected, and in my 3 years of ownership they have appreciated considerably even with all the negative factors.

I had the boro go through them recently and they are in really bad shape. I know I am going to be facing a lot of large expenses. I know the way the market sits I can unload them as-is and make a nice profit on them. But do I want to sell off 2 homes? I have always heard the saying never sell an asset when building wealth. And what am I to do with the proceeds? I could never buy homes now for the price I paid for these.

Should I grind through and try to maintain/fix these places up? Or sell off my class D assets to try and upgrade to better properties?

Joe Villeneuve · Answer

Why is Kenny Rodgers singing in my head as I'm writing this?

It's all about math here, and since you have provided no number$ the answer you're looking for is impossible to give.  However, keep this in mind, the longer you hold a property, and the larger the percentage of equity grows in that property, the more money you are losing because that equity is buying less and less in property value per dollar of equity.  Also, all the equity that is dying more and more as it grows, could (should) be buying more than just the 2 properties...which will actually be increasing your cash flow too.

Vincent Plant · Answer

I purchased each for $62K. I currently owe $46k on each. My mortgage is just under $600 on each monthly and I am getting $1,350 and 1,150 on each side.

Vincent Plant · Answer

Yes I own several other properties and I manage them all myself.

These 2 properties would probably sell for about $120K each as is. This would leave me with about $130K in total net proceeds after all is said and done.

They are in a rough area so repairing them would not give me too much of an increase in rent.

I am interested in the question of equity however. I have always just chased cashflow. I dream of the day of owning all my properties outright and netting even more cashflow, rather than borrowing against the equity or increasing my debt with a cashout refi. Isn't having free and clear assets the whole point? Or am I totally wrong with that mindset.

Vincent Plant · Answer

@Christina Bailey

I sold them!

I listed them and got them under contract for $2k above asking immediately, all no cash, no contingencies.

I did a 1031 exchange and was able to find a much much nicer single family townhome in a different area that I rolled the funds into.

I sold them both for $115k each, clearing about $100k to use in my exchange. I just put it all toward the new purchase which was $175k. So I decreased my debt by about $40k.

Only downside is all the money is tied up in that one house, my interest rate is much higher, and of course the tenant I put in there is not turning out so great.

I’m happy I did it though, those houses were a ticking time bomb that I did not want to deal with.

Christina Bailey · Answer

@Vincent Plant What did you end up doing? I'm currently in nearly the same boat. Our numbers are very close to yours. How did it end up working out?

I'm trying not to get worn down by investing in this area.

Caleb Brown · Answer

With them being in a rough area I would 1031 into something else. They do cashflow nicely so you could always cash out refi or pull a HELOC. There's more inventory so you should be able to identify other properties. Just run #'s with both scenarios(1031 into something else or cash out refi/HELOC).

Billy Daniel · Answer

Thats pretty decent cash flow!

It really comes down to your goals.  I agree with @Joe Villeneuve that they are building a lot of equity that is not being utilized.  Equity is awesome only if its properly utilized.  Otherwise its useless.  Is there a way to complete repairs to raise rents further and also take a second loan to buy another property?  It doesn't need to be an either or when you could do both!

It's a good problem to have and there are several different options.  Personally, I would make repairs to raise rents.  After that was done and rents were raised, I would do a cash out refi or take a 2nd mortgage against them and buy something else in a B or C area.

Knowing when to sell and when to hold?

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