Keep or Sell Rentals

[John S.]

Hi Bigger Pocket Teammates, need some advice-

I just cashed out refinanced my two Michigan rentals to buy more properties and wonder if it is worth to keep these two or just sell them and invest in bigger and better units or even more passive investments like stocks (only if I don't get smashed in taxes). I have been trying to find out if there is a magic ROI or something but it seems like everyone has there own ideas. I like the idea of having a lot of "doors" but not if they don't generate a good return. What's a good return? What would you guys do?

Here are the background and numbers:

Rental 1:

This is a single family residence in a decent city Farmington Hills. It was totally renovated in 2006 with all major items, roof, furnace, windows, kitchen. After 13 years probably need to redo kitchen and baths once current tenants move out next year. They pay $1,600 as they have been there for 7 years and struggle. Once they move out next year I will have to make decision to fix and rent or fix and sell. After update I will guess that I can get the appraised value for the sale or rent of $1800. Here are the numbers:

Appraised Value: $246K

Mortgage: $183,750 at 4.625 30 Year

$1,375 Total PMT ($945 PI, $430 Tax Ins)

$1,600 current rent, can be $1,800

Rental 2:

This is a single family residence in Clinton Township MI. This was renovated in 2007. I will probably pony up $6k for a roof this year. These tenants move out in December. Once again I think I can get the appraised value for a sale and probably $1300 in rent conservatively.

Appraised Value: $164,000

Mortgage: $123,000 at 5.375 30 Year

$975 Total PMT ($688 PI, $286 Tax Ins)

$1,300 Rent, Just about market

Any advice, questions, resources is appreciated!

John S.

[Todd Rasmussen]

Hi John,

Using very rough numbers, after you paid real estate commissions, the rest of your closing costs, and the tax man (assuming you aren't doing a 1031 exchange which is an option)  You'd walk away with maybe 52,700 between the two properties. If you consider the difference between your total payments and market rents ($750 monthly) You can see that (750 / 52,700) * 12 means you'd need to put that 52,700 into something that was yielding 17.1% annual cash on cash return just to get you to where you are once you increase your rents on the first one. So if you can beat 17.1% you should sell and if you can't you should hold.