Should I keep rental or sell and buy 2

Question

I have a rental that has a great rate and low mortgage so I make a nice amount of income from it . However, I have the urge to sell and 1031 the proceeds into 2 properties.  The new properties probably won't make as much . What are your thoughts? Is it wiser  to hold the good rate or have two properties  increasing in value ? TIA property is in Gilbert Az

Jacob St. Martin · Answer

Hello Sabrina,

With the things like this there are two things that should drive your decision: your goals, and the numbers.

Let's talk about the numbers first. The metric that is going to be the most helpful here is return on equity. Take your monthly cash flow and rather then dividing it by your initial investment (which gives you ROI), divide it by your current equity. If your return on equity is lower than the return on investment you could get by redeploying that equity into other properties or other investment vehicles then it is probably time to sell. If your return on equity is still higher than what you would get in other properties you should hold on to it until that changes. Another important factor here is your deal flow. How confident are you that you could get deals to put your money into? In a 1031 you are time constrained and a lot of people have low deal flow right now because inventory is very low in most places. If you are not confident that you can find decent deals maybe hold onto your property. Lastly, when you are running your ROI calculations be sure to also consider market appreciation. One benefit of redeploying your capital into more or larger assets is that normally your appreciation will now be calculated off of a much larger total home value. For instance if you have one $500,000 property with % equity and the market goes up 3% you have gained $15,000 in equity. If you sell and use that $250,000 to buy $1,000,000 of real estate you now get $30,000 in equity when the market goes up 3%. This is especially important in highly appreciating markets.

You should also be considering what your goals are. Do you want more properties and the increased time spent managing that comes with that? Great, go for it. Are you busy and looking to get better returns more passively? Maybe you sell and invest in a syndication or partner with someone like me on some deals. Really think through what you want in life and what you can do with your current and future real estate to move you toward that.

If you want to discuss in more detail feel free to reach out.

Patrick O'Sullivan · Answer

Jacob has some great advice. To add to this there may be some tax related questions you may want to speak with your accountant about. For example, one of my clients is selling his rental home this year because its the last year he can still avoid capital gains on the home as it will be the last year he still qualifies for the 121 Home Sale Exclusion.

Alex Olson · Answer

@Sabrina Savillo A good rule of thumb is that if you like the property and how it does for you, like things about it etc...keep it. If it is causing you stress and headaches. Sell it. Also sell it if you want to upgrade your wealth with better property, better location or better cash flow. There are other areas of the country that cash flow better than others. Read David Greene's book on out of state investing. It is a can't miss book on growing wealth out of state.

Sabrina Savillo · Answer

I am grateful for all the wonderful advice !

I am going to run some numbers and scenarios to see what makes the most sense. Cash out refi isn't a great option because the rate is 4.25 right now. I'm thinking I may hold because it is a nice area and a large home . Maybe cash out refi in the future when I can free up some money and keep the mortgage in a rentable range . Thank you again this was such great advice and knowledge shared .

Theresa Harris · Answer

Jacob gave you solid advice and I agree with the others.  It is about quality, not quantity.  I'd rather have one good property than two dodgy ones.

Alecia Loveless · Answer

@Sabrina Savillo I think Jacob and the others point out a very good thing regarding deal flow and the ability to find one replacement property within the time restrictions of a 1031 Exchange let alone needing to find 2.

I suppose this might depend a bit upon what market(s) you’re looking at for the potential replacement properties but where I’m located investment properties are very scarce right now and when they do become available there’s many people making multiple offers on them which might make it harder for you to land your deals if the market you are looking in is hot.

Sean Ross · Answer

@Sabrina Savillo,

I want to second what @Jacob St. Martin writes about measuring your current cash flow based on your current equity.  It's not the only way to make an REI decision, but it's a very important metric to consider.  How much could the same amount of equity earn you if it were redeployed?

Our company specializes in 1031 exchanges, so we're big fans of them.  But they aren't right in every circumstance, and you may want to keep 1031s in your back pocket unless you have a well-thought out justification for going through the hassle of listing, selling, paying closing costs, searching for a new property under 1031 time constraints, and then buying two new properties.

As @Patrick O'Sullivan points out, speaking with an accountant is a good idea so that you get a good idea.  Once you figure out return on equity, you want to take the step to figure out how your taxes are impacted by having two depreciable assets instead of one, etc.

Maybe you try to refinance and keep the good property, buy a second property, and roll like that...?  There are plenty of options to think through, but I would recommend really nailing down what you want the most and then working backwards from there.

Mason Weiss · Answer

@Sabrina Savillo - You have a good problem, a problem that will put you in a good spot with either choice. Selling and then buying two new properties will increase your overall risk but have the likely better return in a longer time horizon. I think there are other options at play with a potential cash out refi, acquiring a 2nd property while keeping the 1st, or even selling to acquire a 2-4 unit property instead of single family.

You got options. If you want to talk through them further I can give you my insight by phone or even through a DM here on BP's site. Let me know!

Should I keep rental or sell and buy 2

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