To sell rental or not to sell

[Jack B.]

Making about 6.8% cash on cash from rents after expenses. It's a 145K house and although the market is going up, it's small gains compared to my leveraged 500-700K leveraged houses. 

I've kept it to date as a fall back position since it's paid off. If I lose my job, I can move back into it and live cheaply, even with no car (if it's that bad), since everything is within walking distance. It's on a somewhat active road that I didn't care for, but not a big problem when you factor in how cheap I could live there and how convenient it is otherwise. Plus the busy road seems to keep other problems at bay.

It is about an hour away from where I live now though, and dealing with flakes (sometimes all the appointments flake, try to have a few at a time so as not to make it a wasted trip) is time consuming. 

I've considered selling it and either 10-31 exchanging into another paid off property with some money on top (for a nice place, not on an active road). I could also just sell it and pocket the cash waiting to reinvest elsewhere. Or I could buy a nice house in Tampa Florida paid in full with the money. I plan on relocating there though have not made a recent recon visit yet. Can do though...

The house needed a new roof within 5 years per inspector when I bought it. I just celebrated 6 years the other day. The quality of tenants leaves a bit to be desired. Lot's of losers despite being in a gentrifying/not that bad of an area (lot's of new houses and condos going up).

What say ye? Looking for different perspectives here.

[Thomas S.]

To fully understand income properties you must understand that every property has two separate sources of cash flow generation.

The property itself based on debt repayment costs, expenses etc resulting in a positive or negative cash flow and any equity in that property. Initial calculations are based on any given property being assessed with 100% financing.

Every time you pay down a mortgage or the property appreciates a dollar that dollar  generates a separate income on the property which must first be deducted from the income before all other expenses. Every dollar sitting dead in a property is a opportunity lost to invest and generate it's own income stream in another vehicle.

Investors do not allow money to sit idle especially when interest rates are as low as they are today. Equity being worth a minimum 10% with mortgage rates at the 3% range every dollar paid down on a mortgage or dead equity is losing a minimum 7% return per month.

If you are saying you are earning 6.8% return (positive cash flow) on $145,000 then you are losing 3.2% per month on the opportunity value of the equity and for all intent and purpose the property itself is earning nothing since all the profits are being generated by the equity. That is not how income properties are assessed.

Equity and brick and mortar (rental property) are two separate value generating entities that are considered separately.

The reality is that 6.8% on a combination rental property and $145,000 cash is a terrible return on total investment.

Cash on cash is only one way to look at investing but if you are happy with $820/month positive cash flow then that is great. I however believe you can do much better.

Suppose you mortgage it for $110,000 (20% down on the $145,000 = $30,000)

At 3% you would be paying $462/month P&I. Your cash flow would be reduced to $358/month. That would be a 14.2% cash on cash return using your system of calculation. 

The other $110,000 would be invested in possibly 4 other similar properties generating a similar return. The overall result would be $1800/month positive cash flow.

All hypothetical of course.

Equity is killing your TRUE cash flow.