When does it make sense to sell your rental?

[Allende Hernandez]

Good evening folks,

I've been wondering around this lately and decided to come to where the expert live.

I have a rental property that used to be my primary home until a year ago(Miami, FL). We bought it in 2010 and  priced has doubled since.

Last year we bought a new house and decided to keep the previous one as a rental, I had a 15Y loan and refinanced it to 30Y to maximize cash flow. At present time, spread is aprox $1,500/mo (just rent-PITI to simplify things). It will shrink some as I already know insurance will increase quite a bit at renewal.

Prices in the area have gone up and talking to a couple of agents I learned that houses are closing about 10% above appraisal, which makes me wonder where is the "line" where selling outright makes more sense than holding on to it?

I understand that a solid plan for the profits of the sale plays a factor in the decision but I want to keep the question single-threaded for now.

Any pointers?

Thanks in advance!

[Joe Villeneuve]

NOW!!!!

Here's why.  Think of your equity as as cash that's locked up in the property, and that equity is the asset, not the property.  The property is just the temporary resting place for it.  I say this because the equity value would be the same dollar amount...no matter what property, or properties, it is in.  When your equity builds up, it looks good on paper, but only on paper.  It's greatest value is when you release it into the real world.

Here's an example.
Property A:
PV = $100k
Equity = $20k
Cash flow = $1000

Property appreciates to $25k.  New number$ for...
Property A: REI keeps property
PV = $125k
Equity = $45k (plus whatever paydown happened...thanks to the tenant, and their rent payment)
Cash flow = $1000 (assuming rent increase covers taxes/insurance increase)

Property increases in value, but CF remains the same...the landlord gets no real value from the appreciated PV...yet.

Property B*: REI sells property
DP = $40k
PV = $200k
Equity = $40k (still the same as when it was in the original property - closing costs)
Cash flow = $2000 

*  This could be more than 1 property, but the total equity would still be the same...just split up, and it would still be a 20% DP on the Properties...so the Total PV would also be the same.  What changes is the cash flow, and the total PV...and, 
since the PV goes up, so would the appreciation compared to the original Property A since the Original Property A's PV would be only $125k but the new PV would be $200k.  That means if the same appreciation rate (say 10%) was applied to both, the original property A's new PV would be $137.5K, while the new PV would be $220k.