Should I keep my property?

Question

Help!!

Looking for a calculator and guidance.

We have a property purchased 12 years ago; 40k left on mortgage; cash flow of $100/month; can sell for $160k. Should we continue to rent out, or sell and reinvest?

Joe Villeneuve · Answer

Sell it faster than you can say, "I'm losing money by the boat load"..., which you are.

Your equity is wasting itself where it sits.  The equity is what you are paying for the property and the cash flow that goes along with it.  The higher the percentage of equity you have in a property, the more you are paying for it, and the lower the lower the value of that equity becomes with every rise in that percentage.  In this case, your equity ($120k) is buying a property that is only worth $160k, with a CF of only $1200/year.

From the CF perspective, it will take you 133 years for the accumulated CF to equal the equity.  Let me say it another way.  If this property appreciated a measly 1% in the coming year, the equity would grow an additional $1600...that's $400 more than the CF you are getting for that same year.  So, your total return on that year would be $2800.  You may be saying "what's wrong with that"?  The answer is, your actual value of your equity is in its buying power...not its face value.

Now, onto the equity side.  Currently, your equity is buying a property that is worth 1.5 times the face value of that equity.  If you sold the property, and reinvested it as a down payment (this is your initial equity for the new property), after closing costs, you should walk away with at least $100k in cash.  Take that $100k, use it as a DP at 20% the PV, and the new PV is $500k...not $160k.  Take that same 1% appreciation I mentioned above, apply it to this property, and the increase in equity is $50k...not $16k (see above).  Now what about the CF?

If you sold the property, and you used the $100k on one property or more than 0ne property, the cash flow should be at least triple what you're getting now...that's $3600/year...not just $1200.  So, combining the two returns (CF and Equity gains), the total gains that year would be over $50,000...not just $2,800.

The difference between $50,000 vs. $2,800, to me, is a boat load.  Apply this same math comparison the the following years, and that "boat" becomes a "fleet".

Bryce Jamison · Answer

No one can really answer this question without knowing more about your life situation (goals, savings, age, income, etc.), but I fully agree with @Joe Villeneuve. 120K equity to get you $100 a month CF plus whatever minimal equity your gaining doesn't sound good at all to me. You'd do better selling your property and putting the money it a money market account making 3%. If you keep the property or put it in a money market account you're still not keeping up with inflation, so I'd recommend putting that equity to better use somewhere else (another property, S&P 500, another business).

John Woodhouse · Answer

I would say it depends on your financial goals. You just need to sit down on your own and look at the pros and cons and what make sense based on your situation. Your big three options are sell, refinance, or just let it pay itself off.

Anthony King · Answer

@Danielle Elms You need to look at this like you have $120,000 invested so what type of return are you getting on that investment?

Return On Equity = Annual Cash Flow/Equity

1,200/120,000 = .01 or 1%

Can you invest that $120,000 elsewhere and make a better return than 1%? I hope so.

For those suggesting a cash out refinance, if he is only making $100 cash flow with the current mortgage then a 7% rate on $160,000 would most definitely put him into negative cash flow on this one.

Sell this one in a hurry and invest that money in something else.

Eliott Elias · Answer

Pull the cash out (refi) and use the money to buy other properties

Sebastian Hernandez · Answer

I see great answers here.

I think that question truly depends on your goals and doing what will help you achieve them.

Pulling money out of this property through a cash-out refinance and using those funds to purchase another property could be a great option.

Preston Patterson · Answer

Sounds like you have a lot of positive equity. I would be thinking about keeping the property and possibly doing cash out refinance to bank roll your next investment property.

I’m sure some of the more experienced investors will chime in here.

Good luck and welcome to the forums.

Julian Colvard · Answer

Depends on what your goal is. If you want to acquire more properties, then I recommend using the current home as leverage to buy more houses.

If you’re looking for more cash flow, then the possibility of doing a 1031 exchange into a bigger asset That generates more rev might be best for you.

Ricardo Hidalgo · Answer

I would sell it since your cashflow is minimal in comparison to the equity locked up in the property. In addition, prices are going to continue to drop therefore you could probably buy a few properties with better cash flow. Based on the numbers you have presented, your COC return is 1% which is far too low for the amount of equity vested.

Should I keep my property?

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