Should I Sell My Rental?

Question

It’s 2021: historic low interest rates, home prices continue to go up. Ironically unemployment rate is up and it is extremely difficult to evict tenants for not paying rent.

It sounds like a ticking bomb to me but I don’t have a crystal ball so I’m reaching out to more experienced investors to help evaluate my situation.

One of my rentals (SFR) in Sacramento CA. Almost doubled in price over the last 5years. It currently cash flows about $300/month after all expenses including maintenance etc.

However This is one of my worst performing assets since I have to pretty much spend about $3000 every time a tenant moves out and my tenant will be moving out next month.

My original plan was to keep it long term but with all the speculation going on I’m really considering selling and using that money to buy more real estate, perhaps we see a corrections in the next year or so.

What are other investors doing right now, good time to sell? Or continue to hold?

Thanks,

Nick

Jonathan Styer · Answer

@Nick Sandoval I always tell folks, what would you do with the money from the sale? If I were in your shoes I would consider investing out of state if you can get that kind of cashflow elsewhere for less equity in the property, you're increasing your return. Columbus, OH has great cashflow and appreciation.

James Furlo · Answer

Great question. I'm working through that right now myself for a couple of properties. I looked at the opportunity cost to help me decide. Typically you calculate your ROI based on the amount of cash invested and your net income ($3,600 in your case) (NI/cash invested). But for opportunity cost, replace the amount of cash invested with your available cash (equity minus closing costs, commissions, mortgage, cap gains, etc). Now, what's your ROI (NI/available cash)? If you took that available cash and re-invested it in something else, what would your ROI be? I'd also run a scenario with a cash-out refi.

If the current property's ROI is still higher (or "high enough"), even with cash tied up in equity, then keep it. If not, then it's time to move on. On one of my duplexes, my ROI is 47%. It's amazing! But, when I substitute in the available cash - the opportunity cost - it's only 2.5%. Yikes! I know I can do better than 2.5%, so it's time for me to sell my "green house" and 1031 into a "red hotel."

Hopefully, the math makes sense and gives you clarity on your decision. - James

Joe LeGolvan · Answer

@Nick Sandoval I’m in a similar situation in Denver.  At first I was going to sell and then buy cash flowing property. But instead I decided to do a cash out refi‘s and buy cash flowing properties￼. There are a lot of factors that will impact the real estate market. I think locking in low interest rate, with likely inflation around the corner might be a decent play.  As long as your not over leveraged to weather a downfall. ￼￼ But just my opinion...

Zeke Liston · Answer

Hi Nick, if you're looking for cash flow and appreciation, why not sell that rental and buy 5 cash flowing rentals in Columbus, OH?

Dave Poeppelmeier · Answer

@Nick Sandoval, there have been much worse times to sell than now. If you're happy with the equity you're going to pull out and not second-guess yourself if the market keeps climbing, then do it, especially if you feel the property is more headache than it's worth. I'm actually selling a couple of mine for that exact reason, take care of some debt with the free money the government is printing. But, that in itself is another discussion...

Gary Pilkington · Answer

I have also seen great appreciation in value on my Sacramento area rentals and have thought about options as well.

I feel that at least some of this is due to people moving eastward from the bay area now that we are moving to more of a work from home "norm". While I have not had difficulty in finding quality tenants quickly, I look at tenant change time as two things:- A good chance to do some upgrades (add value) to the asset without working around a tenant.- A good chance to market correct rent rates on properties that have had longer term tenants. The upgrades will play into the rent adjustment and I'm never down more than a month.True, I may be navigating right into a tidal wave of change/uncertainty - depending on how far CA goes in making this more difficult on RE investors. However, over the long term, I don't think I'm going to be losing value in the properties and will always be able to sell them.

Longer term, having them completely paid off with a line on them for when the market corrects, to be able to deploy cash as needed makes the most sense in our particular (personal) situation.

Jonathan Styer · Answer

Hi @Justin Phillips, what is the "Life Changer Loan"? Thanks!

Remington Lyman · Answer

You should sell it and 1031 it into something in Columbus, Ohio,

Dan H. · Answer

>It currently cash flows about $300/month after all expenses including maintenance etc.  However This is one of my worst performing assets since I have to pretty much spend about $3000 every time a tenant moves out and my tenant will be moving out next month.

I do not understand.   Are you including your expenses in your cash flow projection?   Your cash flow projection should include expenses as well as cap ex reserve estimates.

>Almost doubled in price over the last 5years.

You do not indicate initial value or your initial equity position (your investment amount).  I suspect your return whoops what you would have received from an investment in the great initial cash flow.  If for example your initial purchase was at $200k current $400k value) and you purchased with 80% LTV ($40k cost not including closing costs).  In this example, You made $200k in 5 years on a ~$40k investment from the appreciation alone.  Note $200k/60 month is over $3k/month from appreciation.  Add the equity pay down and cash flow (currently $300/month) and you have an outstanding rate of return.

I do not pretend to know what RE prices will do in the short term, but I am confident of long term appreciation.

Good luck

Allen L. · Answer

I would sell and invest out of state. I think we had a good run in appreciation, and with interest rate so low and staying here, you generally wouldn't expect another crazy 2020 appreciation period. Take your cash and invest in the mid-west, where you can get cash flowing assets.

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