Newbie - Hold or Sell

[Rick Raleigh]

Hello, My name is Ricky and I'm brand new to BP and to real estate and wanted to get some opinions from others who have done this before. I'm trying to determine when it makes since to sell vs continue to hold a rental property. We have a sfh we bought in 2011 for $43 k, we put about $7k into it and it rents for $1125 and cash flows about $700. The home is now worth at least $100k. I like having the monthly income but at some point I feel like I should sell it to move on to bigger and better. Is there a rule of thumb to sell after a certain amount of appreciation? Thanks!

[Jeremy D.]

Here's my opinion-

Let's assume your goal is buy and hold investments. Let's then assume that your net after closing costs, realtor, etc. if you sell is $100k, and assume you bought the house with a mortgage and currently owe $40k. That equates to $60k in equity. You stated that your monthly cash flow is $700, so your annual ROE is 14%.

If your goal is to get a good ROE and just make some extra money from RE, then $700/mo and 14% ROE is not too bad.

If your goal is to make more and grow, then you should investigate what types of investments are out there.

I know that in Western MI (I'm sure it's similar in your area) you can buy properties that are pretty close to the 2%/50% rule. With some research you can find duplexes in decent areas for about $70k that rent for roughly $1400/mo total. Let's say you sold your property and used the $60k to buy 3 of these properties- using the $60k for (3) $20k down payments, and financed the balances via mortgage.

Each of these 3 properties would cash flow approximately $400/mo ($1400 in rent - $700 in operating expenses - $300 debt service assuming a 5% interest , 30 year fixed mortgage). That means that your $60k investment now creates $1,200/mo in cash flow. Your cash on cash return just increased from 14% to 24% per year, not including the amount that you pay towards principal each month or any potential appreciation on the properties.

So to answer your question it depends on your goals and what other investments you can find. If I were in your situation and in my region of MI, I'd sell and use the proceeds to buy 3 more properties. Or if you really want to keep the property but also want to grow, you could investigate doing a cash out refi and using the proceeds as down payments on more properties.