Sell Or Hold My BRRRR?

[Daniel Kramer]

I've heard the old saying that an investor's only regret is selling a property. I have a single family house that we BRRRR'ed but the tenants are moving out soon. I'm getting more and more tempted to sell & 1031 exchange into a nicer bigger 2-4 unit.

• Expected net profit from sale: ~50k
• Rent: $1,800
• PITI Payment: $930

So even with conservative reserves (30% = $540), I can pure cash flow about $330 by holding. 

Thanks in advance,

Dan

[Chad Duncan]

Why do you think that is the "regret" for investors? It's inflation. The longer you hold, typically, the higher the rents, the higher the equity, the higher the appreciation, etc. I'm assuming that you did the math correctly and $50k is the amount you will likely receive. This is how you do a quick comparative analysis on it;

1) Look at the all-in costs of selling and buying. This is usually 6-7% of the total value in question. An example: say your home is $250k and the new duplex is $350k, the total value in question is $600k. As well, let's say the 1031 exchange fee is $1k. In this case, your loss is due to fees that are $40k (assuming 6.5% all-in costs). This doesn't include any taxes and the risk of not finding a like property within the time frame given through the 1031 ruling. 

2) All of your gains in your current property will be used to pay down the next property, the $50k, as anything else is against the 1031 ruling. Up to this all that has happened is a net of $10k going from your current property to the next property ($50k gain less $40k in sales fees).

3) Now take the potential gain in rent for the new property. You will want to look at the total net cash flow of the new property and subtract what you are currently receiving for the property you have. Let's use your example, you would gain about $210 per month ($540 - $330). 

4) Divide the annual potential gain from the cost of exchanging. In this example, it would be $2,520 ($210 * 12). This would result in a potential expected return of 6.3% ($2,520 / $40,000). This is a very "back of the envelope" calculation. 

There are other things to keep in mind: 

- new mortgage costs (total interest paid) for the new property vs the old

- if the next property is more expensive how much more cash will go to equity per year than the previous one?

- Are there strategies to make your current property perform better, to avoid the costs of exchanging?

- How long would it take you to save up to purchase the duplex while still keeping your current property? 

- Look at this from a long-term perspective. What scenario would provide the most cash flow in years 10, 15, 30? This is a good reason why people kick themselves for selling early.

I advise people to be very careful when they purchase a property as the costs to sell it and buy another is more than it's worth in most cases. Single-family homes shouldn't be investment properties, they are meant for people as a primary residence and as such are very expensive on a per-unit basis. The more units you have under one roof in the name of the game, so keep that in mind next time you look at more properties. Look at large investment groups, what are they doing?