should I sell a property to pull out $500K and invest it elsewhere?

Question

I have an investment property that I bought as my primary home awhile back in Bend, OR. I have $180K on the mortgage and since I bought pre-pandemic, the property has accrued a good amount of equity (I could likely sell for $700K-$750K), leaving me with about $500K in cash.

I'm considering selling the property to invest in an out of state market as the COCR isn't great (I net about $1,700/month in cash flow). My thought is that I could reinvest this money into a few other rentals in better markets to gain better cash flow.

One kicker of the equation is that I have the loan on the property at 3.1% and since 2018, inflation has been much greater than the loan interest, making me hesitant to give up such a good rate.

My goal is increasing cash flow with my investment properties so that I can turn this into a full-time gig. I'm open to suggestions and thoughts. TIA!

Nicholas L. · Answer

@Kolby Knickerbocker

i don't know if you should sell your house or not.  but, what i do know is that that easy OOS cash flow isn't so easy right now, for several reasons.  here are just a few:

-interest rates and prices both remain high. this has really hurt cash flow across the board.

-there is tremendous demand for inventory among both primary buyers and investors.  so, good inventory gets snapped up by locals before OOS investors even get a look at it.

-OOS investors in HCOL areas will buy properties that look good on paper without doing enough due diligence and then get crushed by capex and deferred maintenance.

-OOS investors rely on service providers like agents and PMs and think they're guaranteed an outcome instead of just paying a fee for a service.

these investors were all chasing easy OOS cash flow:

https://www.biggerpockets.com/forums/963/topics/1195280-expe...

https://www.biggerpockets.com/forums/48/topics/1160450-run-i...

https://www.biggerpockets.com/forums/48/topics/1137397-balti...

https://www.biggerpockets.com/forums/52/topics/1010977-12-00...

if you're serious on investing in an OOS market i'd pick one, get to know it, go to it in person, and build a team, and then determine what would you need to do to get a good return in that market.  but selling a trophy asset in a great area and then dumping the proceeds into money pits just because of paper math... would not be my step 1.

hope this helps

Caleb Brown · Answer

I think it's ideal for a 1031. You could see if there are any local banks that would do a HELOC(tough to find). You could also do a cash out refi. Would change the rate but you can keep the property and reinvest to expand your portfolio. Comes down to your preference and what other deals are out there.

Dave Foster · Answer

@Kolby Knickerbocker, It can be a tough thing to give up an advantageous interest rate.  But a couple more points to consider regarding that

1. Your reinvestment targets for a 1031 exchange would have you purchasing $700K of replacement real estate using all $500K of equity.  So you are talking about a loan of $200K. You would actually be borrowing less money than originally but at a higher rate.   Theres a calcuation to make there to see how that. impacts your net return.

2. Not that I'm a proponent of borrowing just for a tax break, but the interest is a deductible expense.  So you just need to look at that additional $2000 - $3000 of interest each year as really being 1000 - $2000 of total new expense to your after the tax deduction.

3.  And following this convoluted rabbit hole calculate what kind of property you would need to exceed the profit level you have right now.  Borrowing $200K at 4-5% will cost you $8000 - $10,000 of interest each year.  Right now your loan is costing you around $6000 per year.  So what kind of property would it take for you to increase your cash flow by $2000 - $3000 a year.  This would wipe out increased interest expense from a jump in interest.  The results might surprise you.

Elias Halvorson · Answer

There are a lot of cheaper areas in the Midwest and South where you could take that 500K and buy either a dozen or so properties (with a DSCR) or buy a bigger multi-family. The key is doing good analysis on the rental market and finding a good property manager.

Kolby Knickerbocker · Answer

thank you for the input! all great things to consider and I appreciate your experience on this :)

Joe Villeneuve · Answer

First, all properties that appreciate the appreciation is based on the property value, not the equity.  The equity is actually what you are paying for the property.

In this case let's look at the numbers that count,...the current numbers.

You have about $500k or more in equity, which is buying you a property that's worth about $700k (I went with the lower PV.  At the higher PV, you have $5k more in PV and equity).

Your CF is around $20k/year, which sounds great, except when you introduce the equity into the discussion.  IF you cashed out you'd walk away with around $400k.  If you kept the property, and accumulated the CF/yr, it would take you 25 years to get that same equity that's sitting, frozen in your property.

Also, if you cashed out and used that same equity as a DP on different RE, at 20% DP, that equity would buy you $2M in PV, not just $700k,...and, I'd be willing to bet, you could find new RE that would have a yearly CF well over $20k/year.

On top of that (remembering my initial statement above), any appreciation applied would be applied to $2M, not just $700k.  Assume a 5% appreciation, and the new PV would be $2.1M vs. just $735k.

Kolby Knickerbocker · Answer

Great questions and things to consider! I haven't lived in it long enough to be exempt from capital gains, good point on that. And yes, the home is in a good area, that will continue to appreciate (not extraordinary but still good), and it's easy to get good tenants.Thank you for the input! Lots of things I hadn't considered.

Chris Watkins · Answer

It depends on your long-term goals. Don't make a move thinking of the next five years, but further down the line. Re-investing that cash will buy you a lot more top-line value, but your cash flow will take a hit for a while. When it comes back, it will come back bigger (5-10 years). Just make sure that you're investing in an area that will continue to see appreciations (midwest and TX/FL may be iffy on that).

Don't worry about giving up the rate if you're looking to grow your portfolio. You could potentially take out a HELOC rather than sell to invest as well.

Jules Aton · Answer

Did you live there long/recent enough to get the homeowner tax exemption?  That is probably the biggest incentive. Is your house in an area that is appreciating, easy to get good tenants? Other considerations are the lost costs to sell and re-purchase other properties. Do you know the other markets well? I don't think being a long distance landlord is as easy as some tout but full disclosure I've stayed with 80 miles of my primary residences. Although 3.1% is a great interest rate I tend to not get too caught up in keeping a property just because the rate is good. Best wishes with whatever you decide.

Jay Hinrichs · Answer

I would stay long enough for the 2 years so you quaify nothing is going to happen in the next year or so.. that tax free money is the best thing we have going in the US in my mind. then U could buy some very safe first trust deeds and make 4 to 6K a month NET NET NET without any of the TTTs.. Just a thought or buy a bizzness that will do far better than rentals.  reading above sounds like this is not an owner occ so forget what I wrote LOL

should I sell a property to pull out $500K and invest it elsewhere?

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