Should I sell or take out equity?

Question

Hello everyone. I'd like to get some thoughts on whether it would be best to sell our rental properties and sit on the cash and wait for other opportunities or keep them and take out the equity to have in hand for the same purpose. My wife and I have been fortunate and lucky with timing to be able to purchase a handful of rental properties during the downturn since 2011. In total we were able to purchase 10 condos and one two family property. We sold most of them and currently have 3 condos left. Those condos have about $100,000 each in equity, while the mortgages amounts are far below the rental amounts.

Thank you.

Cory Carlson · Answer

@Chip Chaunamom here would be my thinking described in “steps”. The reason it reads funny is i copy and pasted it from a report we put together for clients.

Two fundamental strategic approaches are evaluated; the first is cash-out refinancing with the reinvestment of “pulled” net proceeds; and the second is the selling of current properties and reinvesting the net sale proceeds. A combination of both approaches will also be evaluated. The investment returns from each strategy (and a combination of these options) are then compared to the current returns being generated to determine if there is an opportunity to improve the financial performance (increase investment returns) of invested capital (equity).► STEP 1: The operating data (income and expenses) for each property, any debt (mortgage) information, as well as property acquisition data is to be provided by the owner/investor.► STEP 2: This data will be used by Realty Yield to generate a “Quick View” Investment Property Analysis (IPA) of the investment return on invested capital (equity) for each property in the investor’s portfolio. Then, the cumulative investment returns of all owned properties are conveniently illustrated in our Real Estate Wealth Building Analysis Summary report.The analysis will cover the four- (4) primary engines impacting investment real estate returns (pre-tax cash flow, income tax implication, debt/loan impactonyieldandanyprojectedappreciationwillbefactored). A tax basis computation will also be computed.► STEP 3: Reallocation options of invested capital (equity) are examined. The first alternative analyzed will focus on a cash-out refinance scenario utilizing the available “pulled” net cash proceeds for reinvestment into a new properties. The cumulative returns of the current properties with new loans PLUS the new properties projected returns are compared to the currentas-issituation. Thesecondalternativeanalyzestheoptionof selling existing property-(s) and reinvesting the total net sale proceeds. A comparison is once again made between the proposed new property- (s) andthecurrentas-issituation. Thenextcomparisonmadeisbetweenthe refinance and reinvest; and the sell and reinvest strategies. As mentioned above a combination of incorporating both strategies will also be analyzed.The result is that the optimum allocation of invested capital (equity) is found to maximize overall leveraged returns. All relevant tax basis, depreciation and debt/loan issues are carefully examined and considered. And most importantly, all strategic options analyzed and recommended will be consistent with an investor’s goals and risk/return tolerance.

Brad Hammond · Answer

Hi @Chip Chaunamom, that is always a tough choice.  Besides all the financial aspects of it (taxes/1031, ROI, etc) think about the property itself.  You know them inside and out at this point but you would need to learn a new property all over again.  If these condos are at all less than desirable, you might want to sell them once the leases are up.  Properties with issues are selling now but once the market cools down they might be harder to sell.

Paul Moore · Answer

Hey @Chip Chaunamom.  First of all, congrats on getting to this point.  You have surpassed most who attempt to amass a portfolio of single family rentals.  It sounds like you have a rare combo of assets that require low effort, and since tenants kept paying through COVID, it seems like a great option to take out the equity and invest it in passive opportunities or await a market shakeup to buy more.  Good luck!

Chip Chaunamom · Answer

Thank you Brad and Corey for your insight. Selling will come with a hefty tax bill for sure and there aren't many available properties to consider for a 1031 exchange in my neck of the woods. Brad, you make a really good point about knowing the properties inside and out. The tenants have never been late on their rents since they moved in 7 years ago and the properties are easy to maintain. Condos in this area don't require much effort to fill once they become vacant. I'm leaning towards keeping them just because there aren't many deals out there right now where I am (30 minutes north of Boston in Dracut MA.) Thank you both!

Should I sell or take out equity?

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